SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 26, 1998
Commission file number 333-33483
American Skiing Company
(Exact name of registrant as specified in its charter)
Maine 7990
(State or other jurisdiction of (Primary Standard Industrial
incorporation or organization) Classification Code Number)
04-3373730
(I.R.S. Employer
Identification Number)
Sunday River Access Road
Bethel, Maine 04217
(207) 824-8100
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
(Name of exchange on
Title of Each Class which registered)
Common Stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
(Name of exchange on
Title of Each Class which registered)
None None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months or shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for at least the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-X is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's outstanding common stock held by
non-affiliates of the registrant on October 23, 1998, determined using the per
share closing price thereof on the New York Stock Exchange Composite tape, was
approximately $77.6 million. As of October 23, 1998, 30,285,552 shares of common
stock were issued and outstanding, of which 14,760,530 shares were Class A
common stock.
American Skiing Company
Form 10-K Annual Report, for the year ended July 26, 1998
American Skiing Company and Consolidated Subsidiaries
Table of Contents
Part I Page
Item 1 Business ............................................... 1
Item 2 Properties ............................................. 24
Item 3 Legal .................................................. 25
Item 4 Submission of Matters to a Vote of Security Holders .... 25
Part II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters .................................... 26
Item 6 Selected Financial Data ................................ 26
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 28
Item 7A Quantitative and Qualitative Disclosures about
Market Risk ............................................ 40
Item 8 Financial Statements and Supplementary Data............. 41
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................... 41
Part III
Item 10 Directors and Executive Officers of the Registrant...... 42
Item 11 Executive Compensation.................................. 45
Item 12 Security Ownership of Certain Beneficial Owners and
Management.............................................. 54
Item 13 Certain Relationships and Related Transactions.......... 57
Part IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K..................................... 58
Signatures....................................................... 64
(i)
PART I
Item 1 Business
The Company
The Company is the largest operator of alpine resorts in the United
States. The Company owns and operates nine ski resorts, including two of the
five largest resorts in the United States based on 1997-98 skier visits, with at
least one resort in each major skiing market. During the 1997-98 ski season, the
Company's nine resorts generated approximately 5.3 million skier visits,
representing over 9.8% of total skier visits in the United States (compared with
4.9 million and 9.4%, respectively, for the 1996-97 ski season). The Company's
Resorts include Sunday River and Sugarloaf in Maine; Attitash Bear Peak in New
Hampshire; Killington, Mount Snow/Haystack and Sugarbush in Vermont; The
Canyons, adjacent to Park City, Utah; Steamboat in Colorado; and Heavenly near
Lake Tahoe, California (collectively, the "Resorts"). After giving pro forma
effect to the November 1997 acquisition of Steamboat and Heavenly, the Company's
revenues and earnings before interest expense, income taxes, depreciation and
amortization ("EBITDA") for its 1998 Fiscal year were $344.0 million and $73.8
million, respectively.
The Resorts include several of the top resorts in the United States,
including: (i) Steamboat, the number two overall ski resort in the United
States, as ranked in the September 1997 Snow Country magazine survey, and the
fourth largest ski resort in the United States with over 1.0 million skier
visits in the 1997-98 ski season; (ii) Killington, the fourth largest resort in
the United States with over 1.0 million skier visits in the 1997-98 ski season;
(iii) three of the four largest resorts in the Northeast (Killington, Sunday
River and Mount Snow/Haystack) in the 1997-98 ski season; (iv) Heavenly, which
ranked as the second largest resort in the Pacific West region for the 1997-98
season with a resort record 888,000 skier visits; and (v) Sugarloaf, the number
one resort in the Northeast according to the September 1997 Snow Country
magazine survey.
In addition to operating alpine resorts, the Company develops mountainside
real estate which complements the expansion of its on-mountain operations. The
Company has created a unique interval ownership product, the Grand Summit Hotel,
in which individuals purchase quartershare interval interests while the Company
retains ownership of core hotel and commercial properties. The initial sale of
quartershare units typically generates a high profit margin, and the Company
derives a continuing revenue stream from operating the hotel's retail,
restaurant and conference facilities and from renting quartershare interval
interests when not in use by their owners. The Company is developing alpine
resort villages at prime locations within five of its resorts designed to fit
that resort's individual characteristics. The Company currently operates six
Grand Summit Hotels -- two hotels at Sunday River and one hotel each at
Attitash, Mount Snow, Sugarloaf and Killington. Two additional Grand Summit
Hotels are under construction at The Canyons and Steamboat. The Company also
operates golf courses at its resorts and conducts other off-season activities
which accounted for approximately 9.5% of the Company's resort revenues for
fiscal 1998.
The Company's primary strength is its ability to improve resort
operations by integrating investments in on-mountain capital improvements with
the development of mountainside real estate. Since 1994, the Company has
increased skier visits by 10.7% in the aggregate for the three resorts that it
has owned for more than two seasons. In addition, the Company has increased its
market share of skier visits in the northeastern United States from
approximately 21.8% in the 1995-96 ski season to approximately 25.1% in the
1997-98 ski season (after giving pro forma effect to its acquisition of the
Killington, Mount Snow/Haystack and Sugarloaf ski resorts). In the 1997-98 ski
season, skier visits at The Canyons, Steamboat and Heavenly (collectively, the
"Western Resorts"), each of which the Company acquired in 1997, increased by
11.3% over the prior year. Management believes that the Western Resorts provide
the Company with several significant additional operating benefits, including:
(i) geographic diversity; (ii) enhanced cross-marketing of its resorts on a
national basis; (iii) purchasing and other economies of scale; and (iv)
implementation of the Company's operating strategies across a more diversified
resort base.
1
In November 1997, the Company consummated an initial public offering of
its common stock, generating net proceeds to the Company of $244.3 million which
were applied, together with available cash and borrowings under the Company's
bank credit facilities, to fund the acquisition of Steamboat and Heavenly for an
aggregate acquisition cost of approximately $294.8 million (excluding amounts
allocated to the Sabal Point Golf Course, which the Company divested in February
1998).
Resorts
Killington. Killington, located in central Vermont, is the largest ski
resort in the northeast and the fifth largest in the United States, with over
1.0 million skier visits in 1997-98. Killington is a seven-mountain resort
consisting of approximately 1,200 acres with 212 trails serviced by 33 lifts.
The resort has a 4,241-foot summit and a 3,150-foot vertical drop. The resort's
base facilities include eight full-service ski lodges, including one located at
the top of Killington Peak. In December 1996, the Company acquired the Pico
Mountain ski resort located adjacent to Killington and integrated the two
resorts. Management believes the size and diversity of skiable terrain at
Killington make it attractive to all levels of skiers and one of the most widely
recognized of the Company's resorts with regional, national and international
clientele.
The on-mountain accommodations at Killington consist of approximately
5,100 beds, including 532 quartershare interests at the New Grand Summit Hotel.
The off-mountain bed base in the greater Sherburne, Vermont area is
approximately 12,000 beds. Killington also owns and operates 16 retail shops, 12
rental and repair shops, a travel and reservation agency and a cable television
station. At the base of Pico Mountain, the Company owns a well-developed retail
village and a health club. Killington is a year-round resort offering complete
golf amenities including an 18-hole championship golf course, a golf school, a
pro shop, and a driving range.
Since its acquisition in June 1996, the Company has invested $25.6 million in
capital improvements to update Killington's snowmaking, trail and lift systems,
and to develop base facilities and real estate potential at the base areas.
Major improvements and enhancements to the resort completed since June 1996
include (i) installation of two high-speed quad lifts, and upgrading of two
additional lifts to high-speed quads, (ii) installation of one eight-passenger
high-speed gondola to service the Peak Restaurant at the Killington summit and
to replace the old Killington Peak double chair, (iii) construction of a new
children's center and related base area improvements, and (iv)a major water and
sewer system expansion.
In December 1997, the Company completed a land exchange with the state of
Vermont whereby Killington acquired 1,050 acres of undeveloped land centrally
located in its principal base area. The Company's three-year capital program
includes the interconnection of lift and trail systems between the Killington
and Pico resorts. The interconnection of the two mountains is expected to result
in a 16% increase in lift capacity and an additional 110 acres (9%) of skiable
terrain.
2
Sunday River. Sunday River, located in the western mountains of Maine
and approximately a three-hour drive from Boston, is one of New England's
largest ski resorts with over 550,000 skier visits in 1997-98. Extending over
eight interconnected mountain peaks, its facilities consist of approximately 654
acres of skiable terrain and 126 trails serviced by 18 lifts. The resort has a
3,140-foot summit and a 2,340-foot vertical drop. The Company believes Sunday
River has one of the most modern lift systems in the Northeast. Sunday River has
four base lodges, one of which is located at the top of North Peak.
The on-mountain accommodations at Sunday River consist of
approximately 5,850 beds including 726 condominium units, 648 quartershare units
at the Grand Summit Resort Hotel and 580 quartershare units at the new Jordan
Grand Resort Hotel. The off-mountain bed base in greater Bethel, Maine totals
approximately 2,000 beds. The resort owns and operates five ski shops, seven
full-service restaurants, four cafeteria-style restaurants and six bars.
Since 1981, the Company has continually invested in capital
improvements at Sunday River to expand and improve its on-mountain facilities
and in real estate development. Sunday River's 1998 capital program included:
(i) installation of a new high-speed quad lift on Barker Mountain which replaces
an earlier lift, (ii) installation of 150 new tower snow guns to enhance
snowmaking, (iii) five new grooming vehicles, (iv) a new welcome center for
condo check-ins and ticket sales, and a new learn to ski/ride discovery center,
and (v) significant upgrades of facilities. A Robert Trent Jones, Jr.
championship golf course is currently under construction for a planned 2001
opening. Management believes that Sunday River has significant growth potential
with over 325 acres of land at the base of the new Jordan Bowl area which are
planned for development of extensive retail base facilities adjacent to the new
Jordan Grand Resort Hotel. Additionally, there are over 4,000 acres of
undeveloped land owned by the Company and 3,000 acres for which the Company
holds purchase options that are suitable for development as skiable terrain.
Mount Snow/Haystack. Mount Snow, located in Brattleboro, Vermont, is
the second largest ski resort in the Northeast with over 600,000 skier visits in
1997-98. A large percentage of the skier base for Mount Snow derives from
Massachusetts, Connecticut and New York. The resort consists of two mountains
(Mount Snow and Haystack) separated by approximately three miles, which have
been combined under single management. Its facilities consist of 134 trails and
approximately 762 acres of skiable terrain serviced by 25 lifts. The resort has
a 3,580-foot summit, a 1,700-foot vertical drop, five full-service base lodges.
Mount Snow's on-mountain bed base currently consists of 1,960 beds,
including 544 units at the resort's new Grand Summit Hotel. The off-mountain bed
base in the greater Dover, Vermont area has approximately 7,300 beds. The resort
owns and operates eight retail shops, four rental and repair shops, a pro shop,
a country club and a nightclub. Mount Snow also headquarters the Company-owned
"Original Golf School," and operates an 18-hole golf course, eight golf schools
throughout the East Coast, a mountain bike school, a 92-room hotel and a
low-voltage local television station. Since its acquisition in June 1996, the
Company has invested approximately $15.0 million in capital improvements to the
resort, including the installation of two high-speed quad chairlifts.
The Company is expanding Mount Snow's lodges to provide additional space
for guest services, food and beverage services, retail sales, and a children's
center. During the Summer of 1998, a 20,000 square foot "Discovery Center" was
constructed to service new skiers and snowboarders. In addition, the Company
opened a new restaurant and added over 10,000 square feet of retail space in the
Grand Summit Hotel.
3
Sugarloaf. Sugarloaf is located in Carrabassett Valley, Maine and was
ranked as the number one overall ski resort in the East by the September 1997
Snow Country magazine survey. Sugarloaf is a single mountain with approximately
1,400 acres of terrain and 110 trails covering approximately 530 acres, of which
490 acres have snowmaking coverage serviced by 14 lifts including a new
high-speed quad chair to service lower mountain terrain and an additional
fixed-grip quad chair accessing the snowfields. There are approximately 870
additional acres of off-trail skiable terrain. The mountain has a 4,237-foot
summit and a 2,820-foot vertical drop. Sugarloaf offers one of the largest
ski-in/ski-out base villages in the Northeast, containing numerous restaurants,
retail shops and an abundance of lodging. Sugarloaf is widely recognized for its
challenging terrain, including its snowfields, which represent the only
lift-serviced above-treeline skiing in the Northeast. As a destination resort,
Sugarloaf has a broad market, including areas as distant as New York, New
Jersey, Pennsylvania and Canada.
Sugarloaf operates a year-round conference center, a cross-country ski
facility and an 18-hole championship golf course designed by Robert Trent Jones,
Jr., which is rated by both Golf Digest and Golf magazines as one of the top 25
resort courses in the United States. Sugarloaf's slope-side ski village consists
of its base lodge, two hotels, banquet facilities for up to 800 people, retail
stores, a rental and repair shop, a sports and fitness club, 870 condominium
units and vacation homes, restaurants and an extensive recreational path
network.
Sugarbush. Sugarbush, located in Vermont's Mad River Valley, features
the three highest mountain peaks of any single resort in the East. Extending
over six mountain peaks, its facilities consist of 432 acres of skiable terrain
and 112 trails serviced by 18 lifts. The resort has a 4,135-foot summit and a
2,650-foot vertical drop. The mountains are serviced by three base lodges and
two summit lodges.
The on-mountain accommodations at Sugarbush consist of approximately
2,200 beds. The off-mountain bed base within the Mad River Valley totals
approximately 6,600 beds. The resort operates three ski shops, three
full-service restaurants and four cafeteria-style restaurants. The Company also
owns and operates the 46-unit Sugarbush Inn, manages approximately 200
condominium units, and owns and operates a championship golf course as well as a
sports center and a conference center.
Since the acquisition of Sugarbush by the Company in October 1995, the
Company has invested $23.7 million in capital improvements to expand and improve
its on-mountain facilities. The most recently completed improvements include
four high-speed quad chairlifts, a 44% increase in snowmaking capacity, the
creation of new glade skiing terrain, and numerous base area improvements.
Attitash Bear Peak. Attitash Bear Peak, located in the Mt. Washington
Valley, New Hampshire, is one of New Hampshire's largest ski resorts. Covering
two mountain peaks, its facilities consist of 273 acres of skiable terrain and
60 trails serviced by 12 lifts. The resort has a 2,350-foot summit and a
1,750-foot vertical drop. The resort benefits from its location in the heart of
New Hampshire ski country and its proximity to the Town of North Conway and the
Mt. Washington Valley tourist area, and is widely recognized as a
family-oriented resort.
4
The on-mountain accommodations of Attitash Bear Peak consist of
approximately 2,000 beds. In 1997 the Grand Summit Hotel at Attitash was
completed. It consists of 143 rooms, 2 restaurants, a lounge, a health club,
outdoor heated year round pool and 9 conference rooms including a 5,600 square
foot Ballroom. The off-mountain bed base in the Mt. Washington Valley area
totals approximately 16,000 beds. The resort operates three base lodges, four
ski shops, two full-service restaurants, three cafeteria-style restaurants and
two bars.
Since its acquisition in July 1994, the Company has invested
approximately $12.4 million in resort-related capital improvements at Attitash
Bear Peak. The summer of 1998 capital program included the installation of a
high-speed quad lift on Attitash Mountain and the Attitash Adventure Center, a
20,000 square foot base building housing the Discovery Center for beginning
skiers and riders, enhanced space for all children's programs, adaptive programs
and snowboarders. The resort's three year capital improvement program includes a
championship golf course, an additional lift upgrades and further additions to
the summer operations.
The Canyons. When acquired in July, 1997, The Canyons, located in the
Wasatch Range of the Rocky Mountains adjacent to Park City, Utah, was primarily
an undeveloped ski resort with significant potential for future operational and
real estate development. In its first season of operation under the Company's
management, the resort generated over 167,000 skier visits. Currently, the
resort has approximately 2,700 acres of skiable terrain with an elevation of
9,990 feet and a 3,200-foot vertical drop. The area has two new base lodges and
two additional on-mountain restaurants.
Since its acquisition in July, 1997, the Company has invested approximately
$32 million to develop and construct: (i) an eight passenger high-speed gondola,
(ii) seven new quad lifts (including five high-speed quads), (iii) an increase
in skiable terrain to approximately 2,700 acres at the resort, and (iv) two
on-mountain lodges. The resort's new Red Pine lodge will serve as the
cornerstone of the Company's planned High Mountain Meadows real estate
development located on a plateau at an elevation of 8,000 feet.
Management believes the resort has significant growth potential due to
its proximity to Salt Lake City, its undeveloped skiable terrain and its real
estate development opportunities. The resort is located approximately 25 miles
from Salt Lake City and is accessed by a major state highway. The Utah Winter
Sports Park, which is located immediately adjacent to the resort, is scheduled
to serve as the venue for the ski jumping, bobsled and luge events in the 2002
Winter Olympic Games.
Management believes the 2002 Olympic Games will provide international
exposure for the resort. The five-year capital plan currently calls for
substantial development of the resort, involving anticipated capital
expenditures of approximately $30 million, to be completed prior to the 2002
Olympic Games. Management believes that when The Canyons is fully developed, the
resort could encompass over 7,200 acres consisting of 14 mountain peaks with a
maximum elevation of 10,000 feet, a vertical drop of approximately 3,200 feet,
20 high-speed quad ski lifts and an eight-passenger high-speed gondola. In
addition to the $32 million of capital improvements at The Canyons over the past
15 months, the Company estimates that it will need approximately $30 million for
on-mountain capital improvements and approximately $150 million for real estate
development in order to fulfill its five-year development plan for The Canyons.
5
Steamboat. Steamboat ski area is located in the Medicine Bow/Routt
National Forest, Routt County, Colorado on the westerly slopes of Mt. Werner,
approximately 2.5 miles southeast of downtown Steamboat Springs, Colorado. The
area consists of 2,694 acres of land under a Special Use Permit issued by the
USFS and 245 acres of private land owned by Steamboat located at the base of the
ski area. The 1998-99 trail network consists of 140 trails covering 2,939 permit
access that is serviced by 22 ski lifts. Steamboat receives a high level of
natural dry snow, averaging 330 inches annually the past 10 ski seasons.
Steamboat has recorded more than 1 million visits each of the past nine seasons.
Restaurant facilities are currently located in the base area and at
three other points throughout the resort (Thunderhead, Four Points Hut, and
Rendezvous Saddle). On the ski area, the Company operates food and beverage
outlets at ten restaurants, bars and outdoor serving facilities with total
indoor seating capacity of approximately 1,944 and outdoor seating capacity of
790. These facilities are complemented by a number of
independently operated bars and restaurants in the base area and in downtown
Steamboat Springs and are considered adequate to meet current skier needs. As
further Pioneer Ridge expansion occurs, an additional on-mountain restaurant may
be constructed at Cyclone Flats.
During the summer of 1998, Steamboat built the new Pony Express quad
detachable chairlift in Pioneer Ridge. The snowmaking system was also extended
this year to reach the very top of the mountain. This expansion allows
top-to-bottom coverage to insure quality snow from the top of the mountain to
the ski area base, and will improve some of Steamboat's most popular trails.
6
Heavenly. Located on the south shore of Lake Tahoe in the states of
Nevada and California, Heavenly consists of two peaks with a maximum elevation
of approximately 10,000 feet, a 3,500 foot vertical drop with approximately
4,800 acres of skiable terrain and 82 trails serviced by 27 lifts. Heavenly is
the second largest resort in the Pacific West Region with over 880,000 skier
visits for the 1997-98 ski season. Snowmaking covers over 268 acres of skiable
terrain, representing approximately 43% of the trails. Access to the resort is
primarily through the Reno/Tahoe International Airport and by automobile via
Route 50 from San Francisco and Sacramento, California. There are three base
lodges and four on-mountain lodge restaurants. There are no ski-in, ski-out
residential units or tourist accommodation units at the ski resort; however,
there is a well-developed 11,000-bed base in the greater South Lake Tahoe area.
Heavenly's master plan was approved in 1996 and is being implemented
by the Company. The plan calls for the improvement and expansion of winter and
summer uses and support facilities at the resort. A primary objective of the
master plan is to refocus the primary entrance to the ski resort from the three
existing base areas (California, Stagecoach and Boulder) to the commercial core
of South Lake Tahoe utilizing a new high-capacity gondola. The gondola has been
designed for year round sightseeing, while the top station will provide direct
ski access to both the Nevada and California sides via three new lifts.
Additional snowmaking coverage is contemplated which will increase existing
coverage from approximately 268 acres to approximately 500 acres. The master
plan provides for the construction of base facilities and new restaurants at Sky
Meadows, East Peak Lake and California base. The Company's summer 1998 capital
program included $7.8 million in proposed improvements at Heavenly including two
four-passenger high-speed chairlifts known as "Gunbarrel Express" and
"Stagecoach Express" and a fixed-grip three passenger chairlift known as the
"Perfect Ride" are currently under construction, and are scheduled to open for
the beginning of the 1998-99 ski season.
7
Alpine Resort Industry
There are approximately 750 ski areas in North America. In the United
States, approximately 521 ski areas generated approximately 54 million skier
visits during the 1997-98 ski season. Since 1985, the ski resort industry has
undergone a period of consolidation and attrition resulting in a significant
decline in the total number of ski areas in North America. The number of ski
resorts in the United States has declined from approximately 735 in 1983 to
approximately 521 in 1998, although the number of skier visits has remained
relatively flat. Despite the recent consolidation trend overall, ownership of
the smaller regional ski resorts remains highly fragmented. The Company believes
that technological advances and rising infrastructure costs are the primary
reasons for the ski resort industry consolidation, and that further
consolidation is likely as smaller regional resorts are acquired by larger
resort operators with more sophisticated management capabilities and increased
availability of capital. In addition, the ski resort industry is characterized
by significant barriers to entry because the number of attractive sites is
limited, the costs of resort development are high, and environmental regulations
impose significant restrictions on new development.
The following chart shows a comparison of the industry-wide skier
visits compared to the Company's skier visits in the U.S. regional ski markets
during the 1997-98 ski season:
.........
Geographic Region 1997-98 Percentage of Total Skier Visits at Company Market Company Resorts
Total Skier Skier Visits Company Resorts Share
Visits (in (in millions)
millions)
----------------- --------- ------------------ --------------- -------------- ------------------
Northeast 12.7 23.5% 3.2 25.2% Killington,
Sugarbush, Mount
Snow/Haystack,
Attitash/Bear Peak,
Sunday River,
Sugarloaf USA
Southeast 4.3 7.9% --- ---
Midwest 6.7 12.4% --- ---
Rocky Mountain 19.2 35.5% 1.2 6.3% The Canyons,
Steamboat
Pacific West 11.2 20.7% 0.9 8.0% Heavenly
- - ---------------------- -------------------- --------------------- --------------------- -------------------- ---------------------
U.S. Overall 54.1 100.0% 5.3 9.8%
- - --------------------
(*) Source: Kottke National End of Season Survey 1997/98 Final Report
8
United States ski resorts range from small operations which cater
primarily to day skiers from nearby population centers to larger resorts which
attract both day skiers and destination resort guests. Management believes that
day skiers focus primarily on the quality of the skier experience and travel
time, while destination travelers are attracted to the number and type of
amenities available and activities offered, as well as the perceived overall
quality of the vacation experience. Destination guests generate significantly
higher resort operating revenue per skier day than day skiers because of their
additional spending on lodging, food and other retail items over a multiple-day
period.
Since 1985, the total number of skier visits has been relatively flat.
However, according to the National Ski Area Association, the number of skier
visits represented by snowboarders in the United States has increased from
approximately 6.4 million in the 1994-95 ski season to approximately 11.2
million in the 1997-98 ski season, a compound annual growth rate of
approximately 20.6%. Management believes that snowboarding will continue to be
an important source of lift ticket, skier development, retail and rental revenue
growth for the Company.
The Company believes that it is well-positioned to capitalize on certain
favorable trends and developments affecting the alpine resort industry in the
United States, including: (i) the 66.7 million members of the "baby boom"
generation that are now approaching the 40 to 59 year age group where
discretionary income, personal wealth and pursuit of leisure activities are
maximized (this group is estimated to grow by 16.7% over the next 23 years);
(ii) the "echo boom" generation (children of baby boomers) is emerging as a
significant economic force as they begin to enter the prime entry age for
skiing, snowboarding and other "on-snow" sports; (iii) advances in ski equipment
technology such as development of parabolic skis which facilitate learning and
make the sport easier to enjoy; (iv) the continued growth of snowboarding as a
significant and enduring segment of the industry, which is increasing youth
participation in alpine sports; and (v) a greater focus on leisure and fitness.
There can be no assurance, however, that such trends and developments will
continue to have a favorable impact on the ski industry.
Operating Strategy
The Company believes that the following key operating strategies will
allow it to increase revenues and profitability by capitalizing on its position
as a leading mountain resort operator and real estate developer.
Capitalize on a Multi-Resort Network
The Company's network of resorts provides both geographic diversity
and significant operating benefits. The Company believes its geographic
diversity: (i) reduces the risks associated with unfavorable weather conditions,
(ii) insulates the Company from economic slowdowns in any particular region,
(iii) increases the accessibility and visibility of the Company's network of
resorts to the overall North American skier population and (iv) enables the
Company to offer a wide range of mountain vacation alternatives.
The Company believes that its ownership of multiple resorts also
provides the opportunity to (i) create the industry's largest cross-marketing
program, (ii) achieve efficiencies and economies of scale in purchasing goods
and services, (iii) strengthen the distribution network of travel agents and
tour operators by offering a range of mountain resort alternatives, consistent
service quality, convenient travel booking and incentive packages, (iv)
establish performance benchmarks for operations across all of the company's
resorts, (v) utilize specialized individuals and cross-resort teams at the
corporate level as resources for the entire Company, and (vi) develop and
implement consumer statistical and usage information and technology systems for
application across all of the Company's resorts.
9
Increase Revenues Per Skier
The Company seeks to increase revenues per skier by managing ticket
yields and expanding revenue sources at each resort. Management seeks to
increase non-lift ticket revenue sources by increasing point-of-sale locations
and sales volume through retail stores, food and beverage services, equipment
rentals, skier development, lodging and property management. In addition,
management believes that aggressive cross-selling of products and programs (such
as the Company's frequent skier and multi-resort programs) to resort guests
increases Resort revenues and profitability. The Company believes it can
increase ticket yields by managing ticket discounts, closely aligning ticket
programs to specific customer market segments, offering multi-resort ticket
products and introducing a variety of programs that offer packages which include
tickets with lodging and other services available at its resorts. During the
1997-98 ski season, the Company increased its average yield per skier visit by
approximately 2.2% as compared to the 1996-97 ski season. Season pass revenue
for the 1997-98 ski season at the Resorts increased by 11.0% as compared to the
1996-97 ski season. In addition to its on-mountain activities, the Company has
expanded its retail operations by establishing retail stores in strategic high
traffic and recognized retail districts such as Freeport, Maine, North Conway,
New Hampshire, and South Lake Tahoe, California, thereby strengthening the name
and image of the Company and its resorts.
Innovative Marketing Programs
The Company's marketing programs are designed to: (i) establish a
nationally recognized high-quality name and image, while promoting the unique
characteristics of its individual resorts, (ii) capitalize on cross-selling
opportunities, and (iii) enhance customer loyalty. The Company engages in joint
marketing programs with nationally recognized commercial partners such as
Marriott, Mobil, Budweiser, Pepsi/Mountain Dew, Saab, Motorola, Vermont Pure,
Very Fine, Kodak, Swatch, Airwalk, FILA, Burton and Rossignol. Management
believes these joint marketing programs create a high-quality image and a strong
market presence on a regional and national basis. In addition, the Company
utilizes loyalty based incentive programs such as the Edge Card, a private label
frequent skier program in which participants receive credits towards lift
tickets and other products.
The Company utilizes a variety of marketing media including direct mail,
television and the Internet. Television marketing efforts include targeted
commercials and programming such as the MTV Winter Lodge, which is hosted by MTV
and targets teens and young adults. Internet marketing efforts include a Company
sponsored web site at www.peaks.com featuring photographs and detailed
information about the Company's resorts and current skiing conditions. The
Company's aggregate marketing budget for fiscal 1998 was approximately $28
million, including the value of contributions from strategic commercial
marketing partners.
10
High Impact Capital Improvements
The Company attracts skiers to its resorts by creating a superior
skiing and riding experience through high impact capital investments in
on-mountain facilities. The Company focuses its investments on increasing lift
capacity, expanding skiable terrain and snowmaking coverage, and developing
other exciting alpine attractions. For example, during the last two years the
Company has: (i) expanded glade skiing terrain at most resorts, (ii) expanded
skiable terrain at The Canyons to 2,700 acres making it one of Utah's largest
resorts, and (iii) installed heated eight-passenger high-speed gondolas at
Killington and The Canyons. Since 1994, when the Company began implementing its
acquisition strategy, the Company has significantly increased lift capacity,
skiable terrain and snowmaking coverage at its resorts.
Growth through Acquisitions
Since fiscal 1994, the Company has achieved substantial growth in its
business through acquisitions. The Company intends to consider future
acquisitions of large well-established destination resorts as well as smaller
"feeder" resorts. The Company focuses on acquiring larger resorts where it
believes it can improve profitability by implementing the Company's integrated
real estate development and on-mountain capital improvement strategy. The
Company also believes that by acquiring smaller regional resorts which have a
strong local following it can capitalize on a broader customer base to
cross-market its major destination resorts. The acquisition of less developed
resorts may also offer opportunities for expansion.
Integration of Investments in Resort Infrastructure and Real Estate
The Company develops mountainside real estate that complements its
investments in ski operations to enhance the overall attractiveness of its
resorts as vacation destinations. Management believes that this integrated
approach results in growth in overall skier visits, including multi-day visits,
while generating significant revenues from real estate sales and lodging.
Investment typically begins with on-mountain capital improvements such as the
creation of new lifts, trails, expanded snowmaking capability, additional
restaurants and improved ski schools. As resort attendance increases, the
Company develops mountainside real estate to provide accommodations for the
increased number of resort guests. The Company carefully manages the type and
timing of real estate development to achieve capital appreciation and high
occupancy of accommodations. The Company's integrated investment strategy was
developed and refined at its Sunday River resort, where it has sold over 1,600
units of residential real estate since 1983. During the same period, annual
skier visits at Sunday River increased from approximately 50,000 to over
550,000, representing an approximate 18% compound annual growth rate.
Mountainside Real Estate Development
The Company's real estate development strategy is designed to
capitalize on the 7,000 acres of developable land it controls at or near its
resorts and its 15 years of experience in real estate development. The Company
owns or has rights to land providing the capacity to develop over 30,000
residential units. The Company's resort real estate development strategy is
comprised of three distinct, but related, components: (i) Grand Summit
quartershare hotels, (ii) alpine resort village development and (iii) discrete
resort-specific projects. Residential units in Grand Summit Hotels are sold in
quartershare interval interests that allow each of four quartershare unit owners
to use the unit for 13 weeks divided evenly over the year. In addition to its
Grand Summit Hotels, the Company is developing alpine resort villages at five of
its largest resorts. Each village consists of carefully planned communities
integrated with condominiums, luxury townhouses, single family luxury dwellings
or lots and commercial properties. The Company established a strategic
partnership with Marriott Ownership Resorts, Inc. which will bring 200 unit
timeshare resort villas to the center of each resort village. Each of the
Company's resorts also has the potential for additional real estate development
involving discrete projects tailored to the characteristics of the particular
resort.
11
Expand Golf and Convention Business
The Company is one of the largest owners and operators of resort golf
courses in New England and seeks to capitalize on this status to increase
off-season revenues. Sugarloaf, Killington, Mount Snow/Haystack and Sugarbush
all operate championship resort golf courses. The Sugarloaf course, designed by
Robert Trent Jones, Jr., is rated as one of the top 25 upscale courses in the
country according to the May 1996 Golf Digest magazine survey and one of the top
25 public courses in the country according to the May 1996 Golf magazine survey.
In addition, a championship course designed by Robert Trent Jones, Jr. is
currently under construction at Sunday River. The Company also operates eight
golf schools at locations along the East Coast from Florida to Maine. The
Company's golf program and other recreational activities draw off-season
visitors to the Company's resorts and support the Company's growing off-season
convention business, as well as its real estate development operations.
Resort Operations
The Company's resort revenues are derived from a wide variety of sources
including lift ticket sales, food and beverage, retail sales including rental
and repair, skier development, lodging and property management, golf, other
summer activities and miscellaneous revenue sources. Lift ticket sales represent
the single largest source of resort revenues and represented approximately 48%
of total resort operations revenue for fiscal 1998, after giving pro forma
effect for the November 1997 acquisition of Heavenly and Steamboat Resorts.
The following chart reflects the Company's sources of resort revenues
across certain revenue categories as well as the percentage of resort revenues
constituted by each category for the fiscal year ended July 26, 1998, on a pro
forma basis.
....
Fiscal Year Ended July 26, 1998
Pro Forma
Revenue Category Resort Revenues Percentage of
(in millions) Resort Revenues
Lift Tickets .................................... $136.1 48.2%
Food and Beverage ................................. 35.7 12.7%
Retail Sales ...................................... 39.6 14.0%
Lodging and property management.................... 29.7 10.5%
Skier development ................................. 22.3 7.9%
Golf, other summer activities and miscellaneous ... 18.8 6.7%
- - --------------------------------------------------- ----- -----
Total Resort Revenues ............................. $282.2 100.0%
12
Lift Ticket Sales. The Company manages its lift ticket programs and
products so as to increase the Company's ticket yields. Lift tickets are sold to
customers in packages including accommodations in order to maximize occupancy.
In order to maximize skier visits during non-peak periods and to attract
specific market segments, the Company offers a wide variety of incentive-based
lift ticket programs. The Company manages its ticket yields during peak periods
so as to maximize aggregate lift ticket revenues.
Food and Beverage. Food and beverage sales provide significant revenues for
the Company. The Company owns and operates the food and beverage facilities at
its resorts, with the exception of the Sugarloaf resort, which is under a
long-term concession contract that pre-existed the Company's ownership. The
Company's food and beverage strategy is to provide a wide variety of
restaurants, bars, cafes, cafeterias and other food and beverage outlets. The
Company's control of its on-mountain and base area food and beverage facilities
allows it to capture a larger proportion of guest spending as well as to ensure
product and service quality. The Company currently owns and operates over 40
different food and beverage outlets.
Retail Sales. Retail revenue aids in stabilizing the Company's daily and
weekly cash flows, as the Company's retail shops tend to have the strongest
sales on poor weather days. Across all of its resorts, the Company owns over 80
retail and ski rental shops. The large number of retail locations operated by
the Company allows it to improve margins through large quantity purchase
agreements and sponsorship relationships. On-mountain shops sell ski accessories
such as goggles, sunglasses, hats, gloves, skis, snowboards, boots and larger
soft goods such as jackets and snowsuits. In addition, all locations offer the
Company's own logo-wear which generally provides higher profit margins than
other retail products. In the non-winter seasons, the shops sell mountain bikes,
in-line skates, tennis equipment and warm weather apparel. In addition, in 1997,
the Company expanded its retail operations, by expanding and opening new
off-site retail facilities in high traffic areas, such as stores on the
Killington Access Road, in downtown South Lake Tahoe, and in the Freeport, Maine
and North Conway, New Hampshire retail districts.
Lodging and Property Management. The Company's lodging and property
management departments manage its own properties as well as properties owned by
third parties. Currently, the Company's lodging departments manage approximately
1,750 lodging units at the Company's Resorts. The lodging departments perform a
full complement of guest services including reservations, property management,
housekeeping and brokerage operations. Most resorts have a welcome center to
which newly arriving guests are directed. The center allocates accommodations
and provides guests with information on all of the resort's activities and
services. The Company's property management operation seeks to maximize the
synergies that exist between lodging and lift ticket promotions.
13
Skier Development. The Company has been an industry leader in the
development of learn to ski programs. Its Guaranteed Learn to Ski Program was
one of the first skier development programs to guaranty that a customer would
learn to ski in one day. The success of this program led to the development of
"Perfect Turn," which management believes was the first combined skier
development and marketing program in the ski industry. Perfect Turn ski
professionals receive specialized training in coaching, communication, skiing
and both selling related products and cross selling other resort goods and
services. Perfect Turn is currently licensed to five resorts in the United
States and Canada. The Company operates a hard goods marketing program at each
of its resorts designed to allow customers to test skis and snowboards with ski
professionals, purchase their equipment from those professionals and receive
ongoing product and technological support through Perfect Turn. For the 1998-99
season the Company has embarked upon a new skier development program that will
focus on the marketing and sales of the entire mountain resort experience,
rather than simply traditional learn-to-ski concepts.
Marketing Programs
The Company's marketing programs are designed to: (i) increase the skier
and rider market, (ii) build the individual images of the Company's resorts,
(iii) retain customers within the Company's system of resorts through loyalty
programs, (iv) utilize marketing partners to leverage marketing efforts, and
(v) develop new programs in both summer and winter to attract new guests.
Increase the skier and rider market: The company has developed a new
and proprietary skier development system. It combines the unique learning method
of Perfect Turn with graduated length skis, a new sales process and specially
designed discovery centers for first time skiers and riders. Management believes
this new system will significantly increase the retention rate of first time
skiers and riders. In addition to this new system the Company is implementing a
major public relations campaign with Jonny Moseley, 1998 Olympic Gold Medalist
in Freestyle Mogul Skiing, as the official spokesperson of the Company designed
to increase participation in the sport.
Build the individual images of the Company's resorts: The Company's
resorts attract different and distinct market segments. Marketing emphasis is on
building a close relationship with the Company's guests. Management believes
that by establishing a clear, concise and compelling position for each resort,
customer loyalty will be increased.
Retain customers within our system of resorts through loyalty programs: The
Company has developed several loyalty programs to retain customers within the
Company's system: (i) Magnificent 7 which allows frequent skiers to purchase 7
or more days of skiing at a special price, (ii) season passes which are targeted
to the very frequent skiers, (iii) The Edge(R) frequent skier card targeted to
less frequent skiers that can earn points towards future lift ticket purchases,
(iv) the direct to lift Edge card which allows guests to earn frequent skier
points and bypass ticket windows, and (v) The First USA Edge Visa(R) card with a
special bonus points program based on charge volume that enables guests to earn
credits to be used at our resorts.
Utilize marketing partners to leverage our marketing efforts: The Company,
because of the demographics of its customers and its high profile image, is a
very attractive asset to major marketers. The company has entered into
promotional agreements that include television, radio and special events
programs with many major corporations including Marriott, Mobil, Budweiser,
Pepsi/Mountain Dew, SAAB, Motorola, Vermont Pure, Very Fine, Burton, Rossignol,
Kodak, Swatch, and Airwalk.
14
Develop new programs both summer and winter to attract new guests:
Winter activities at Company resorts have been have greatly expanded with the
addition of new Fun Centers. These Fun Centers include ice skating,
snowmobiling, snow tubing, snowshoeing, luging, snowcat rides, arcades and other
indoor and outdoor activities. As part of an ongoing effort to expand summer
revenues, the Company has created Grand Summer Vacations which package the many
summer activities available at Company resorts including waterslides, canoeing,
mountain biking, climbing walls, chairlift rides, golf, tennis, hay rides,
alpine slides, BMX parks, and swimming.
Real Estate Development
General. The Company has been developing alpine resort real estate for over
fifteen years as part of its integrated resort and real estate investment
strategy. Since 1983, the Company has sold over 1,600 units of residential real
estate at Sunday River (including condominiums, townhouses and quartershare
interval ownership interests). The three components of the Company's real estate
development strategy are (i) the Grand Summit quartershare hotel concept, (ii)
development of alpine resort villages, and (iii) resort-specific discrete
projects. The Company believes it has a significant real estate development
pipeline over the next 10 to 15 years.
The Company's real estate development program achieved national
prominence in fiscal 1998. This program generated over $105 million in pre-sales
in fiscal 1998, compared with $10.4 million in fiscal 1996 and $38.7 million in
fiscal 1997. The Company opened three 200-room Grand Summit Hotels at New
England resorts and commenced construction of three new hotels at Western
Resorts on the strength of very high pre-sales.
The Company's strategy for real estate development calls for the
completion of at least 12 projects over the next 36 months. Four of these
projects are the new Grand Summit Hotels in New England, where the Company is in
the process of selling out the remaining inventory. More than 50% of the
inventory in those hotels is currently sold.
The next component of the real estate development plan is completion of
three hotels currently under construction at The Canyons in Utah and Steamboat
in Colorado. The Grand Summit Hotel at The Canyons is a 358-room full-service
hotel that has generated more than $40 million in pre-sales since marketing
began in late January 1998. The Grand Summit Hotel at Steamboat is a 325-room
facility that has generated over $26 million in presales since marketing began
in early February 1998. The final western hotel under construction is the
Company's prototype condominium hotel at The Canyons called Sundial Lodge. In
July 1998, the Company pre-sold 100% of this 150-unit facility in only ten
hours, generating $42.5 million in sales contracts.
The remaining five projects include a Grand Summit Hotel at Heavenly,
located in the Park Avenue Redevelopment District in downtown South Lake Tahoe,
and condominium hotels based upon the Company's Sundial Lodge prototype to be
constructed at The Canyons, Heavenly, Steamboat and Sunday River. Any one or
more projects from the Company's existing pipeline could be substituted for any
of these five projects, as market conditions and strategy dictate.
15
These 12 projects will make up the first phase of Management's
comprehensive development strategy, which envisions the full development of five
alpine resort villages, including one each at Sunday River, Killington,
Steamboat, The Canyons and Heavenly. Pricing strategy within each of these
villages is carefully orchestrated to build pricing momentum as development
progresses. A key measure for this development program is revenue per unit sold,
which is expected to increase as the villages gain critical mass. Each resort
village reflects the Company's carefully crafted plaza design concept, which
creates an energy center at the heart of each resort village.
In July 1998, the Company established a joint venture agreement with
Marriott Vacation Club International to bring a 200-unit timeshare luxury villa
to the center of each resort village. This unique partnership provides the
Company with access to Marriott's distribution capabilities, as well as
increases the profile of the resort villages. The combination of the Company's
alpine resort locations and Marriott's recognized brand name expands the
Company's position in the timeshare industry and is expected to provide a more
visible presence nationwide.
Development
Commencement Reserved
Dates Under Sales Future Under or future
Resort (fiscal year) Sold Development (1) Pre-Sold(2) Inventory(3) Development(4) Completed Development(1) Development(4)
- - ------ ------------- ---- --------------- ----------- ----------- -------------- ---------- ------------- -------------
Residential Units Commercial Space (square ft.)
----------------------------------------------------------------------------- ---------------------------------------
Sunday River 1982 1,625 378 51 284 4,894 248,405 -- 207,995
Sugarbush 1996 -- 352 -- -- 2,150 1,800 40,419 22,581
Attitash
Bear Peak 1996 159 460 5 256 219 40,800 -- 60,000
Killington 1997 276 -- 59 189 11,282 61,614 -- 343,086
Mt. Snow 1997 176 -- 70 294 2,308 54,785 -- 160,015
The Canyons 1997 -- 982 400 -- 5,992 14,900 106,383 299,717
Sugarloaf 1998 -- 358 -- 81 1,820 -- 8,426 120,000
Steamboat 1998 -- 928 276 -- 3,005 -- 62,950 170,350
Heavenly 1998 -- 760 -- -- 30 -- 23,315 99,287
----- ---- ---- ----- ------ ------- ------- ---------
Total 2,236 4,218 861 1,104 31,700
<FN>
(1) Includes all units or commercial space currently under construction or
in the permitting process.
(2) Pre-Sold is defined as units secured with either binding purchase and
sales agreements or non-binding reservation agreements.
(3) Sales Inventory is defined as constructed units remaining unsold.
(4) Based on,among other things, the Company's capital and development
plan for the next 10 to 15 years, the Company's estimates for
projected demand of units and the availability of developable acreage.
There can be no assurance, however, that the Company will undertake,
or have adequate financing to complete, such development, or that the
Company will receive all necessary permits and regulatory approvals.
</FN>
16
Grand Summit Hotels. The Company operates six Grand Summit Hotels and
has four additional hotels under development. The Grand Summit Hotel is a unique
interval ownership product which is based on the Company's successful Summit
Hotel at its Sunday River resort. Each hotel is a condominium consisting of both
residential and commercial units and includes: a multi-level atrium lobby, two
or more restaurants, retail space, a grand ballroom, conference space, a health
club with an outdoor heated pool and other recreational amenities. The
commercial space is retained by the Company and used to operate the core hotel
business, while the residential units are sold in quartershare interests. Each
quartershare consists of a 13-week ownership interest spread evenly across the
year. At the Company's Sunday River Hotel, owners utilize the unit for an
average of approximately three weeks out of a possible 13 weeks. Weeks that are
not used by an owner are typically dedicated to the Company's optional rental
program for rental to a third party on terms allowing the Company to retain up
to 50% of gross rental revenue. Consequently, the Company benefits from revenue
generated by: (i) the sale of units, (ii) the recurring revenues from lodging
rental revenue and (iii) other hotel and commercial operations.
Quartershare owners participate in Resort Condominium International
("RCI"), the world's largest vacation interval exchange program. The Company
also operates an internal exchange program within its expanding Grand Summit
Hotel network. The Company expects that the opportunity to exchange intervals at
any of its resorts nationwide will enhance its loyalty programs, cross-marketing
of resorts and unit sales opportunities. Alpine Village Development
Participation in the RCI program allows the Company's quartershare owners to
exchange their occupancy right for an occupancy right in one of approximately
3,000 participating resorts worldwide.
The Company has begun construction of four of its five resort villages at
The Canyons, Killington, Sunday River's Jordan Bowl, Steamboat and Heavenly.
Each village will be characterized by its proximity to resort facilities, ski
in/ski out access, dramatic landscape and resort specific design and
architecture.
The Canyons. Two distinct areas at The Canyons are in the permitting
process for resort village development. One area consists of approximately 350
acres in the base area, 150 acres of which are controlled by the Company. The
second area is the Company's High Mountain Meadows development consisting of
approximately 120 acres located on a mid-mountain plateau at an elevation of
over 8,000 feet. Each of the base area and the mid-mountain plateau area are
under long-term leases that provide an option to purchase fee title to parcels
within that area. The base area development is currently in the master planning
process with county authorities and now has fully vested rights for significant
portions of the contemplated development. The base village will be a mix of
residential and commercial space arranged in six neighborhoods designed to
create an integrated base area community, anchored by a Grand Summit Hotel. The
master plan provides for the integrated development of 150 acres of
Company-controlled property, as well as approximately 200 acres of surrounding
property owned by unrelated third parties.
17
The High Mountain Meadows development presents an opportunity to
develop a mid-mountain base area surrounded by six of the resort's 14 mountain
peaks and will be accessed by a four-mile scenic drive and an eight-passenger,
high-speed heated gondola. The village will serve as the base for skiing the
surrounding mountains, creating access to an additional 2,000 vertical feet of
skiable terrain. The primary lodge servicing this area, the Red Pine Lodge, is
located within the at the mid-mountain development and commenced operations in
the 1997-98 ski season.
The Company commenced construction of the base village during the summer of
1998, with a Grand Summit Hotel and a 150-unit prototype condominium hotel. The
village will consist of approximately two million square feet of compact,
high-density residential and commercial development. The development will be
principally a pedestrian village characterized by resort lodging, luxury
condominiums and ranches and mountain recreation properties. The zoning for the
base area and High Mountain Meadows development is being revised pursuant to
replanning provisions of the county's general plan. The proposed revision to the
zoning would permit extensive development in each area. Adequate sewer and water
capacity are available in close proximity to the resort; however, such capacity
must be purchased from third party vendors and the Company must construct the
necessary infrastructure for transport to both developments.
Killington Base Area. In December 1997, the Company consummated a land
exchange with the State of Vermont exchanging approximately 3,000 acres of
essential wildlife habitat owned by the Company for approximately 1,050 acres of
undeveloped land centrally located in the base area. As part of the Company's
proposed development plan for Killington, this parcel will be combined with an
existing 400-acre planned unit development adjacent to Killington's golf
facilities and the resort's primary base area.
The Company has retained IBI, an internationally recognized resort and
mountain-planning firm, to assist in the master planning of the village. The
400-acre planned unit development is specifically zoned for commercial
development. The village will integrate four "neighborhoods" into a planned
community containing a variety of real estate uses centering on a resort village
core. The 1,050 acres acquired from the State must be rezoned to accommodate the
planned development. The City of Rutland, Vermont and certain environmental
groups traditionally active in ski resort development have entered into a
memorandum of understanding designating the area as a growth zone to be utilized
for development. The first phase of the village contemplates 1,600 units and 1.8
million square feet of development.
The Company believes that adequate water is available from nearby wells for
both projects. Sewer capacity will be provided through the Company's recently
completed connection to the City of Rutland municipal sewer system with 600,000
gallons per day excess capacity.
Jordan Bowl at Sunday River. Jordan Village will be located on
approximately 1,100 acres of a 4,000-acre undeveloped parcel owned by the
Company at the western end of the existing resort and the center of the
Company's landholdings. The village will rest at the base of the Jordan Bowl,
one of the resort's most popular skiing areas. Development of Jordan Village
began with the construction of a scenic four-mile access road from the existing
resort center to the Jordan Village area and the December, 1997 opening of a
ski-in/ski-out 220-unit Grand Summit Hotel. Construction of a Robert Trent
Jones, Jr. championship golf course is also underway. The master plan for the
area also contemplates a high-density pedestrian village surrounded by
neighborhoods consisting of luxury townhouses and detached single family
dwellings. The Jordan Bowl area is zoned for village development. No density
restrictions apply to the area. The Company believes adequate water is available
for contemplated development and Sunday River's sewage treatment facility has
sufficient capacity to allow completion of the planned development of the
resort.
18
Steamboat Base Area. The 375-room Grand Summit Hotel under construction at
Steamboat is the first step in creating a new pedestrian village at the base of
Steamboat. The Company is working closely with local authorities to develop a
comprehensive village plan that will produce up to an estimated 1.6 million
square feet of development. A key feature of the plan is the interconnection of
the Company's largest development site at Steamboat with the resort village.
Heavenly. Immediately following the acquisition of Heavenly, the Company
entered into negotiations for, and acquired, the development rights to the Park
Avenue Development project located in the center of downtown South Lake Tahoe,
California. That area has all necessary entitlements to construct a high-speed
gondola to the summit of the resort, and two large hotel or quartershare
projects consisting of over 1 million square feet and 724 units. The Company
also has received all necessary entitlements for a 120-unit condominium hotel to
be constructed in the Stagecoach base area.
Other Resort Development
Each of the Company's resorts has the potential for additional real estate
development involving discrete projects tailored to the characteristics of the
particular resort. There can be no assurances, however, that the Company will
successfully pursue any of the development opportunities described below.
Sugarloaf. Development plans have begun for a high-density condominium
development with commercial space as an expansion to the existing alpine village
at the Bucksaw area. The first townhouses will be marketed in the 1998/1999 ski
season. There are several additional planned developments including single
family homes around the 18-hole Robert Trent Jones, Jr. Championship golf
course. Sugarloaf has over 1,100 acres of land held for development.
Mount Snow/Haystack. There are several undeveloped sites at Mount
Snow/Haystack with potential for future projects including renovation of the
current base lodge, a 21-acre parcel which could support up to 72 three-bedroom
units with direct ski lift access, and a two-acre parcel for a convention
center. Mount Snow/Haystack also owns an 800-acre parcel slated for a proposed
golf course expansion, which could create the opportunity for substantial golf
course frontage real estate development. In addition, there are approximately 30
acres of developable land at the base of Haystack.
Sugarbush. Sugarbush has all necessary entitlements for construction of a
Grand Summit Hotel. The Company is in the process of positioning the
re-introduction of that product to the market with higher levels of finish
consistent with the Company's vision for Sugarbush, which is to appeal to the
highest segment of the Eastern market.
Attitash. The Company is in the planning stages of a championship 18-hole
golf course at Attitash. together with that course will come golf/slopeside
development opportunities. This area is well suited for extension of the
Company's townhouse program.
Leased Properties
The Company's operations are wholly dependent upon its ownership or control
over the real estate constituting each resort. The following summarizes
non-owned real estate critical to operations at each resort. Management believes
each of the following leases, permits or agreements is in full force and effect
and that the Company is entitled to the benefit of such agreements.
19
Sunday River leases approximately 1,500 acres, which constitute a
substantial portion of its skiable terrain, under a 50-year lease terminating on
October 14, 2030. The lease renews automatically thereafter on a year-to-year
basis unless terminated by either the lessor or lessee. This lease was amended
on January 23, 1998 to allow SRSC to purchase portions of the leased property
for real estate development at a predetermined amount per acre. In January 1998,
the Company acquired an undivided one-half interest in the fee title to the
leased parcel.
The Sugarbush resort uses approximately 1,915 acres pursuant to a special
use permit issued by the United States Forest Service dated May 17, 1995. The
permit has a 40-year term expiring April 30, 2035. The special use permit has a
renewal option which provides that it may be renewed if the use of the property
remains compatible with the special use permit, the site is being used for the
purposes previously authorized, and the ski area has been continually operated
and maintained in accordance with all the provisions of the permit.
Mount Snow leases approximately 1,315 acres which constitute a substantial
portion of its skiable terrain. Of this total, 893 acres are occupied by Mount
Snow pursuant to a special use permit granted by the United States Forest
Service dated November 29, 1989. The permit has a 40-year term expiring December
31, 2029, which is subject to renewal at the option of Mount Snow if certain
renewal conditions are satisfied. Mount Snow also leases 252 acres, which
constitute a portion of its skiable terrain, from the Town of Wilmington,
Vermont. The lease expires November 15, 2030. There are no renewal options. In
addition, Mount Snow leases approximately 169 acres from Sargent Inc. pursuant
to two separate leases expiring September 30, 2018 and March 31, 2025,
respectively. Each lease can be renewed for an additional 30-year term. Mount
Snow also has the option to purchase the leased property and a right of first
refusal in the event Sargent Inc. receives a bona fide offer for the leased
properties.
Attitash Bear Peak uses approximately 281 acres of its skiable terrain
pursuant to a special use permit issued by the United States Forest Service
dated July 19, 1994. The permit has a 40-year term expiring July 18, 2034, which
is renewable subject to certain conditions. In addition, Attitash Bear Peak
leases a portion of its parking facilities under a lease expiring December 31,
2003. Attitash Bear Peak has the option to purchase this leased property at any
time during the lease term.
Killington leases approximately 2,500 acres from the State of Vermont. A
substantial portion of that property constitutes skiable terrain. The initial
lease was for an initial 10-year term which commenced in 1960. The lease
contains nine 10-year renewal options. Killington exercised the renewal option
in 1970, 1980 and 1990. Assuming continued exercise of Killington's option, the
lease ultimately expires in the year 2060. The lease is subject to a buy-out
option retained by the State of Vermont, as landlord. At the conclusion of each
10-year term (or extended term) the State has the option to buy out the lease
for an amount equal to Killington's adjusted capital outlay plus 10% of the
gross receipts from the operation for the preceding three years. Adjusted
capital outlay means total capital expenditures extending back to the date of
origin of the lease depreciated at 1% per annum, except that non-operable assets
depreciate at 2% per annum. This buy-out option will next become exercisable in
the year 2000. Although the Company has not had confirmation from Vermont State
officials, it has no reason to believe that the State intends to exercise the
option at that time.
20
The Sugarloaf resort leases the Sugarloaf Golf Course from the Town of
Carrabassett Valley, Maine pursuant to a lease dated June 3, 1987. The lease
term expires December 2003. Sugarloaf has an option to renew the lease for an
additional 20-year term.
The Canyons leases approximately 2,100 acres, including most of the
base area and a substantial portion of the skiable terrain, under a lease from
Wolf Mountain Resorts, LC. The initial term of this lease is 50 years expiring
July 2047, with an option to extend for three additional terms of 50 years each
(the "Wolf Lease"). The lease provides an option to purchase (subject to certain
reconveyance rights) those portions of the leased property that are intended for
residential or commercial development at a cost of 5.5% of the full capitalized
cost of such development in the case of property retained by the Company, or 11%
of such cost in the case of property intended for resale. The Canyons also
leases approximately 807 acres, which constitutes the area for the planned
mid-mountain village and a substantial portion of skiable terrain, from the
State of Utah School and Institutional Trust Land Administration. The lease term
ends in 2078 and provides an option to purchase those portions of the
mid-mountain village area that are intended for real estate development at a
cost of 25% of their fair market value on an undeveloped basis. The Wolf Lease
also includes a sublease of certain skiable terrain owned by the Osguthorpe
family. The Company has established certain additional ski development rights
under a direct agreement with the Osguthorpe family. The ski development rights
for approximately 3,000 acres of skiable terrain targeted for development by the
Company are contained in a development agreement with Iron Mountain Associates,
LLC, which agreement includes a lease of all skiable terrain for a term ending
September 13, 2094.
Heavenly uses approximately 1,543 acres of its skiable terrain located
in California and Nevada pursuant to a special use permit issued by the United
States Forest Service. The permit expires on August 5, 2029. Heavenly uses
approximately 2,000 acres of additional skiable terrain in Nevada pursuant to a
special use permit dated December 18, 1990. The permit expires on August 5,
2029.
Steamboat uses approximately 2,644 acres, a substantial portion of which is
skiable terrain, pursuant to a special use permit issued by the United States
Forest Service. The permit expires on August 31, 2029. Under Steamboat's
existing master plan, an additional 958 acres of contiguous National Forest
lands is expected to be added to the permitted area.
Systems and Technology
Information Systems. The Company's information systems are designed to
improve the ski experience through the development of more efficient guest
service products and programs. The Company has substantially implemented a
comprehensive system and technology plan including: (i) a radio frequency lift
ticket scanning system that provides more accurate tracking, control and
information on all ticket products, (ii) a direct-to-lift access system that
allows skiers to bypass the ticket window and proceed directly to the lift with
an individualized radio frequency card that directly debits their credit or
frequent-skier card, (iii) an integrated customer database that tracks
information regarding guest preferences and product purchasing patterns, (iv) an
extensive data communications network linking most point-of-sale locations
through a central database, (v) a central reservations system for use in the
resort's rental management business and (vi) a skier development reservation and
instructor scheduling system that simplifies the booking process and allows for
optimal utilization of instructors.
21
Snowmaking Systems and Technology. The Company believes it operates the
largest consolidated snowmaking operation in existence, with approximately 3,000
acres of snowmaking coverage. The Company's proprietary snowmaking software
program enables it to produce what management believes is the highest quality
man-made snow in the industry. The Company's snowmaking capability can be
implemented at its western resorts resulting in an extended season and reliable
snow conditions and consistent quality surfaces during unfavorable weather
conditions.
All of the Company's snowmaking systems are operated via computer-based
control using industrial automation software and a variety of state of the art
hardware and instrumentation. The Company utilizes an efficient ground based,
tower based and fully automated snowgun nozzle technology and has developed
software for determining the optimal snowmaking nozzle setting at multiple
locations on the mountain. This system monitors the weather conditions and
system capacities and determines the proper operating water pressure for each
nozzle, eliminating guesswork and ensuring the ideal snow quality. The Company
refers to this ideal quality product as "Retail Snow," a high quality, durable
skiing surface with top to bottom consistency. All of the snowmaking systems are
networked to provide the ability to view information from multiple locations
within its resort network. Another unique feature of the Company's system is the
current display of trail status, lift status, weather conditions and other
various on mountain information at locations throughout each resort. Much of
this information is available on the World Wide Web at the Company's and its
individual resorts' web sites.
Competition
The ski industry is highly competitive. The Company competes with mountain
resort areas in the United States, Canada and Europe. The Company also competes
with other recreation resorts, including warm weather resorts, for the vacation
guest. In order to cover the high fixed costs of operations associated with the
ski industry, the Company must maintain each of its regional, national and
international skier bases. The Company's prices are directly impacted by the
variety of alternatives presented to skiers in these markets. The most
significant competitors are resorts that are well capitalized, well managed and
have significant capital improvement and resort real estate development
programs.
The Company's resorts also face strong competition on a regional basis.
With approximately three million skier visits generated by its northeastern
resorts, competition in that region is an important consideration. The Company's
northeastern markets are the major population centers in the northeast,
particularly eastern Massachusetts, northern Connecticut, New York and northern
New Jersey. For example, skier origin data collected at Sunday River indicates
that approximately 43% of its weekend skiers reside in Massachusetts. Similar
data collected at Killington and Mount Snow indicate that approximately 23% and
35%, respectively, of their weekend skiers reside in New York, with high
concentrations from Massachusetts, Connecticut, New Jersey and Vermont. The
Colorado, Utah and California ski markets are also highly competitive.
Employees and Labor Relations
The Company employs approximately 7,826 employees at peak season and
approximately 1,600 persons full time. None of the Company's employees are
covered by any collective bargaining agreements. The Company believes it has
good relations with its employees.
22
Government Regulation
The Company's resorts are subject to a wide variety of federal, state,
regional and local laws and regulations relating to land use,
environmental/health and safety, water resources, air and water emissions,
sewage disposal, and the use, storage, discharge, emission and disposal of
hazardous materials and hazardous and nonhazardous wastes, and other
environmental matters. While management believes that the Company's resorts are
currently in material compliance with all land use and environmental laws,
failure to comply with such laws could result in costs to satisfy environmental
compliance and/or remediation requirements or the imposition of severe penalties
or restrictions on operations by government agencies or courts that could
adversely affect operations. Phase I environmental assessments have been
completed on all nine resort properties. The reports identified areas of
potential environmental concern including the need to upgrade existing
underground storage tanks at several facilities and to potentially remediate
petroleum releases. In addition, the Phase I environmental assessment for The
Canyons indicated some soil contamination in areas where underground storage
tanks have been removed. At this point, the extent or significance of the
contamination at that site is unknown. The reports did not, however, identify
any environmental conditions or non-compliance at any of the resorts, the
remediation or correction of which management believes would have a material
adverse impact on the business or financial condition of the Company or results
of operations or cash flows. The Killington resort has been identified by the
U.S. Environmental Protection Agency (the "EPA") as a potentially responsible
party ("PRP") at two sites pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA" or "Superfund"). Killington has
entered into a settlement agreement with the EPA at one of the sites, the
Solvents Recovery Service of New England Superfund site in Southington,
Connecticut. Killington recently rejected an offer to enter into a de minimis
settlement with the EPA for the other site, the PSC Resources Superfund Site in
Palmer, Massachusetts, on the basis that Killington disputes its designation as
a PRP. The Company believes that its liability for these Superfund sites,
individually and in the aggregate, will not have a material adverse effect on
the business or financial condition of the Company or results of operations or
cash flows. The Company believes it has all permits, licenses and approvals from
governmental authorities material to the operation of the resorts as currently
configured. The Company has not received any notice of material non-compliance
with permits, licenses or approvals necessary for the operation of any of its
properties.
The capital programs at the resorts will require permits and approvals from
certain federal, state, regional and local authorities. The Company's operations
are heavily dependent upon its continued ability, under applicable laws,
regulations, policies, permits, licenses or contractual arrangements, to have
access to adequate supplies of water with which to make snow and service the
other needs of its facilities, and otherwise to conduct its operations. There
can be no assurance that new applications of existing laws, regulations and
policies, or changes in such laws, regulations and policies will not occur in a
manner that would have a material adverse effect on the Company, or that
important permits, licenses or agreements will not be canceled, not renewed, or
renewed on terms no less favorable to the Company. Major expansions of any one
or more resorts could require the filing of an environmental impact statement
under environmental laws and applicable regulations if it is determined that the
expansion has a significant impact upon the environment and could require
numerous other federal, state and/or local approvals.
23
Although the Company has consistently been successful in implementing its
capital expansion plans, no assurance can be given that necessary permits and
approvals will be obtained. The Company's marketing and sales of interval
ownership interests is subject to extensive federal and state government
regulation.
Item 2
Properties
The Resorts include several of the top resorts in the United States,
including: (i) Steamboat, the number two overall ski resort in the United
States, as ranked in the September 1997 Snow Country magazine survey, and the
fifth largest ski resort in the United States with over 1.0 million skier visits
in the 1997-98 ski season; (ii) Killington, the fourth largest resort in the
United States with over 1.0 million skier visits in the 1997-98 ski season;
(iii) three of the four largest resorts in the Northeast (Killington, Sunday
River and Mount Snow/Haystack) in the 1997-98 ski season; (iv) Heavenly, which
ranked as the second largest resort in the Pacific West region for the 1997-98
season with a resort record 888,000 skier visits; and (v) Sugarloaf, the number
one resort in the Northeast according to the September 1997 Snow Country
magazine survey.
The following table summarizes certain key statistics of the Company's resorts:
Skiable Vertical Snowmaking 1997-98
Terrain Drop Total Coverage Ski Skier
Resort (Year Acquired) (acres) (feet) Trails Lifts (% of acres) Lodges Visits
(high-speed) (000s)
Killington (1996) 1,200 3,150 205 33(6) 59.8% 8 1,077
Sunday River (1980) 654 2,340 126 18(4) 93.3 4 552
Mount Snow/Haystack (1996) 763 1,700 134 26(3) 66.0 5 602
Sugarloaf (1996) 1,400 2,820 126 14(2) 35.0 1 358
Sugarbush (1995) 432 2,650 112 18(4) 66.1 5 388
Attitash Bear Peak (1994) 273 1,750 60 13(2) 89.7 2 233
The Canyons (1997) 2,700 3,190 63 13(9) 5.6 2 168
Steamboat (1997) 1,879 3,668 140 24(4) 13.6 4 1,053
Heavenly (1997) 4,800 3,500 82 27(6) 5.7 7 888
----- ----- ----- ----- --- -- -----
Total 14,101 1,048 186(40) 38 5,319
See the Item 1 Section entitled "Business - Resorts" for a more
detailed description of the Company's resorts.
24
Item 3
Legal Proceedings
The Company currently and from time to time is involved in litigation
arising in the ordinary course of its business. The Company does not believe
that it is involved in any litigation that will, individually or in the
aggregate, have a material adverse effect on its financial condition or results
of operations or cash flows.
Each of the Company's subsidiaries which operate resorts have pending
claims and are regularly subject to suits with respect to personal injury claims
related principally to skiing activities at such resort. Each of these operating
companies maintains liability insurance that the Company considers adequate to
insure claims related to usual and customary risks associated with the operation
of a ski resort. The Company operates a captive insurance company authorized
under the laws of the State of Vermont, which provides liability and workers'
compensation coverage for its resorts located in Vermont.
Item 4
Submission of Matters to a Vote of Security Holders
Not applicable.
25
PART II
Item 5
Market for the Registrant's Common Stock and Related Security Holder
Matters.
The Company's Common Stock is traded on the New York Stock Exchange
under the symbol "SKI". The Company's Class A Common Stock is not listed on any
exchange and is not publicly traded, but is convertable into Common Stock of the
Company. As of October 23, 1998, 30,285,552 shares of common stock were issued
and outstanding, of which 14,760,530 shares were Class A Common Stock held by
one holder and 15,525,022 shares of Common Stock held by approximately 5,000
holders.
The following table sets forth, for the fiscal quarters indicated (ended
January 25, 1998, April 26, 1998, and July 26, 1998, the range of high and low
sale prices of the Company's common stock as reported on the NYSE Composite
Tape. Prior to the offering on November 6, 1997, there was no established
public trading market for the common stock of the Company.
Fiscal 1998 Common Stock
High Low
1st Quarter --- ---
2nd Quarter $18.25 $12.00
3rd Quarter $17.00 $12.50
4th Quarter $16.00 $12.13
Market Information
The Company has not declared or paid any cash dividends on its capital
stock. The Company currently intends to retain earnings, if any, to support its
capital improvement and growth strategies and does not anticipate paying cash
dividends on its Common Stock in the foreseeable future. Payment of future
dividends, if any, will be at the discretion of the Company's Board of Directors
after taking into account various factors, including the Company's financial
condition, operating results, current and anticipated cash needs and plans for
capital improvements and expansion. The Indenture governing the Company's 12%
Senior Subordinated Notes due 2002 contains certain restrictive covenants that,
among other things, limit the payment of dividends or the making of
distributions on equity interests of the Company.
Item 6
Selected Financial Data
The following selected historical financial data of the Company have been
derived from the financial statements of the Company audited by
PricewaterhouseCoopers LLP, independent accountants as of and for each of the
fiscal years ended July 30, 1995, July 28, 1996, July 27, 1997 and July 26,
1998; and for the year ended July 31, 1994 have been derived from the financial
statements of the Company audited by Berry, Dunn, McNeil & Parker, independent
accountants.
26
Historical Year Ended (1)
-----------------------------------------------------------------
July 31, July 30, July 28, July 27, July 26,
1994 1995 1996 1997 1998
-----------------------------------------------------------------
(in thousands, except per share, real estate units,
and skier visit amounts)
Consolidated Statement of Operations Data:
Net revenues:
Resort.................................................... $26,544 $ 46,794 $ 63,489 $166,923 $278,577
Real estate............................................... 6,682 7,953 9,933 8,468 61,843
------- ------- -------- -------- --------
Total net revenues................................... 33,226 54,747 73,422 175,391 340,420
------- ------- -------- -------- --------
Operating expenses:
Resort.................................................... 15,787 29,725 41,799 109,774 169,865
Real estate............................................... 3,179 3,994 5,844 6,813 44,292
Marketing, general and administrative (2)................. 5,940 9,394 11,289 26,126 42,554
Stock compensation charge.................................. -- -- -- -- 14,254
Depreciation and amortization............................. 2,421 3,910 6,783 18,293 37,966
------- ------- ------- -------- -------
Total operating expenses............................. 27,327 47,023 65,715 161,006 308,931
------- ------- ------- -------- -------
Income from operations......................................... 5,899 7,724 7,707 14,385 31,489
Other expenses:
Commitment fee............................................ -- -- 1,447 -- --
Interest expense.......................................... 1,026 2,205 4,699 23,730 34,575
------- ------- ------- ------- -------
Income (loss) before provision (benefit) for income taxes and
minority interest in loss of subsidiary..................... 4,873 5,519 1,561 (9,345) (3,086)
Provision (benefit) for income taxes........................... -- 400 3,906 (3,613) (774)
Minority interest in loss of subsidiary................. ..... -- -- (108) (250) (445)
------- ------- ------- ------- -------
Income (loss) from continuing operations...................... 4,873 5,119 (2,237) (5,482) (1,867)
Extraordinary loss, net of income tax benefit ................ -- -- -- -- 5,081
------- ------- ------- ------- -------
Net income (loss).............................................. 4,873 5,119 (2,237) (5,482) (6,948)
------- ------- ------- ------- -------
Accretion of discount and issuance costs and dividends accrued
on mandatorily redeemable preferred stock.................... -- -- -- 444 5,346
------- ------- ------- ------- -------
Net income (loss) available to common shareholders............. $ 4,873 $ 5,119 $(2,237) $(5,926) $(12,294)
======= ======= ======= ======= ========
Basic and diluted loss per common share:
Continuing operations....................... ................ -- -- $ (2.37) $ (5.61) $(0.07)
Extraordinary loss .......................................... -- -- -- -- (0.20)
Net loss available to common shareholders ................... -- -- (2.37) (6.06) (0.48)
Weighted average common shares outstanding .................... -- -- 942 978 25,832
------- ------- ------- ------- ------
Other Data:
Resort:
Skier visits (000's)(3)................................... 528 1,060 1,290 3,025 5,322
Season pass holders (000's)............................... 3.7 11.2 13.2 30.9 44.1
Resort revenues per skier visit........................... $ 50.26 $ 44.15 $ 49.22 $ 55.18 $52.34
Resort EBITDA(4)(5)....................................... $ 4,817 $ 7,675 $ 10,401 $ 31,023 $66,158
Real estate:
Number of units sold...................................... 155 163 177 123 1,009
Number of units pre-sold(6)............................... -- -- 109 605 861
Real estate EBIT(5)(7).................................... $ 3,503 $ 3,959 $ 4,089 $ 1,655 $17,551
Statement of Cash Flows Data:
Cash flows from operations................................ $ 5,483 $ 12,593 $ 7,465 $ 6,788 3,621
Cash flows from investing activities...................... (9,041) (13,843) (122,583) (14,070)(384,303)
Cash flows from financing activities...................... 3,764 2,399 116,941 19,655 380,494
Balance Sheet Data:
Total assets.............................................. $51,784 $ 72,434 $298,732 $ 337,340 780,899
Mandatorily redeemable preferred stock ................... -- -- -- 16,821 39,464
Long term debt, including current maturities.............. 22,724 35,056 210,720 236,330 383,220
Common shareholders' equity............................... 26,212 30,502 21,903 15,101 268,204
(1) The historical results of the company reflect the results of operations of
the Attitash Bear Peak ski resort since its acquisition in July 1994, the
results of operations of the Sugarbush ski resort since October 1994, the
results of operations of the Mount Cranmore ski resort from its acquisition in
June 1995 through its divestiture in November 1996, the results of operation of
S-K-I Ltd. since its acquisition in June 1996 and the results of operation of
Pico Mountain since its acquisition in November 1996.
(2)In the first quarter of fiscal 1998, the Company granted to certain executive
officers and other employees fully vested options to purchase 622,038 shares of
Common Stock at an exercise price of $2.00 per share. The Company also agreed to
pay certain tax liabilities which the recipients of the options expect to incur
upon exercise of the options. Because the $2.00 per share exercise price was
below the fair market value of a share of Common Stock on the date of grant, the
Company recognized a one-time compensation charge of $14.3 million in fiscal
1998.
(3)For the purposes of estimating skier visits, the Company assumes that a
season pass holder visits the Company's resorts a number of times that
approximates the average cost of a season pass divided by the average daily lift
ticket price.
(4)Resort EBITDA represents resort revenues less cost of resort operations and
marketing, general and administrative expense.
(5)Resort EBITDA and Real Estate EBIT are not measurements calculated in
accordance with GAAP and should not be considered as alternatives to operating
or net income as an indicator of operating performance, cash flows as a measure
of liquidity or any other GAAP determined measurement. Certain items excluded
from Resort EBITDA and/or Real Estate EBIT, such as depreciation, amortization
and non-cash charges for stock compensation awards and asset impairments are
significant components in understanding and assessing the Company's financial
performance. Other companies may define Resort EBITDA and Real Estate EBIT
differently, and as a result, such measures may not be comparable to the
Company's Resort EBITDA and Real Estate EBIT. The Company has included
information concerning Resort EBITDA and Real Estate EBIT because management
believes they are indicative measures of the Company's liquidity and financial
position, and are generally used by investors to evaluate companies in the
resort industry.
(6)Presold units represent quartershare and other residential units for which
the Company has a binding sales contract, subject to certain closing conditions,
and has received a 5% down payment on the unit from the purchaser. Recognition
of the revenue from such pre-sales is deferred until the period in which such
sales are closed.
(7)Real Estate EBIT represents revenues from real estate sales less cost of real
estate sold, including selling costs, holding costs, the allocated capitalized
cost of land, construction costs and other costs relating to property sold.
27
Item 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
We are pleased to present to you management's discussion and analysis
of financial condition and results of operations for the twelve months ended
July 26, 1998. The results include the Steamboat and Heavenly resorts which were
acquired on November 12, 1997. As you read the material below, we urge you to
carefully consider the audited Consolidated Financial Statements and related
notes contained elsewhere in this report.
Liquidity and Capital Resources
Short-Term. The Company's primary short-term liquidity needs are
funding seasonal working capital requirements, continuing the real estate
development, completing projects initiated in the Company's summer 1998 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 working capital and
ski-related capital improvements are cash flow from operations of its
subsidiaries and borrowings under the New Credit Facility (as hereinafter
defined). Real estate development is funded primarily through construction
financing facilities established for major real estate development projects and
through the mezzanine facilities established or to be established through the
Company's real estate development holding company, American Skiing Company
Resort Properties, Inc. ("Resort Properties"). The construction financing
facility and Resort Properties mezzanine facilities are without recourse to
American Skiing Company and its resort operating subsidiaries.
The Company established a new credit facility on November 12, 1997 (as
amended to date, the "New Credit Facility"). The New Credit Facility is divided
into two sub-facilities, $65 million of which ($4.5 million of which was
available at July 26, 1998) is available for borrowings by ASC East, Inc. and
its subsidiaries (the "East Facility") and $150 million of which ($15.8 million
of which was available at July 26, 1998) is available for borrowings by the
Company excluding ASC East, Inc. and its subsidiaries (the "West Facility"). The
East Facility consists of a six-year revolving credit facility in the amount of
$35 million and an eight-year term facility in the amount of $30 million. The
West Facility consists of a six-year revolving facility in the amount of $75
million and an eight-year term facility in the amount of $75 million.
The revolving facilities are subject to annual 30-day clean down
requirements to an outstanding balance of not more than $10 million for the East
Facility and not more that $35 million for the West Facility. The maximum
availability under the revolving facilities will reduce over the term of the New
Credit Facility by certain prescribed amounts. The term facilities amortize at a
rate of approximately 1.0% of the principal amount for the first six years with
the remaining portion of the principal due in two substantially equal
installments in years seven and eight. Beginning in July 1999, the New Credit
Facility requires mandatory prepayment of 50% of the Company's excess cash flows
during any period in which the ratio of the Company's total senior debt to
EBITDA exceeds 3.50 to 1. In no event, however, will such mandatory prepayments
reduce either revolving facility commitment below $35 million. The New Credit
Facility contains affirmative, negative and financial covenants customary for
this type of senior credit facility, including maintenance of customary
financial ratios. Except for a leverage test, compliance with financial
covenants is determined on a consolidated basis notwithstanding the bifurcation
of the New Credit Facility into sub-facilities. The East Facility is secured by
substantially all the assets of ASC East, Inc. and its subsidiaries, except its
real estate development subsidiaries, which are not borrowers under the New
Credit Facility. The West Facility is secured by substantially all the assets of
the Company and its subsidiaries, except ASC East, Inc. and its subsidiaries.
28
The Company retained approximately $15 million of unexpended proceeds
from its initial public offering. As of July 26, 1998, these proceeds were
invested in Resort Properties. In the fourth quarter of the Company's fiscal
1998, these proceeds were treated as capital contribution to real estate.
ASC East, Inc. is prohibited under the indenture governing its $120
million 12% Senior Subordinated Notes due 2006 from paying dividends or making
other distributions to the Company, except under certain circumstances.
Therefore, ASC East, Inc.'s ability to distribute excess cash to the Company for
use by the Company or its other subsidiaries is limited.
The Company issued $17.5 million of convertible, preferred stock and
$17.5 million convertible notes in July, 1997 to fund development at The
Canyons. These securities were converted on November 12, 1997, into 10 1/2%
Mandatorily Redeemable Preferred Stock of the Company.
In the fourth quarter of 1998, the Company withdrew an offer to holders of
ASC East, Inc.'s $120 million 12% Senior Subordinated Notes to exchange those
obligations for $120 million of 12% Senior Subordinated Notes of the Company
("Exchange Offer"), and also canceled a planned $100 million bond offering (the
"Bond Offering"). Each of these offerings were canceled due to adverse market
conditions. The Company had planned to use the proceeds of the Bond Offering to
fund Summer 1998 capital improvements and make an equity investment in the
Company's real estate holding subsidiary, Resort Properties.
Following cancellation of the Exchange Offer and the Bond Offering,
management of the Company opted to fund Summer 1998 capital improvements through
the New Credit Facility and a $31 million leasing facility arranged by
BancBoston Leasing, Inc. Interim funding of working capital for Resort
Properties and its planned 1998 real estate development program was obtained
through a loan from BankBoston, N.A. and Morgan Stanley Capital Funding in the
amount of $30 million, which closed on September 4, 1998 (the "Bridge Loan").
The Bridge Loan bears interest at a rate of 14% per annum (payable monthly in
arrears) and matures on December 4, 1998. The Bridge Loan is secured by security
interests in and mortgages on substantially all of Resort Properties' assets, on
which security interests and mortgages will not be perfected or recorded until
and unless a default occurs under the terms of the loan. Resort Properties
expects to repay the Bridge Loan with the proceeds of an $85 million
subordinated debt financing ("Mezzanine Facility"), which it is currently in the
process of privately placing. No assurance can be given that the $85 million
Mezzanine Facility will be successfully placed or that the terms of the
Mezzanine Facility will not be costly, restrictive to Resort Properties'
operations or dilutive of the Company's existing shareholders. Failure to place
the Mezzanine Facility would require curtailing a major portion of future real
estate development and refinancing the Bridge Loan to provide longer term
funding for Resort Properties' existing seven development projects. The Bridge
Loan is non-recourse to American Skiing Company and its resort operating
subsidiaries. The Mezzanine Facility is expected to be non-recourse to American
Skiing Company and its resort operating subsidairies.
29
The Company runs 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 which are
being financed through a $145 million construction loan facility between Grand
Summit Resort Properties, Inc., ("GSRP", the Company's Grand Summit development
subsidiary) and TFC Textron Financial, which closed on September 25, 1998 (the
"Textron Facility"). A portion of the proceeds of the Textron Facility were also
used to refinance an existing facility with TFC Textron used to finance
construction of Grand Summit Hotels at Killington, Mt. Snow, Sunday River and
Attitash Bear Peak, which had $31.4 million outstanding as of July 26, 1998. The
Textron Facility bears interest at the rate of prime plus 1.5% per annum
(payable monthly in arrears), subject to a 9.25% floor, and matures on September
24, 2002. The principal is payable incrementally as quartershare sales are
closed at the rate of 80% of the net proceeds of each closing. The Textron
Facility is secured by mortgages against the project sites, is subject to
customary covenants, representations and warranties for this type of
construction facility, and is non-recourse to American Skiing Company and its
operating subsidiaries. The Textron Facility, together with funds invested by
the Company, is sufficient to fund all of the Company's Grand Summit Hotel
projects for which the Company is currently in pre-sales.
The remaining hotel project commenced by the Company in 1998, the
Sundial Lodge project at The Canyons, is expected to be financed through a
construction loan facility with KeyBank, N.A. in a principal amount equal to 90%
of the total project cost (the "Key Facility"), and the remaining proceeds of
the Bridge Loan. The Company anticipates that this facility will close in the
Company's second fiscal quarter of 1999. No assurance can be given that the Key
Facility will close as currently contemplated.
Due to the seasonality of the Company's business, the Company's
maximum annual leverage occurs during the months of November and December.
During fiscal 1999, the Company expects to reach its maximum leverage point in
December, 1998 at which time borrowings (exclusive of real estate borrowings
with recourse only to Resort Properties and/or its subsidiaries) are expected to
approximate $380 million. During this period, the Company expects to have
little, if any, borrowing availability under the New Credit Facility and will
have limited ability to fund extraordinary expenses.
Long-Term. The Company's primary long-term liquidity needs are to fund
skiing related capital improvements at certain of its resorts, extensive
development of its slopeside real estate, and any future acquisitions of resort
properties. The Company has invested over $130 million in skiing related
facilities in fiscal years 1997 and 1998 combined. As a result, the Company
expects its resort capital programs for the next several fiscal years to be more
limited in size. The fiscal 1999 resort capital program is expected to total
approximately $55 million, with the summer 1999 resort capital program estimated
at between $25 million and $35 million. The Company anticipates its annual
maintenance capital needs to be approximately $12 million.
30
The Company's largest long-term capital needs relate to The Canyons resort
in Utah and the Company's real estate development program. The Canyons resort
will require an estimated $30 million over the next three years to fully develop
on-mountain facilities in time for the 2002 Winter Olympic Games. Other major
capital expenditures anticipated during the next several fiscal years include
the interconnection of its Killington and Pico resorts, at an estimated cost of
$7.0 million, and water projects at its Killington and Mount Snow resorts, at an
estimated cost of $4.0 million each and at The Canyons at an estimated cost of
$12.3 million.
There is a considerable degree of flexibility in the timing and, to a
lesser degree, scope of these capital improvements. Although specific capital
expenditures can be deferred for extended periods, continued growth of skier
visits, revenues and profitability will require continued capital investment in
on-mountain improvements. The Company's practice is to finance on-mountain
capital improvements through resort cash flow and its senior credit facility.
The size and scope of the capital improvement program will generally be
determined annually depending upon future availability of cash flow from each
season's resort operations and future borrowing availability under the New
Credit Facility.
The Company's business plan anticipates the development of both Grand
Summit hotels and condominium hotels at several resorts, and resort villages at
Sunday River, Killington, The Canyons, Steamboat and Heavenly. All real estate
development is undertaken through the Company's real estate development
subsidiary, Resort Properties. Recourse on indebtedness incurred to finance real
estate development is limited to Resort Properties and/or its subsidiaries.
Resort Properties' seven existing development projects are currently funded by
the Bridge Loan, the Textron Facility and the anticipated Key Facility. The
Bridge Loan matures December 4, 1998, and is anticipated to be refinanced with a
portion of the proceeds of the Mezzanine Facility. No assurance can be provided
that the Mezzanine Facility will close prior to the maturity of the Bridge Loan.
The Company expects to undertake future real estate development projects
through special purpose subsidiaries with financing provided principally on a
limited recourse basis. Required equity contributions for approximately the next
five of these projects are expected to be made using the remaining proceeds of
the Mezzanine Facility and sales proceeds from the Company's four existing Grand
Summit Hotel projects. Financing commitments for future real estate development
do not currently exist, and no assurance can be given that they will be
available or established. The Company will be required to establish construction
facilities or other financing arrangements for these projects before undertaking
each development.
The Company from time to time considers potential acquisitions which would
be accretive to earnings. There are not currently any funding sources
immediately available to the Company for such acquisitions, however, and the
Company would need to establish such sources prior to consummating any such
acquisition.
31
Results of Operations of the Company
The following table sets forth, for the periods indicated, certain
operating data of the Company as a percentage of revenues.
Fiscal Year Ended
--------------------------------------------
July 28, 1996 July 27, 1997 July 26, 1998
--------------------------------------------
Revenues:
Resort ................................................ 86.5% 95.2% 81.8%
Real estate ........................................... 13.5 4.8 18.2
----- ----- -----
Total revenues ................................... 100.0 100.0 100.0
----- ----- -----
Operating expenses:
Resort .................................................. 56.9 62.6 49.9
Cost of real estate sold................................. 8.0 3.9 13.0
Marketing, general and administrative ................... 15.4 14.9 12.5
Stock compensation charge................................ 4.2
Depreciation and amortization ........................... 9.2 10.4 11.1
----- ----- -----
Total operating expenses ......................... 89.5 91.8 90.7
----- ----- -----
Income from operations ..................................... 10.5 8.2 9.3
Commitment fee ............................................. 2.0 -- --
Interest expense ........................................... 6.4 13.5 10.2
----- ----- -----
Income (loss) before provision for income taxes
and minority interest in loss of subsidiary ........... 2.1 (5.3) (0.9)
Provision (benefit) for income taxes ....................... 5.3 (2.1) (0.2)
----- ----- -----
Income (loss) before minority interest in loss of
subsidiary ............................................ (3.2) (3.2) (0.7)
Minority interest in loss of subsidiary .................... 0.2 0.1 0.1
----- ----- -----
Net income (loss) from continuing operations................ (3.0)% (3.1)% (0.6)%
----- ----- -----
Extraordinary expense....................................... 1.4
Net Loss ................................................... (3.0)% (3.1)% (2.0)%
Accretion of discount and dividends on
mandatorily redeemable preferred stock...................... 1.6
----- ----- -----
Net loss available to common shareholders (3.0)% (3.1)% (3.6)%
32
Fiscal Year Ended July 26, 1998 ("Fiscal 1998")
Versus Fiscal Year Ended July 27, 1997 ("Fiscal 1997")
The actual results of Fiscal 1998 versus the actual results of Fiscal
1997 discussed below are not comparable due to the acquisition of the Steamboat
and Heavenly resorts on November 12, 1997, and the acquisition of The Canyons
resort in July 1997. Accordingly, the usefulness of the comparisons presented
below is limited, as the Fiscal 1998 results include the results of Steamboat
and Heavenly since November 12, 1997, while the Fiscal 1997 results do not
include any results for Steamboat and Heavenly. Likewise, the Fiscal 1998
results include the results of The Canyons for the entire year while the Fiscal
1997 results do not include any results for The Canyons. Please see the pro
forma comparisons elsewhere in this Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Resort revenues increased $111.7 million or 66.9% from $166.9 million
for Fiscal 1997 to $278.6 million for Fiscal 1998. The Steamboat and Heavenly
resorts acquired on November 12, 1997, and The Canyons resort acquired in July
1997, accounted for $98.3 million of the increase. The remaining $13.4 million
represents an increase of 8.0% and is principally attributable to increases in
skier visits, the acquisition of new retail and food and beverage outlets, the
opening of three new hotels, and increased yields per skier visit at the
Company's pre-acquisition group of resorts.
Real estate revenues increased $53.3 million for Fiscal 1998 as
compared to Fiscal 1997. The increase is attributable to completion of the
Company's new quartershare condominium hotels at Killington, Mount Snow and
Sunday River and closings of quartershare sales at those projects.
Cost of resort operations increased $60.1 million or 54.7% from $109.8
million to $169.9 million. The acquisition of Steamboat, Heavenly, and The
Canyons resorts accounted for $49.6 million of the increase. The remaining $10.5
million represents an increase of 9.6% and is principally attributable to the
increases in skier visits, business volume, and new operations at the Company's
pre-acquisition resorts.
Cost of real estate sold increased $37.5 million in Fiscal 1998
compared to Fiscal 1997. The increase is attributable principally to increased
sales, as outlined above, and to non-capitalizeable costs associated with new
projects under development at Killington, The Canyons and Steamboat.
Marketing, general and administrative expenses increased 62.9% from
$26.1 million to $42.6 million. The inclusion of Steamboat, Heavenly and The
Canyons accounted for approximately $8.1 million of this increase. The remaining
$8.4 million represents a 32.2% increase attributable to increased costs
associated with the establishment of public holding company corporate functions,
including legal, accounting, shareholder relations, financial analysis,
management information system support functions, corporate marketing initiatives
involving the Edge card direct to lift and corporate wide sponsorship programs.
The Company incurred a stock compensation charge of $14.3 million in
Fiscal 1998, associated with the grant of non-qualified stock options to certain
key members of senior management.
33
Depreciation and amortization increased $19.7 million for Fiscal 1998
compared to Fiscal 1997. The increase is principally attributable to the
acquisitions of Steamboat, Heavenly and The Canyons and the additional plant and
equipment related to the summer 1997 capital improvement program.
Interest expense increased from $23.7 million for Fiscal 1997 to $34.6
million for Fiscal 1998. The increase is principally attributable to the
Company's New Credit Facility, which was established contemporaneously with the
closing of its initial public offering and the acquisition of Steamboat and
Heavenly on November 12, 1997.
The benefit for income taxes decreased from $3.6 million for Fiscal
1997 to $.8 million for Fiscal 1998 due to a decrease in the loss before income
taxes. The effective income tax rate decreased from 38.7% in Fiscal 1997 to
25.1% in Fiscal 1998 due to the non-recurring stock option compensation charge
of $14.3 million, not all of which is deductible for income tax purposes.
The extraordinary loss recorded by the Company results from the early
retirement of certain indebtedness in conjunction with the Company's initial
public offering in November, 1997, including the Company's then-existing
revolving line of credit, junior subordinated discount notes, and certain
indebtedness established upon acquisition of Sugarbush.
Accretion of discounts and dividends accrued on the mandatorily
redeemable preferred stock of $5.3 million in Fiscal 1998 represents the
accretion of the exchange feature, the amortization of the issuance costs and
the accrual of dividends relating to the Series A Exchangeable Preferred Stock
prior to its exchange. The activity in this component for Fiscal 1998 also
includes $2.8 million of dividends accrued on the 10 1/2% Mandatorily Redeemable
Preferred Stock subsequent to its exchange for the Series A Exchangeable
Preferred Stock on November 12, 1997.
34
Pro Forma Results For Fiscal 1998 Versus Fiscal 1997
The following unaudited pro forma results of operations of the Company
for Fiscal 1998 and Fiscal 1997 assume that the acquisitions of The Canyons and
of Steamboat and Heavenly occurred on July 29, 1996 and that the Company's
initial public offering and its New Credit Facility became effective on that
date as well. These proforma results are not necessarily indicative of the
actual results that would have been achieved nor are they necessarily indicative
of future results of operations.
Resort revenues increased $26.7 million or 10.5% from $255.5 million
to $282.2 million. This increase is primarily attributable to an 8.1% increase
in total skier visits, which increased from 4.9 million to 5.3 million on a
proforma basis, as well as the acquisition of new retail and food and beverage
outlets and the opening of three new hotels at the Company's eastern resorts.
Real estate revenues increased $53.3 million from $8.5 million to $61.8
million. This increase is attributable to the completion of the Company's new
quartershare condominium hotels at Killington, Mount Snow and Sunday River, and
the closing of quartershare sales at those projects.
Cost of resort operations increased $14.8 million or 9.0% from $163.7
million to $178.5 million. This increase is primarily attributable to increased
business volume and the acquisition of new food and beverage and retail outlets
and the opening of three new hotels at the Company's eastern resorts.
Cost of real estate sold increased $37.5 million in Fiscal 1998
compared to Fiscal 1997. The increase is attributable principally to increased
sales, as outlined above, and to non-capitalizeable costs associated with new
projects under development at Killington, The Canyons, and Steamboat.
Marketing, general and administrative expenses increased $9.5 million
or 25% from $38.0 million to $47.5 million. This increase is primarily due to
the establishment of public holding company corporate functions including legal,
accounting, shareholder relations, financial analysis, management information
support functions, corporate marketing initiatives involving the Edge card,
direct to lift and corporate-wide sponsorship programs, and the initiation of a
professional management and marketing program at The Canyons.
Depreciation and amortization expense increased $4.2 million or 11.9%
from $35.4 million in Fiscal 1997 to $39.6 million in Fiscal 1998. This increase
is attributable to capital expenditures which totaled $106.9 million in Fiscal
1998.
Interest expense increased $8.7 million or 32.6% from $26.7 million in
Fiscal 1997 to $35.4 million in Fiscal 1998. This increase is due primarily to
higher levels of debt outstanding associated with completed quartershare units
held for sale by the Company, and with the Company's intensive capital
program in the past year.
35
The benefit for income taxes increased $3.0 million from $2.6 million
in Fiscal 1997 to $5.6 million in Fiscal 1998. This is attributable primarily to
the increase in the loss before income taxes on a pro forma basis.
The extraordinary loss recorded by the Company results from the early
retirement of certain indebtedness in conjunction with the Company's initial
public offering in November, 1997, including the Company's then-existing
revolving line of credit, junior subordinated discount notes, and certain
indebtedness established upon the acquisition of Sugarbush.
Accretion of discounts and dividends accrued on the Company's 10 1/2%
Mandatorily Redeemable Preferred Stock of $5.3 million represents the accretion
of the exchange feature, the amortization of issuance costs and the accrual of
dividends relating to the Series A Exchangeable Preferred Stock prior to its
exchange. The activity in this component for Fiscal 1998 also includes $2.8
million of dividends accrued on the 10 1/2% Mandatorily Redeemable Preferred
Stock subsequent to its exchange for the Series A Exchangeable Preferred Stock
on November 12, 1997.
Fiscal Year Ended July 27, 1997 Compared to Fiscal Year Ended July 28, 1996
Resort revenues in fiscal 1997 were $166.8 million, an increase of
$103.3 million, or 162.8%, as compared to resort revenues of $63.5 million in
fiscal 1996. This increase was due primarily to the addition of the S-K-I
resorts in June 1996, which accounted for $106.6 million, which was offset by
$3.2 million attributable to a decrease in revenues due to the divestiture of
the Cranmore ski resort and an increase in resort revenues at the Company's
other resorts.
Revenues from real estate operations in fiscal 1997 were $8.5 million,
a decrease of $1.4 million, or 14.7%, as compared to revenues from real estate
operations of $9.9 million in fiscal 1996. This decrease was due primarily to
all quartershare units at the Summit Hotel at Sunday River being fully sold by
July 1996. The Company has completed construction of the Grand Summit Hotel at
the Attitash Bear Peak ski resort and began closing on quartershare unit sales
at that Project on April 6, 1997. As of July 27, 1997 the Grand Summit at
Attitash Bear Peak had $5.0 million in quartershare unit sales.
36
Cost of resort operations in fiscal 1997 was $109.7 million, an
increase of $68.0 million, or 162.5%, as compared to cost of resort operations
of $41.8 million in fiscal 1996. This increase was due primarily to the addition
of the S-K-I resorts.
Cost of real estate operations in fiscal 1997 was $6.8 million, an
increase of $1.0 million, or 17.2%, as compared to cost of real estate
operations of $5.8 million in fiscal 1996. This increase was due to
pre-construction activities on the hotel projects that began construction in the
fourth quarter of the year ended July 27, 1997 and costs related to the sales of
quartershares at the Grand Summit at Attitash Bear Peak.
Marketing, general and administrative expenses in fiscal 1997 were
$26.1 million, an increase of $14.8 million, or 131.0%, as compared to
marketing, general and administrative expenses of $11.3 million in fiscal 1996.
This increase was due to the addition of the S-K-I resorts, which account for an
increase of $11.9 million. The remaining difference of $2.9 million is due to a
decrease in expense of $0.5 million due to the divestiture of the Cranmore ski
resort and an increase in expense of $3.4 million due to increased marketing
activity at the pre-merger resorts.
Depreciation and amortization expenses in fiscal 1997 were $18.3
million, an increase of $11.5 million, or 169.7%, as compared to depreciation
and amortization expenses of $6.8 million in fiscal 1996. This increase was due
primarily to the addition of the S-K-I resorts, which account for an increase of
$10.2 million. The remainder of the increase results from capital improvements
and the amortization of goodwill and prepaid loan fees that did not exist prior
to the acquisition of the S-K-I resorts.
Interest expense in fiscal 1997 was $23.7 million an increase of $19
million or 505% as compared to interest expense of $4.7 million in fiscal 1996.
This increase was due to increased indebtedness associated with the acquisition
of the S-K-I Resorts, and the Company's extensive capital programs during the
summer of 1996.
Fiscal Year Ended July 28, 1996 Compared to Fiscal Year Ended July 30,
1995.
Resort revenues in fiscal 1996 were $63.5 million, an increase of $16.7
million, or 35.7%, as compared to resort revenues of $46.8 million in fiscal
1995. This increase was due to (i) $4.0 million attributable to the acquisition
of Mt. Cranmore in June 1995, (ii) an increase of approximately 19,000 skier
visits, or approximately 10%, at Attitash Bear Peak, (iii) an increase of
approximately 20,000 skier visits, or approximately 13%, at Sugarbush, (iv) an
increase in lift ticket prices, resulting in an increase in revenues per skier
visit from $41.89 in fiscal 1995 to $44.61 in fiscal 1996, (vi) an approximate
10% increase in season pass revenues, primarily due to the addition of a
multi-resort season pass, and (vii) $2.8 million attributable to the inclusion
of the S-K-I resorts for the final month of fiscal 1996.
37
Real estate revenues in fiscal 1996 were $9.9 million, an increase of
$2.0 million, or 24.3%, as compared to real estate revenues of $7.9 million in
fiscal 1995. This increase was due to increased sales of quartershare units at
the Summit Hotel at Sunday River and the sale of 16 additional townhouse units
at Sunday River in fiscal 1996 compared to fiscal 1995, as well as higher
average sales prices.
Cost of operations in fiscal 1996 was $41.8 million, an increase of
$12.1 million, or 40.7%, as compared to cost of operations of $29.7 in fiscal
1995. This increase was due to (i) $1.5 million attributable to the acquisition
of Mt. Cranmore, (ii) incremental costs resulting from the increased skier
visits, (iii) operating costs resulting from the increased snowmaking and lift
capacity and skiable terrain that resulted from the $22.2 million of capital
expenditures during fiscal 1996 and (iv) $2.9 million attributable to the
inclusion of the S-K-I resorts for the final month of fiscal 1996.
Cost of real estate sold in fiscal 1996 was $5.8 million, an increase
of $1.9 million, or 48.7%, as compared to cost of real estate sold of $3.9 in
fiscal 1995. This increase was due to the increased real estate sales volume.
Marketing, general and administrative expense in fiscal 1996 were
$11.3 million, an increase of $1.9 million, or 20.2%, as compared to marketing,
general and administrative expenses of $9.4 in fiscal 1995. This increase was
due to (i) approximately $0.7 million attributable to the acquisition of Mt.
Cranmore, (ii) an extensive marketing campaign following the significant
improvements made at Sugarbush, (iii) expenses resulting from the acquisition of
Mt. Cranmore and Sugarbush and (iv) $0.9 million attributable to the inclusion
of the S-K-I resorts for the final month of fiscal 1996.
Depreciation and amortization in fiscal 1996 were $6.8 million, an
increase of $2.9 million, or 74.4%, as compared to depreciation and amortization
of $3.9 million in fiscal 1995. This increase was due to depreciation resulting
from (i) the $24 million capital program completed prior to the 1995-96 ski
season, (ii) the acquisitions of Mt. Cranmore and Sugarbush and (iii) $0.9
million attributable to the inclusion of S-K-I resort for the final month of
fiscal 1996.
Interest expense in fiscal 1996 was $4.7 million, an increase of $2.5
million, or 113.6%, as compared to interest expenses of $2.2 in fiscal 1995.
This increase was due to (i) increased borrowings to support the Company's
capital program, (ii) the acquisitions of Mt. Cranmore and Sugarbush and (iii)
$0.2 million attributable to the inclusion of the S-K-I resorts for the final
month of fiscal 1996.
38
Income tax expense in fiscal 1996 was $3.9 million, an increase of $3.5
million, or 875%, as compared to income tax expenses of $0.4 million in fiscal
1995. The majority of the increase in the Company's provision for income taxes
was attributable to the conversion of the former S corporations to C
corporations, offset by an $0.8 million benefit due to inclusion of the S-K-I
resorts for the final month of fiscal 1996.
Year 2000
The Company has devoted substantial resources to year 2000 compliance
(Y2K) in the last two years. The Company has formed a task force which has
developed a comprehensive strategy to systematically evaluate and update systems
as appropriate.
The Company has made substantial investments to upgrade to information
systems which are Y2K compliant. The task force has also identified systems
which are not Y2k compliant and has scheduled upgrades to these systems which
are to be completed by September of 1999.
The task force is also assessing internal non-IS systems
(telecommunications, security, etc.) for Y2K compliance, This assessment will be
completed by December 31, 1998, and the recommended remediations will be
implemented by September of 1999.
Furthermore, the task force is completing a risk assessment and
contingency plans in regards to third party vendors. This is expected to be
completed by March of 1999.
39
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of
the Private Securities Litigation Reform Act Of 1995
The above information 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 obtaining financing with which to repay the Bridge
Loan and undertake future capital improvements; demand for and costs associated
with real estate development; change 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 and resort real estate; competition;
regional and national economic conditions; laws and regulations relating to the
Company's land use, development, environmental compliance and permitting
obligations; renewal or extension terms of the Company's leases and permits; the
adequacy of water supply; 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 1999 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 7A
Quantitative and Qualitative Disclosures about Market Risk
The Company's market risk sensitive instruments do not subject the
Company to material market risk exposures, except for such risks related to
interest rate fluctuations. As of July 26, 1998, the Company has long term debt
and subordinated notes outstanding with a carrying value of $383 million and an
estimated fair value of $398 million. The Company has entered into two interest
rate protection agreements. These agreements are in connection with the
Company's New Credit Facility and effectively swap variable interest rate
borrowings to fixed rate borrowings. The total amount of the New Credit Facility
that is effected by this agreement is $102.5 million. The rate for this portion
of the New Credit Facility is fixed at is 5.68% plus an incremental rate based
on the Company's leverage, and expires November 17, 2005. Total borrowings under
the New Credit Facility are $194.2 million, leaving $91.7 million at a variable
rate and, depending on the Company's leverage, the interest rate will be LIBOR
plus 2.5% to 3.5%.
Fixed interest rate debt outstanding as of July 26, 1998, excluding
the New Credit Facility debt, was $190.0 million, carries an average interest
rate of 10.86%, and matures as follows: $89 million in fiscal 1999, $11.9
million in fiscal 2000, $30.9 million in fiscal 2001, $6.6 million in fiscal
2002, $5.3 million in fiscal 2003, and $127.3 million in fiscal 2004 and after.
The Company has also entered into two noncancellable interest rate
swap agreements. The notional amount of both agreements is $120 million. The
first swap agreement matures on July 15, 2001. In respect to this swap
agreement, the Company receives interest at a rate of 12% per annum and pays
interest out at a variable rate based on the notional amount of the swap
agreement. The second swap agreement expires July 15, 2006 and requires the
Company pay interest at a rate of 9% and receive interest at a variable rate
based on the notional amount of the swap agreement. The two variable portions of
the swap agreements offset each other until July 15, 2001. After that date the
Company will be paying interest at a fixed rate of 9% and receiving interest at
a variable rate. The variable rate of interest the Company would receive is
based on the six month Libor, as of October 23, 1998 that rate was 4.965%.
40
Item 8
Financial Statements
Selected Quarterly Operating Results
The following table presents certain unaudited quarterly financial
information of the Company for the eight quarters ended July 26, 1998. In the
opinion of the Company's management, this information has been prepared on the
same basis as the Consolidated Financial Statements appearing elsewhere in this
Form 10K and includes all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the financial results set forth herein.
Results of operations for any previous quarters are not necessarily indicative
of results for any future period.
Quarter Ended
Oct. 27, Jan. 26, Apr. 27, Jul. 27, Oct. 26, Jan. 25, Apr. 26, Jul. 26,
1996 1997 1997 1997 1997 1998 1998 1998
(in thousands)
Revenues:
Resort ...................... $ 11,728 $59,418 $86,601 $ 9,176 $13,811 $107,425 $144,641 $12,700
Real estate ................. 1,569 1,740 2,674 2,485 810 7,890 40,914 12,229
------- ------- ------- -------- -------- ------- ------- --------
Total revenues .............. 13,297 61,158 89,275 11,661 14,621 115,315 185,555 24,929
------- ------- ------- -------- -------- ------- ------- --------
Operating expenses:
Cost of operations ........ 15,034 38,995 42,163 13,583 17,808 64,244 65,413 22,400
Cost of real estate sold .. 1,032 935 2,913 1,933 925 5,223 28,334 9,810
Marketing, general and
administrative .......... 4,792 7,709 9,097 4,528 6,845 13,621 12,623 9,465
Stock compensation charge.. --- --- --- --- 14,254 --- --- ---
Depreciation and
amortization ............ 1,527 7,344 8,075 1,347 1,506 15,009 17,960 3,491
------- ------- ------- -------- -------- ------- ------- --------
Total operating expenses .... 22,385 54,983 57,320 21,390 41,338 98,097 124,330 45,166
------- ------- ------- -------- -------- ------- -------- --------
Income (loss) from operations $( 9,088) $ 6,175 $27,027 $ (9,729) ($26,717) $17,218 $ 61,225 ($20,237)
------- ------- ------- -------- -------- ------- ------- --------
Item 9
Changes in and Disagreements with Accountants over
Accounting and Financial Disclosures
None
41
PART III
Item 10
Directors and Executive Officers
The Charter and the bylaws of the Company provide that two-thirds of
the Board of Directors of the Company shall be comprised of directors elected by
the holders of the Class A Common Stock (the "Class A Directors") and one-third
shall be comprised of directors elected by the holders of the Common Stock (the
"Common Directors"). The directors are to serve staggered terms, with one-third
of the directors elected for a one year term, one-third of the directors elected
for a two year term, and one-third of the directors elected for a three year
term. Currently, the Board of Directors is comprised of six members, four of
which are Class A Directors and two of which are Common Directors. At the
Company's December 8, 1998 annual meeting four Class A Directors will be elected
by the holders of the Company's Class A Common Stock and three Common Directors
will be elected by the holders of the Company's Common Stock.
Directors
Nominees for Common Directors
Joel B. Alvord, Director. 60. Mr. Alvord was appointed a director of
the Company on February 9, 1998. Mr. Alvord is currently President and Managing
Director of Shawmut Capital Partners, Inc. Prior to joining Shawmut in 1996, he
was Chairman of Fleet Financial Group for two years, after it was merged with
Shawmut National Corporation. Mr. Alvord began his banking career in 1963. He
became President of Hartford National Corporation in 1978 and served as Chief
Executive Officer of Shawmut National Corporation from 1987 to 1995. He is a
director of Hartford Steam Boiler Inspection & Insurance Company (HSB Group),
CUNO, Inc., and Fleet Financial Group. He has been a member of the Board of the
Federal Reserve Bank of Boston and Swiss Reinsurance Company of North America.
He is a trustee of the Wang Center for the Performing Arts, a trustee of The
A.R.T., and an overseer of the Boston Symphony Orchestra and the Museum of Fine
Arts.
Christopher J. Nassetta, Director. 36. Mr. Nassetta was appointed a
director of the Company on February 9, 1998. Mr. Nassetta is Executive Vice
President and Chief Operating Officer for Host Marriott Corporation. Before
joining Host Marriott in 1995, Mr. Nassetta co-founded Bailey Capital
Corporation in 1991, where he was responsible for the operations of the real
estate investment and advisory firm. Prior to founding Bailey Capital
Corporation, Mr. Nassetta spent seven years with The Oliver Carr Company,
serving as Chief Development Officer and as Development Director, as well as
Vice President and Regional Partner. Currently, Mr. Nassetta serves on the Board
of Trustees for Prime Group Realty Trust, and as a member of the McIntire School
of Commerce Advisory Board for the University of Virginia.
42
David B. Hawkes. 54. David B. Hawkes is a nominee to join the Board of
Directors of the Company. He is currently a co-owner, consultant and business
advisor of Cloudhawk, Inc., a management consulting firm which has offices in
Maine and New Hampshire. He is also a part owner in New England Internet
Services, Inc. Before founding Cloudhawk in 1993, Mr. Hawkes served as partner
with KPMG Peat Marwick from 1970 to 1993, in charge of the firm's Portland,
Maine tax practice. Mr. Hawkes is a member of the Board of Directors of several
companies, including AAA of Northern New England, Bancroft & Martin, Inc., Mark
Stimson Associates and Northland Health Group.
Nominees For Class A Directors
Leslie B. Otten, Director, President and Chief Executive Officer. 49.
Mr. Otten has served in his present capacity since the inception of the Company
in July, 1997. In 1970, Mr. Otten joined Sherburne Corporation, then the parent
company of Sunday River, Killington and Mount Snow. Mr. Otten became Assistant
General Manager of Sunday River in 1972 and became General Manager of Sunday
River in 1974. He has been a director and the President and Chief Executive
Officer of the Company (or its predecessors) since 1980. Mr. Otten is currently
a director and was previously chairman of the Portland Museum of Art, and is
also a director of the Maine Chamber and Business Alliance, Maine Handicap
Skiing, Gould Academy (a private secondary school) and Project Opportunity (a
higher education scholarship program).
Christopher E. Howard, Director, Senior Vice President, Acting Chief
Financial Officer, General Counsel and Clerk. Chief Operating Officer and Senior
Vice President, American Skiing Company Resort Properties, Inc. 41. Mr. Howard
has been a director and officer of the Company since its inception in July,
1997. Mr. Howard joined the Company's subsidiary, ASC East, Inc., in 1996 after
serving as its outside counsel. From 1982 to October, 1996, Mr. Howard practiced
with Pierce Atwood, northern New England's largest law firm, where he was a
partner and senior member of the firm with a practice emphasizing on corporate
and real estate development. Mr. Howard organized and was the interim Chief
Executive Officer of Maine's Employer's Mutual Insurance Company, Maine second
largest insurance company. He serves on the Board of the Maine Governmental
Facilities Authority and is a former member of the Board of the Maine Chamber of
Commerce.
43
Gordon M. Gillies, Director. 54. Mr. Gillies was appointed as a
director of the Company in February 9, 1998. Mr. Gillies retired as a Coast
Guard Officer in 1970, attended the University of New Mexico (M.A. 1972) and
Wake Forest University (J.D. 1976). Mr. Gillies practiced law in Maine from 1976
to 1991, when he retired from practice to join the faculty of Hebron Academy, a
private boarding-day secondary school in Maine.
Martel D. Wilson, Jr., Director. 61. Mr. Wilson was appointed as a
director of the Company in August, 1998. Mr. Wilson is the former Vice
President, Chief Financial Officer and Director of S-K-I Ltd., the owner and
operator of the Killington, Mount Snow and Sugarloaf ski resorts, in which
capacities he served from 1988 to 1996. He graduated from the University of
Colorado and received an M.B.A. from Cornell University. Mr. Wilson is a
Director and Chairman of the Board of Building Material Distributors, Inc. of
Stockton, California, a building material wholesaler in California and Nevada
,and a director of Chittenden Corp., a bank holding company with subsidiaries in
Massachusetts and Vermont. He is a past President and Director of the Rutland
Region Chamber of Commerce, a past Trustee of the College of St. Joseph the
Provider, a past President and Director of the Rutland Regional Medical Center,
and past Chairman of the Board of Trustees of Comprehensive Health Resources, a
health care holding company.
44
Executive Officers
The following table sets forth the executive officers of the Company
and its primary subsidiaries as of the date hereof:
Name/Age Position
Leslie B. Otten, 49 Director, President and Chief Executive Officer
Christopher E. Howard, 41 Director, Senior Vice President,
Acting Chief Financial Officer,
General Counsel and Clerk of American Skiing
Company; Chief Operating Officer and
Senior Vice President of American Skiing Company
Resort Properties, Inc.
G. Christopher Brink, 45 Senior Vice President--Marketing
Warren C. Cook, 53 Chief Operating Officer,
Senior Vice President--Resort Operations
W. Scott Oldakowski, 35 Senior Vice President--Marketing and Sales of
American Skiing Company Resort Properties, Inc.
Michael Meyers, 44 Senior Vice President--Project Delivery of
American Skiing Company Resort Properties, Inc.
Gregory Spearn, 45 Senior Vice President--Planning and Development
of American Skiing Company Resort Properties, Inc.
For biographical information about Messrs. Otten and Howard, see
"Directors."
G. Christopher Brink, Senior Vice President--Marketing. Mr. Brink has
been with the Company since 1993 and in his present capacity since July 1996.
Prior to joining the Company, Mr. Brink served from 1991-1993 as a director of
off-site sale centers for Marriott Vacation Ownership, Inc.
Warren C. Cook, Chief Operating Officer, Senior Vice President--Resort
Operations. Mr. Cook joined the Company in 1996 as Managing Director of
Sugarloaf Mountain Corporation, upon ASC East's acquisition of that Company. Mr.
Cook has served as Senior Vice President - Resort Operations of the Company
since January, 1997, and as the Company's Chief Operating Officer since July
1998. Mr. Cook was President and Chief Executive Office of Sugarloaf Mountain
Corporation from 1986 to 1996.
W. Scott Oldakowski, Senior Vice President--Marketing and Sales,
American Skiing Company Resort Properties, Inc. Mr. Oldakowski joined the
Company in 1991 as an independent consultant on the Summit Hotel project before
being hired as Director of Real Estate in 1993. He became Vice President of Real
Estate Sales for the Company in 1995. From 1986 to 1991, he served as Director
of Sales and Marketing at multiple resorts for Dunes Marketing Group, a resort
development firm.
45
Michael Meyers, Senior Vice President--Project Delivery, American
Skiing Company Resort Properties, Inc. Mr. Meyers joined the Company in April
1995 and has led the development of five hotels for Grand Summit Resort
Properties, Inc., a subsidiary of the Company. From 1989 to 1993, Mr. Meyers was
Vice President at Stanmar Development, a real estate development firm.
Immediately prior to joining the Company, he was chief operating officer from
1993 to 1995 for Massachusetts Industrial Finance Agency.
Gregory Spearn, Senior Vice President--Planning and Development,
American Skiing Company Resort Properties, Inc. Mr. Spearn joined the Company in
the fall of 1997, specializing in master planning, entitlements and
on-time/on-budget project delivery. From 1995 to 1997, he held the position of
Senior Vice President of Intrawest Corporation. Prior to joining Intrawest he
served as Senior Vice President, Development for the Polygon Group of Companies,
a large private corporation engaged in the multi-family development and
construction business in the Pacific Northwest, beginning in 1993.
46
Section 16(A) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers and directors and persons who own more than ten
percent of a registered class of the Company's equity securities to file initial
reports of ownership and changes in ownership with the Securities and Exchange
Commission ("SEC") and the New York Stock Exchange. Such officers, directors and
shareholders are required by SEC regulations to furnish the Company with copies
of all Section 16(a) forms they file. Based solely on a review of the copies of
such forms furnished to the Company, all persons subject to the reporting
requirements of Section 16(a) filed the required reports on a timely basis for
Fiscal 1998, except that Messrs. Otten, Howard, Brink, Cook, Richardson and
Mills each filed one late report on Form 3, and Mesrs. Alvord, Nassetta and
Gillies each failed to make one required filing on Form 3.
47
Item 11. Executive Compensation.
Executive Compensation And Other Information
Summary Compensation Table
The following table provides information concerning compensation paid
by the Company to the Chief Executive Officer and the other four highest paid
executive officers of the Company whose compensation was at least $100,000 for
Fiscal 1998 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
Name and Principal Fiscal Annual Compensation Long-Term Compensation
Position Year
Salary Bonus Other annual Restricted Securities All other
compensation Stock underlying Compensation
Awards Options/SARs
Leslie B. Otten 1998 $386,538.56 $--- $10,000.00(2) --- 1,853,197 ---
President and Chief 1997 $350,000.00 $--- $--- --- --- ---
Executive Officer
Thomas M. Richardson 1998 $218,846.22 $30,000.00 $10,000.00(2) --- 100,300 ---
Chief Financial 1997 $170,000.00 $--- $--- --- --- ---
Officer
Christopher E. Howard, 1998 $223,076.83 $61,271.25 $10,000.00(2) --- 150,450 ---
Chief Administrative 1997 $150,000.00 $ -- $ -- --- --- ---
Officer
Burton R. Mills 1998 $191,923.11 $-- $227,955.52(1) --- 80,240 ---
Senior Vice President 1997 $170,000.00 $--- $--- --- --- ---
- Mountain Operations
G. Christopher Brink 1998 $191,923.11 $-- $-- --- 80,240 ---
Senior Vice President 1997 $170,000.00 $--- $--- --- --- ---
- Marketing
<FN>
(1) Represents compensation resulting from cash payment made by the Company to
cover individual Federal and State income tax liability generated by exercising
stock options.
(2) Represents compensation for attendance at meetings at the Board of
Directors.
</FN>
48
The following table sets forth information concerning individual grants
of stock options made under the 1997 Stock Option Plan during Fiscal 1998 for
services rendered during Fiscal 1998 by each of the Named Executive Officers.
Option Grants During Fiscal 1998
Individual Grants Potential realizable value at
assumed annual rates of stock price
appreciation for option term (1)
NUMBER OF
SECURITIES % OF TOTAL OPTIONS/ EXERCISE
UNDERLYING SARS GRANTED TO OR
OPTIONS/SARS EMPLOYEES DURING BASE PRICE EXPIRATION
NAME GRANTED (#) FISCAL 1998 ($/SH) DATE 0% ($) 5% ($) 10% ($)
Leslie B. Otten 1,853,197 71.7% $18.00 08/01/07 $--- $20,978,381.00 $53,163,337.00
Christopher E. 150,450 5.8% $2.00 08/01/07 $2,407,200.00 $4,110,310.00 $6,723,214.00
Howard (2)
Thomas M. Richardson (2) 100,300 3.9% $2.00 08/01/07 $1,604,800.00 $2,740,206.00 $4,482,143.00
Burton R. Mills (2) 80,240 3.1% $2.00 08/01/07 $1,283,840.00 $2,192,165.00 $3,585,714.00
G. Christopher Brink (2) 80,240 3.1% $2.00 08/01/07 $1,283,840.00 $2,192,165.00 $3,585,714.00
<FN>
(1) The potential realizable value uses the hypothetical rates specified by
the Securities and Exchange Commission and is not intended to forecast
future appreciation, if any, of the Company's Common Stock price.
(2) The options granted to these Named Executive Officers include a cash
payment on the date that the options are exercised to cover individual
Federal and State income tax liability generated by exercising the
options.
</FN>
49
The following table sets forth information concerning each exercise of
stock options during Fiscal 1998 by each of the Named Executive Officers and the
value of unexercised options at July 26, 1998.
Aggregated Options/SAR Exercises During Fiscal Year Ended
July 26, 1998, and Option/SAR Values as of July 26, 1998
NAME SHARES ACQUIRED VALUE NUMBER OF VALUE OF
ON EXERCISE REALIZED SECURITIES UNEXERCISED
(#) ($) UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS/SARS (2)
OPTIONS/SARS (2)
Leslie B. Otten N/A --- 1,853,197/0 $ ---
Christopher E. Howard N/A --- 150,450/0 $1,589,128.13
Thomas M. Richardson N/A --- 100,300/0 $1,059,418.75
Burton R. Mills 20,000 $246,103.40 60,240/0 $ 636,285.00
G. Christopher Brink N/A --- 80,240/0 $ 847,535.00
<FN>
(1) The "Value of Unexercised In-the-Money Options/SARs at July 26, 1998"
was calculated by determining the difference between the closing price
on the New York Stock Exchange of the underlying Common Stock at July
24, 1998, of $12 9/16 and the exercise price of the option. An option
is "In-the-Money" when the fair market value of the underlying Common
Stock exceeds the exercise price of the option.
(2) All of such Options/SARs are exerciseable.
</FN>
50
Employment Agreements
The Company does not currently have any employment agreements in place
with its executive officers. The Compensation Committee of the Board of
Directors is currently considering proposed employment agreements between the
Company and Messrs. Otten and Howard.
Director Compensation and Fees
The Company reimburses each member of the Board of Directors for
expenses incurred in connection with attending Board and committee meetings.
Directors receive $5,000 for attendance at each meeting of the Board, unless
attendance is via telephone. The Company grants options to purchase 2,500 shares
of Common Stock to non-employee directors upon their election and re-election to
the Board of Directors. The stock options are fully vested at the time of
granting and have a term of 10 years with an exercise price not less than fair
market value as of the date of the grant.
Report On Executive Compensation
The Compensation Committee of the Board of Directors (the "Committee")
is comprised of Messrs. Alvord and Wilson, with Mr. Otten acting as an
ex-officio member. The Committee is responsible for establishing and
administering the Company's executive compensation programs and determining
awards under the Company's 1997 Stock Option Plan.
The report of the Compensation Committee shall not be deemed
incorporated by reference by any general statement incorporating by reference
this Proxy Statement into any filing under the Securities Act of 1933 or the
Securities Exchange Act of 1934, except to the extent that the Company
specifically incorporates this information by reference, and shall not otherwise
be deemed filed under such Acts.
51
Compensation Philosophy
The Committee's compensation philosophy is designed to support the
Company's primary objective of creating long term value for shareholders. The
Committee follows a three-prong compensation strategy applicable to the
Company's executive officers, including the Chief Executive Officer ("CEO"),
whereby each executive officer of the Company is compensated through three
separate but related compensation schemes:
First, each executive officer receives a base salary
consistent with his or her core responsibilities;
Second, a short term bonus, generally determined annually,
is established to provide reward and incentive for shorter term
productivity;
Third, stock options are awarded under the Company's 1997
Stock Option Plan to provide a longer term incentive and reward longer
term Company loyalty and performance.
This strategy is intended to: (i) attract and retain talented
executives; (ii) emphasize pay for performance; and (iii) encourage management
stock ownership.
The Internal Revenue Code imposes a limitation on the deduction for
certain executive officers' compensation unless certain requirements are met.
The Committee has carefully considered the impact of these tax laws and has
taken certain actions intended to preserve the Company's tax deduction with
respect to any affected compensation. The Company's 1997 Stock Option Plan
qualifies for tax deductibility. The following are descriptions of the Company
compensation programs for executive officers, including the CEO.
Base Salary
The Company generally establishes base salary ranges by considering
compensation levels in similarly sized companies in the
resort/leisure/hospitality industry and the real estate development industry.
The base salary and performance of each executive officer is reviewed
periodically (at least annually) by his or her immediate supervisor (or the
Committee, in the case of the CEO) resulting in salary actions as appropriate.
An executive officer's level of responsibility is the primary factor used in
determining base salary. Individual performance and industry information are
also considered in determining any salary adjustment. The Committee reviews and
approves all executive officer salary adjustments as recommended by the CEO. The
Committee reviews the performance of the CEO and establishes his base salary.
52
Bonus Plan
The Company has established an incentive compensation plan for
executive officers of the Company, which is designed to provide rewards for
shorter term productivity by key employees. The plan provides for payment of
cash bonuses to executive officers if certain performance objectives established
for each individual are met. Such objectives include maximization of the
Company's EBITDA, development and sale of real estate assets, and consummation
of strategic acquisitions which are accretive to earnings of the Company.
Stock Option Plan
The Company's 1997 Stock Option Plan is designed to align management
interests with those of shareholders. In furtherance of this objective, the
level of stock option grants for executive officers is determined by the
Committee each year, typically in consultation with the CEO except with respect
to the CEO himself. Awards for all employees (including all executive officers)
are determined by giving equal consideration to base salary, level of
responsibility and industry long-term compensation information.
Compensation Committee
/s/ Joel Alvord
/s/ Martel Wilson
Performance Graph
The following graph compares the performance of the Company's Common
Stock to the Russell 2000 and the Company's Peer Group Index*.
GRAPHIC
SKI Russell 2000 Peer Group*
11/4/97 100 100 100
11/30/97 85 97 99
12/31/97 88 99 97
1/31/98 81 97 97
2/28/98 88 104 108
3/31/98 99 109 116
4/30/98 91 109 114
5/31/98 79 103 109
6/30/98 76 103 113
7/24/98 74 99 102
*The Company's Peer Group Index performance is weighted according to
market capitalization.
53
The total return graphic is presented for the approximate eight-month
period since the Company's initial public offering. The total stockholder return
assumes that $100 is invested at the beginning of the period in the Common Stock
of the Company, The Russell 2000, and the Company's Peer Group. The Company's
Peer Group, as selected by the Company, is comprised of Vail Resorts, Inc.,
Intrawest Corp., Fairfield Communities, Inc., Vistana Inc., Florida Panthers
Holdings, Premier Parks, Inc., and Cedar Fair, L.P. The Company has selected
this Peer Group because these companies operate in the
Resort/Leisure/Hospitality sector or the Resort Real Estate Development sector.
The Company included The Russell 2000 in the graph because the Company is
included in such index and because there is no industry index for the Company's
business. Total shareholder return is weighted according to market
capitalization so that companies with a larger market capitalization have a
greater impact on the Peer Group index results. Historical stock performance
during this period may not be indicative of future stock performance.
Item 12
Security Ownership of Certain Beneficial Owners and Management.
Set forth in the following table is the beneficial ownership of the
Company's Common Stock and Class A Common Stock as of October 1, 1998, for all
directors, nominees and the executive officers listed on the Summary
Compensation Table and all directors, nominees and executive officers as a
group. No director, nominee or executive officer owns more than 1% of the
outstanding shares of Common Stock of the Company (including exercisable
options), with the exception of Mr. Otten who owns approximately 15.6% of the
total outstanding shares of Common Stock of the Company (including exercisable
options) and all of the outstanding shares of Class A Common Stock of the
Company. All directors and executive officers as a group own approximately 17.6%
of the total outstanding shares of Common Stock of the Company (including
exercisable options). No director or executive officer of the Company, other
than Mr. Otten, owns any Class A Common Stock of the Company.
54
Common Stock Class A Common Percent Of Class A
Beneficially Owned Stock Beneficially Owned Common Stock And
Common Stock
Beneficially Owned
Directors and Named Executive Officers Percent of Percent of
Shares Class Shares Class
Leslie B. Otten (1)(6) 2,716,530 15.6% 14,760,530 100% 54.4%
Christopher E. Howard (2) 150,450 1.0% --- --- *
Thomas M. Richardson (5) 101,600 * --- --- *
Burton R. Mills (2) 60,240 * --- --- *
G. Christopher Brink(2) 80,240 * --- --- *
Martel D. Wilson, Jr.(4) 10,500 * --- --- *
Gordon M. Gillies(2) 2,500 * --- --- *
Christopher J. Nassetta(2) 2,500 * --- --- *
Joel B. Alvord(4) 6,500 * --- --- *
David B. Hawkes 500 * --- --- *
Directors and Executive Officers as a 3,131,560 17.6% 14,760,530 100% 55.0%
Group (10 persons) (3)
- - -----------------------------------------
* Less than one percent
<FN>
(1) Includes 1,853,197 shares of Common Stock issuable under exercisable
options granted under the Company's Stock Option Plan. Also includes
30,000 shares owned by Albert Otten Trust f/b/o Mildred Otten, as to
which Mr. Otten is trustee and co-beneficiary. Does not include 20,060
shares of Common Stock issuable under exercisable options granted
under Stock Option Plan to Mr. Otten's spouse, Christine Otten, as to
which Mr. Otten disclaims beneficial ownership.
(2) All shares of Common Stock beneficially owned by such person are
issuable under exercisable options granted under the Stock Option
Plan.
(3) Includes 2,254,427 shares of Common Stock issuable under exercisable
options granted under the Stock Option Plan.
(4) Includes 2,500 shares of Common Stock issuable under exercisable
options granted under the Stock Option Plan.
(5) Includes 100,300 shares of Common Stock issuable under exercisable
options granted under the Stock Option Plan.
(6) As of October 15, 1998, all of Mr. Otten's Common Shares and 9,200,000
of Mr. Otten's Class A shares were pledged to secure a margin loan
from ING (U.S.) Capital Corporation, the proceeds of which were used
by Mr. Otten to purchase approximately 833,333 shares of Common Stock
of the Company in the Company's IPO on November 6, 1997. A default
under this loan which is not cured within any applicable grace period
would entitle ING to realize on this pledge and could result in a
change in control of the Company.
</FN>
55
Information As To Certain Shareholders
Set forth below is certain information with respect to the only persons
known to the Company who owned beneficially more than five percent of any class
of the Company's voting securities as of October 1, 1998.
Common Stock Class A Common Percent Of Class A
Beneficially Owned Stock Beneficially Owned Common Stock And
Common Stock
Beneficially Owned
Five Percent Percent of Percent of
Shareholders___________________ Shares Class Shares Class
Leslie B. Otten (1) 2,716,530 15.0% 14,760,530 100% 53.0%
American Skiing Company
P.O. Box 450
Bethel, ME 04217
Madeleine LLC (2) 2,348,746 13.1% --- --- 7.3%
c/o Cerberus
450 Park Avenue
New York, NY 10022
State of Wisconsin Investment Board 2,525,000 16.3% --- --- 8.3%
P.O. Box 7842
Madison, WI 53707
Fusion Capital Management Inc. 1,063,700 6.9% --- --- 3.5%
237 Park Avenue
Suite 801
New York, New York 10012
<FN>
(1) Includes 1,853,197 shares of Common Stock issuable under exercisable
options granted under the Stock Option Plan. Also includes 30,000 shares
owned by Albert Otten Trust f/b/o Mildred Otten, as to which Mr. Otten is
trustee and co-beneficiary. Does not include 20,060 shares of Common Stock
issuable under exercisable options granted under Stock Option Plan to Mr.
Otten's spouse, Christine Otten, as to which Mr. Otten disclaims beneficial
ownership.
(2) Includes 2,348,746 shares of Common Stock issuable upon the conversion of
such holder's shares of 10 1/4% Convertible Preferred Stock. Does not
include up to 1,323,982 additional shares of Common Stock issuable upon
conversion of the Company's 10 1/2% Convertible Preferred Stock as a result
of the accrual of cumulative dividends thereon to the scheduled maturity of
the redemption of such preferred stock.
</FN>
56
Item 13
Certain Relationships and Related Transactions.
In June 1996, Sunday River Skiway Corporation, a subsidiary of the
Company ("SRSC"), issued an unsecured demand note to Mr. Otten obligating SRSC
to pay to Mr. Otten a total of $5.2 million. Interest on the note is calculated
at 5.4% per expected annum. The note was issued to Mr. Otten for an amount equal
to the income taxes to be paid by him in 1996 and 1997 with respect to the
income of SRSC as an S corporation which was converted to a C corporation. The
remaining principal amount of such note, as of July 26, 1998, was approximately
$1.8 million.
Christine Otten, Mr. Otten's spouse, is employed by the Company as its
director of retail purchasing and is actively involved in its retail sales
activities. During fiscal years 1996, 1997 and 1998, Ms. Otten received total
compensation of $54,577, $51,600 and $51,600, respectively. In the first quarter
of fiscal 1998, the Company granted Ms. Otten options to purchase up to 20,060
shares of Common Stock at a price of $2.00 per share. Ms. Otten is fully vested
with respect to these shares. The options granted to Ms. Otten include a cash
payment on the date of exercise to cover Federal and State income tax liability
generated by exercising the options.
Western Maine Leasing Co., a corporation wholly owned by Mr. Otten,
presently leases items of heavy equipment to SRSC under short-term leases on
terms believed by management to be comparable to those that could be obtained by
SRSC from unaffiliated lessors of such equipment. In fiscal 1996, 1997 and 1998,
payments under such leases totaled $37,000, $24,000 and $17,000, respectively.
SRSC provides lodging management services for Ski Dorm, Inc., a
corporation owned by Mr. Otten and his mother, which owns a ski dorm located
near the Sunday River resort, on terms believed by management to be comparable
to those that would be offered by SRSC to unaffiliated entities. In fiscal 1996,
1997 and 1998, payments by Ski Dorm, Inc., to SRSC totaled $90,000, $258,000 and
$2,000, respectively. In addition, Ski Dorm, Inc., issued to SRSC a promissory
note in 1995 in the principal amount of $265,000, of which $250,000 was
outstanding at October 1, 1998. Such note is secured by a mortgage on real
estate and related improvements owned by Ski Dorm, Inc. Interest on the note is
charged at the prime rate plus 1 1/2% and principal and any accrued interest are
due in December 1999.
Mr. Otten borrowed funds from ING (U.S.) Capital Corporation to
purchase Common Stock in the Company's IPO, and has pledged shares of Common
Stock and Class A Common Stock to secure the loan. In connection with the loan,
the Company entered into a registration rights agreement with the lender
containing customary provisions pursuant to which the lender will have the right
to require the Company to register with the Securities and Exchange Commission,
at the Company's expense, the shares pledged by Mr. Otten to secure the loan.
57
PART IV
Item 14
Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this report: Page
1. Index to financial statements, financial statement schedules,
and supplementary data, filed as part of this report:
Report of Independent Accountants......................................... F-1
Consolidated Statement of Operations...................................... F-2
Consolidated Balance Sheet ............................................... F-2
Consolidated Statement of Changes in Shareholders' Equity ................ F-4
Consolidated Statement of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................ F-8
2. Financial Statement Schedules: All other schedules are omitted because
they are not applicable or the required information is shown in the
consolidated financial statements or notes thereto.
3. Exhibits filed as part of this report:
Exhibit
No. Description
3.1 Articles of Incorporation of the Company, as amended (incorporated by
reference to Exhibit 3.1 of the Company's Registration Statement on
Form S-1, Registration No. 333-33483).
3.2 By-laws of the Company (incorporated by reference to Exhibit 3.2 to
the Company's Registration Statement on Form S-1, Registration No.
333-33483).
4.1 Specimen Certificate for shares of Common Stock, $.01 par value, of
the Company (incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-1, Registration No. 333-33483).
4.2 Form of Statement of Resolution Establishing Shares of 10 1/2%
Repriced Convertible Exchangeable Preferred Stock (incorporated by
reference to Exhibit 4.2 to the Company's Registration Statement on
Form S-1, Registration No. 333-33483).
58
4.3 Form of Indenture relating to 10 1/2% Repriced Convertible
Subordinated Debentures (incorporated by reference to Exhibit 4.3 to
the Company's Registration Statement on Form S-1 Registration No.
333-33483).
10.1 Stock Purchase Agreement dated as of August 1, 1997, among Kamori
International Corporation, ASC West and the Company (incorporated by
reference to Exhibit 2.1 of the Company's Registration Statement on
Form S-1 Registration No. 333-33483).
10.2 Assignment dated May 30, 1997, between Wold Mountain Resorts, L.C. and
ASC Utah (incorporated by reference to Exhibit 10.7 to the Company's
Registration Statement on Form S-1 Registration No. 333-33483).
10.3 Loan and Security Agreement dated as of October 1, 1984, among the
State of Vermont (acting by and through the Vermont Industrial
Development Authority), Sherburne Corporation, Proctor Bank and
BankBoston, N.A. (incorporated by reference to Exhibit 10.16 to ASC
East's Registration Statement on Form S-4, Registration No. 333-9763).
10.4 Loan and Security Agreement dated as of October 1, 1984, among the
State of Vermont (acting by and through the Vermont Industrial
Development Authority), Mount Snow, Ltd., Proctor Bank and BankBoston,
N.A. (incorporated by reference to Exhibit 10.17 to the Company's
Registration Statement on Form S-1 Registration No. 333-33483).
10.5 Indenture dated October 24, 1990, between Killington Ltd. and The
Howard Bank, as trustee (representative of indentures with respect to
similar indebtedness aggregating approximately $2,995,000 in original
principal amount and maturing at various times from 2015 to 2016)
(incorporated by reference to Exhibit 10.19 to ASC East's Registration
Statement on Form S-4, Registration No. 333-9763).
10.6 Indenture dated as of June 28, 1996 among ASC East, certain
Subsidiaries and United States Trust Company of New York, relating to
Series A and Series B 12% Senior Subordinated Notes Due 2006 (
incorporated by reference to Exhibit 4.1 to ASC East's Registration
Statement on Form S-4, Registration No. 333-9763).
10.7 Form of Subordinated Debenture Due 2002 from L.B.O. Holding, Inc. to
former shareholders of Mt. Attitash Lift Corporation (incorporated by
reference to Exhibit 10.34 to ASC East's Registration Statement on
Form S-4, Registration No. 333-9763).
10.8 Purchase Agreement dated as of April 13, 1994, among Mt. Attitash Lit
Corporation, certain of its shareholders and L.B.O. Holding, Inc.
(incorporated by reference to Exhibit 10.35 to ASC East's Registration
Statement on Form S-4, Registration No. 333-9763).
59
10.9 Stock Purchase Agreement dated August 17, 1994, between Sugarloaf
Mountain Corporation and S-K-I Ltd. (incorporated by reference to
Exhibit 10.36 to ASC East's Registration Statement on Form S-4,
Registration No. 333-9763).
10.10 Acquisition Agreement dated May 16, 1995, among Sugarbush Resort
Holdings, Inc., Sugarbush Resort Corporation, Snowridge, Inc., Sugar
Ridge, Inc., Sugarbush Inn Corporation and Bev Ridge, Inc.,
(incorporated by reference to Exhibit 10.38 to ASC East's Registration
Statement on Form S-4, Registration No. 333-9763).
10.11 Lease dated October 15, 1980, among H. Donald Penley, Joseph Penley,
Albert Penley and Sunday River Skiway Corporation (incorporated by
reference to Exhibit 10.40 to ASC East's Registration Statement on
Form S-4, Registration No. 333-9763).
10.12 Lease/Option dated July 19, 1984, between John Blake and L.B.O.
Holding, Inc. (incorporated by reference to Exhibit 10.41 to ASC
East's Registration Statement on Form S-4, Registration No. 333-9763).
10.13 Lease Agreement dated as of July 1, 1993, between Snowridge, Inc. and
Mountain Water Company (incorporated by reference to Exhibit 10.42 to
ASC East's Registration Statement on Form S-4, Registration No.
333-9763).
10.14 Lease Agreement dated as of March 1, 1988, between Snowridge, Inc. and
Mountain Wastewater Treatment, Inc., (incorporated by reference to
Exhibit 10.43 to ASC East's Registration Statement on Form S-4,
Registration No. 333-9763).
10.15 Lease dated November 10, 1960, between the State of Vermont and
Sherburne Corporation (predecessor to Killington, Ltd.) (incorporated
by reference to Exhibit 10.44 to ASC East's Registration Statement on
Form S-4, Registration No. 333-9763).
10.16 Lease Agreement dated as of June 21, 1994, between the Town of
Wilmington and Mount Snow, Ltd. (incorporated by reference to Exhibit
10.46 to ASC East's Registration Statement on Form S-4, Registration
No. 333-9763).
10.17 Lease Agreement dated April 24, 1995, between Sargent, Inc. and Mount
Snow, Ltd. (incorporated by reference to Exhibit 10.47 to ASC East's
Registration Statement on Form S-4, Registration No. 333-9763).
10.18 Agreement between Sugarloaf Mountain Corporation and the Inhabitants
of the Town of Carrabassett Valley, Maine, concerning the Sugarloaf
Golf Course dated June 3, 1987 (incorporated by reference to Exhibit
10.52 to ASC East's Registration Statement on Form S-4, Registration
No. 333-9763).
60
10.19 Agreement dated July 26, 1995, among Bombardier Corporation,
Killington, Ltd., Mount Snow, Ltd., Waterville Valley Ski Area, Ltd.,
Bear Mountain, Ltd., and Sugarloaf Mountain Corporation (incorporated
by reference to Exhibit 10.55 to ASC East's Registration Statement on
Form S-4, Registration No. 333-9763).
10.20 Purchase and Sale Agreement dated as of August 30, 1996, among
Waterville Valley Ski Area, Ltd., Cranmore, Inc., ASC East and Booth
Creek Ski Acquisition Corp. (incorporated by reference to Exhibit
10.61 to ASC East's Registration Statement on Form S-4, Registration
No. 333-9763).
10.21 Purchase and Sale Agreement dated as of October 16, 1996, among
Sherburne Pass Mountain Properties, LLC, Pico Mountain Sports Center,
LLC, Pico Mountain Operating Company, LLC, Harold L. and Edith
Herbert, and Pico Ski Area Management Company (incorporated by
reference to Exhibit 10.62 to ASC East's Registration Statement on
Form S-4, Registration No. 333-9763).
10.22 Ground Lease Agreement dated July 3, 1997, between ASC Utah and Wolf
Mountain Resorts, L.C. (incorporated by reference to Exhibit 10.64 to
the Company's Registration Statement on Form S-1, Registration No.
333-33483).
10.23 Ground Lease Guaranty dated July 3, 1997, from the Company to Wolf
Mountain Resorts, L.C. (incorporated by reference to Exhibit 10.65 to
the Company's Registration Statement on Form S-1, Registration No.
333-33483).
10.24 Loan and Security Agreement dated as of August 1, 1997, among Grand
Summit Resort Properties, inc., the lenders listed therein and Textron
Financial Corporation, as Administrative Agent for the lenders
(incorporated by reference to Exhibit 10.71 to the Company's
Registration Statement on Form S-1, Registration No. 333-33483).
10.25 $2,750,000 Subordinated Promissory Note dated November, 1996 by Booth
Creek Ski Acquisition Corp., Waterville Valley Ski Resort, Inc. and
Mount Cranmore Ski Resort, Inc., to ASC East (incorporated by
reference to Exhibit 10.72 to the Company's Registration Statement on
Form S-1, Registration No. 333-33483).
10.26 Purchase and Sale Agreement dated July 3, 1997, between Wolf Mountain
Resorts, L.C., and ASC Utah (incorporated by reference to Exhibit
10.74 to the Company's Registration Statement on Form S-1,
Registration No. 333-33483).
61
10.27 Stock Option Plan (incorporated by reference to Exhibit 10.89 to the
Company's Registration Statement on Form S-1, Registration No.
333-33483).
10.28 Form of Non-Qualified Stock Option Agreement (Five-Year Vesting
Schedule) (incorporated by reference to Exhibit 10.90 to the Company's
Registration Statement on Form S-1, Registration No. 333-33483).
10.29 Form of Non-Qualified Stock Option Agreement (Fully-Vested)
(incorporated by reference to Exhibit 10.91 to the Company's
Registration Statement on Form S-1, Registration No. 333-33483).
10.30 Form of Incentive Stock Option Agreement (incorporated by reference to
Exhibit 10.92 to the Company's Registration Statement on Form S-1,
Registration No. 333-33483).
10.31 Letter of Agreement dated August 27, 1996, among SKI Ltd and certain
shareholders of Sugarloaf Mountain Corporation (incorporated by
reference to Exhibit 10.63 to ASC East's Registration Statement on
Form S-4, Registration No. 333-9763).
10.32 Amended and Restated Credit Agreement dated as of November 12, 1997,
among ASC East, certain Subsidiaries as Borrowers and the Company, ASC
West and certain Subsidiaries as Guarantors, the Lenders party
thereto, BankBoston, N.A. as Agent for the Lenders and DLJ Capital
Funding, Inc. as Documentation Agent for the Lenders (incorporated by
reference to Exhibit 1 to the Company's quarterly report on Form 10-Q
for the quarter ended October 26, 1997).
10.33 Amended and Restated Credit Agreement dated as of November 12, 1997,
among ASC Utah, ASC West and certain Subsidiaries as Borrowers, the
Company as Guarantor, the Lenders party thereto, BankBoston, N.A. as
Agent for the Lenders and DLJ Capital Funding, Inc. as Documentation
Agent for the Lenders (incorporated by reference to Exhibit 2 to the
Company's quarterly report on Form 10-Q for the quarter ended October
26, 1997).
10.34 Registration Rights Agreement dated November 10, 1997 by and between
American Skiing Company and ING (U.S.) Capital Corporation
(incorporated by reference to Exhibit 3 to the Company's quarterly
report on Form 10-Q for the quarter ended October 26, 1997).
62
10.35 Contract on Sale by and between Orlando Resort Corporation and ELW
Golf Group, Inc. (incorporated by reference to Exhibit 4 to the
Company's quarterly report on Form 10-Q for the quarter ended October
26, 1997).
10.36 First Amendment to Amended and Restated Credit Agreement dated as of
July 20, 1998, among ASC East, certain Subsidiaries as Borrowers and
the Company and certain Subsidiaries as Guarantors, the lenders party
thereto and BankBoston, N.A. as agent for the lenders.
10.37 First Amendment to Amended and Restated Credit Agreement dated as of
July 20, 1998, among ASC Utah, ASC West, and certain of its
Subsidiaries as Borrowers, the Company as Guarantor, the lenders party
thereto and BankBoston, N.A. as agent for the lenders
10.38 ISDA Master Lease Agreement between BankBoston, N.A. and the Company
dated as of May 12, 1998.
10.39 Credit Support Annex to ISDA Master Agreement between BankBoston, N.A.
and the Company dated as of May 12, 1998.
10.40 Unlimited Guaranty by the Company in favor of BancBoston Leasing,
Inc., dated as of July 20, 1998.
10.41 Form of Master Lease Agreement dated as of various dates among
BancBoston Leasing, Inc. as Lessor and Heavenly Valley Limited
Partnership, Killington, Ltd., Mount Snow, Ltd., ASC Leasing, Inc.,
Steamboat Ski & Resort Corporation, and Sunday River Skiway Corp. as
Lessees.
10.42 Purchase and Development Agreement by and among the Company, American
Skiing Company Resort Properties, Inc., and Marriott Ownership
Resorts, Inc., dated as of July 22, 1998 (incorporated by reference to
Exhibit 1 to the Company's Form 8-K dated July 27, 1998).
11.1 Computation of earnings per share.
22.1 Subsidiaries of the Company.
23.1 Consent of Berry, Dunn, McNeil & Parker.
23.2 Consent of PriceWaterhouseCoopers, LLP.
24.1 Power of Attorney
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
During the Company's fourth fiscal quarter of 1998, the Company filed
one report on Form 8-K dated July 27, 1998. In that report, the Company
announced the execution of a joint venture agreement with Marriott Ownership
Resort International pursuant to which Marriott is expected to build at least
five 200 unit timeshare hotels at the Company's resorts. The joint venture
agreement also includes collaborative marketing provisions between the two
companies.
63
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Company has duly caused this instrument to be signed on its behalf
by the undersigned, thereunto duly authorized, in the Town of Bethel, State of
Maine, on this 26th day of October, 1998.
American Skiing Company
By: /s/ Leslie B. Otten
--------------------------------
Leslie B. Otten
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Christopher E. Howard
--------------------------------
Christopher E. Howard
Senior Vice President, Chief Administrative
Officer, General Counsel, Clerk and Chief
Financial Officer
(Principal Financial Officer)
By: /s/ Christopher D. Livak
--------------------------------
Christopher D. Livak
Vice President-Accounting
(Principal Accounting Officer)
By: /s/ Christopher E. Howard, attorney-in-fact
--------------------------------
Joel B. Alvord
By: /s/ Christopher E. Howard, attorney-in-fact
--------------------------------
Gordon M. Gillies, Director
By:
--------------------------------
Christopher J. Nassetta, Director
By:
--------------------------------
Martel D. Wilson, Director
64
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned offices and directors of American Skiing Company
hereby severally constitute and appoint Christopher E. Howard and Leslie B.
Otten, and each of them singly, our true and lawful attorneys with full power to
them, and each of them singly, to sign for us and in our names in the capacities
indicated below, the Annual Report on Form 10-K filed herewith and generally to
do all such things in our names and on our behalf in our capacities as offices
and directors to enable American Skiing Company to comply with the provision of
the Securities Exchange Act of 1934, as amended, and all requirements of the
Securities and Exchange Commission, hereby ratifying and confirming our
signatures as they may be signed by our said attorneys, or any of them, to said
Annual Report.
Signature Title Date
Chairman of the Board of Directors,
/s/ Leslie B. Otten President and Chief Executive Officer October 26, 1998
- - ------------------- (Principal Executive Officer)
Leslie B. Otten
Senior Vice President, Chief
/s/ Christopher E. Howard Administrative Officer, General
- - -------------------------- Counsel, Clerk and Chief October 26, 1998
Christopher E. Howard Financial Officer,
(Principal Financial Officer)
/s/ Joel B. Alvord
- - ------------------------ Director October 26, 1998
Joel B. Alvord
- - -------------------------- Director October 26, 1998
Martel D. Wilson, Jr.
/s/ Gordon M. Gillies
- - -------------------------- Director October 26, 1998
Gordon M. Gillies
- - --------------------------- Director October 26, 1998
Christopher J. Nassetta
65
Report of Independent Accountants
October 14, 1998
To the Board of Directors and Shareholders of American Skiing Company
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
American Skiing Company and its subsidiaries at July 27, 1997 and July 26, 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended July 26, 1998 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
F-1
Consolidated Balance Sheet
(In thousands, except share and per share amounts)
July 27, July 26,
1997 1998
Assets
Current assets
Cash and cash equivalents $ 15,558 $ 15,370
Restricted cash 2,812 4,946
Accounts receivable 3,801 7,538
Inventory 7,282 13,353
Prepaid expenses 1,579 3,709
Deferred financing costs 1,338 1,246
Deferred income taxes 422 1,413
--------------- ---------------
Total current assets 32,792 47,575
Property and equipment, net 252,346 521,139
Real estate developed for sale 23,540 78,636
Goodwill 10,664 76,301
Intangible assets - 23,706
Deferred financing costs 8,093 7,966
Long-term investments 3,507 7,397
Other assets 6,398 16,865
Restricted cash - 1,314
--------------- ---------------
Total assets $ 337,340 $ 780,899
--------------- ---------------
Liabilities, Mandatorily Redeemable Preferred Stock and Shareholders' Equity
Current liabilities
Current portion of long-term debt $ 39,748 $ 43,698
Current portion of subordinated notes and debentures - 455
Accounts payable and other current liabilities 25,738 44,372
Deposits and deferred revenue 4,379 8,895
Demand note, Principal Shareholder 1,933 1,846
--------------- ---------------
Total current liabilities 71,798 99,266
Long-term debt, excluding current portion 46,833 211,570
Subordinated notes and debentures, excluding current portion 149,749 127,497
Other long-term liabilities 7,898 10,484
Deposits and deferred revenue - 1,320
Deferred income taxes 28,514 22,719
Minority interest in subsidiary 626 375
--------------- ---------------
Total liabilities 305,418 473,231
Commitments, lease contingencies and contingent liabilities (Note 13)
Mandatorily redeemable Series A 14% Exchangeable Preferred Stock, par value
$1,000 per share, 70,179 shares authorized; 17,500 shares issued and
outstanding at July 27, 1997; net of unaccreted issuance costs and including
accretion of discount and cumulative dividends in arrears (redemption value of
$18,537 at July 27, 1997) 16,821 -
Mandatorily redeemable 10 1/2% Repriced Convertible Preferred Stock, par value
$1,000 per share, 40,000 shares authorized; 36,626 shares issued and
outstanding at July 26, 1998; including cumulative dividends in arrears
(redemption value of $39,464) at July 26, 1998 - 39,464
Shareholders' Equity
Common stock, Class A, par value of $.01 per share; 15,000,000 shares authorized;
14,760,530 issued and outstanding 10 148
Common stock, par value of $.01 per share; 100,000,000 shares authorized;
15,525,022 issued and outstanding - 155
Additional paid-in capital 2,786 267,890
Retained earnings 12,305 11
--------------- ---------------
Total shareholders' equity 15,101 268,204
--------------- ---------------
Total liabilities, mandatorily redeemable preferred stock and shareholders'
equity $ 337,340 $ 780,899
--------------- ---------------
F-2
Consolidated Statement of Operations
(In thousands, except share and per share amounts)
Year Ended
July 28, July 27, July 26,
1996 1997 1998
Net revenues:
Resort $ 63,489 $166,923 $278,577
Real estate 9,933 8,468 61,843
------------- ------------- --------------
Total net revenues 73,422 175,391 340,420
------------- ------------- --------------
Operating expenses:
Resort 41,799 109,774 169,865
Real estate 5,844 6,813 44,292
Marketing, general and administrative 11,289 26,126 42,554
Stock compensation charge - - 14,254
Depreciation and amortization 6,783 18,293 37,966
------------- ------------- --------------
Total operating expenses 65,715 161,006 308,931
------------- ------------- --------------
Income from operations 7,707 14,385 31,489
------------- ------------- --------------
Other expenses:
Commitment fee 1,447 - -
Interest expense 4,699 23,730 34,575
------------- ------------- --------------
Income (loss) before provision (benefit) for income taxes and
minority interest in loss of subsidiary 1,561 (9,345) (3,086)
Provision (benefit) for income taxes 3,906 (3,613) (774)
Minority interest in loss of subsidiary (108) (250) (445)
------------- ------------- --------------
Loss from continuing operations (2,237) (5,482) (1,867)
------------- ------------- ---------------
Extraordinary loss, net of income tax benefit of $3,248 - - 5,081
------------- ------------- --------------
Net loss (2,237) (5,482) (6,948)
------------- ------------- --------------
Accretion of discount and issuance costs and dividends accrued on
mandatorily redeemable preferred stock - 444 5,346
------------- ------------- --------------
Net loss available to common shareholders $(2,237) $(5,926) $(12,294)
------------- ------------ --------------
Basic and diluted loss per common share (Note 2):
Continuing operations $ (2.37) $ (5.61) $ (0.07)
Extraordinary loss - - (0.20)
Net loss available to common shareholders $ (2.37) $ (6.06) $ (0.48)
Weighted average common shares outstanding 942 978 25,832
------------- ------------- --------------
F-3
Consolidated Statement of Changes in Shareholders' Equity
(In thousands, except share amounts)
Class A Additional
Common stock Common Stock paid-in Retained
Shares Amount Shares Amount Capital earnings Total
Balance at July 31, 1995 116,737 $ 116 - $ - $ 1,660 $28,726 $30,502
Net loss - - - - - (2,237) (2,237)
Distributions to Principal Shareholder - - - - - (8,358) (8,358)
Contributions - - - - 1,020 - 1,020
Conversion of affiliate company common stock to ASC
common stock 822,431 (106) - - 106 - -
Issuance of shares of common stock 39,132 - - - 976 - 976
---------- -------- ------- ---------- -------- --------- ----------
Balance at July 28, 1996 978,300 10 - - 3,762 18,131 21,903
Exchange of the Principal Shareholder's 96% interest in
ASC East for 100% of the Common Stock of the Company (939,168) (10) - - - - (10)
Restatement of beginning of the year retained earnings
for the establishment of the 4% minority interest in ASC
East and share of earnings since inception (39,132) - - - (976) 100 (876)
Issuance of Common Stock of the Company to the Principal
Shareholder 1,000,000 10 - - - - 10
Conversion of Common Stock to Class A Common Stock (1,000,000) (10) 1,000,000 10 - - -
Stock split in October 1997, accounted for retroactively - - 13,760,530 - - - -
Accretion of discount and issuance costs and dividends
accrued on mandatorily redeemable preferred stock - - - - - (444) (444)
Net loss - - - - - (5,482) (5,482)
----------- -------- ---------- -------- ---------- -------- --------
Balance at July 27, 1997 - $ - 14,760,530 $ 10 $ 2,786 $12,305 $15,101
F-4
Consolidated Statement of Changes in Shareholders' Equity
(In thousands, except share amounts ) (Continued)
Class A Additional
Common stock Common Stock paid-in Retained
Shares Amount Shares Amount capital earnings Total
Balance at July 27, 1997 - $ - 14,760,530 $ 10 $ 2,786 $12,305 $15,101
Shares issued pursuant to initial public offering 14,750,000 148 - - 244,181 - 244,329
Issuance of Common Stock options - - - - 8,538 - 8,538
Conversion of Class A Common Stock - - - 138 (138) - -
Purchase of minority interest in subsidiary 615,022 6 - - 8,648 - 8,654
Original issue discount on Series A 14% Exchangeable
Preferred Stock and 14% Senior Exchangeable Notes - - - - 1,841 - 1,841
Shares issued to purchase subsidiary 140,000 1 - - 1,994 - 1,995
Exercise of Common Stock options 20,000 - - - 40 - 40
Accretion of discount and issuance costs and dividends
accrued on mandatorily redeemable preferred stock - - - - - (5,346) (5,346)
Net loss - - - - - (6,948) (12,294)
------------- ------ ---------- --------- --------- ------- ---------
Balance at July 26, 1998 15,525,022 $ 155 14,760,530 $ 148 $ 267,890 $ 11 $ 268,204
------------- ------- ---------- ---------- ---------- -------- ---------
F-5
Consolidated Statement of Cash Flows
(In thousands)
Year Ended
--------------------------------------
July 28, July 27, July 26,
1996 1997 1998
Cash flows from operating activities:
Net loss $ (2,237) $ (5,482) $ (6,948)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Minority interest in loss of subsidiary (108) (250) (445)
Depreciation and amortization 6,783 18,293 37,966
Amortization of discount on subordinated notes and debentures and
other liabilities 435 3,300 1,520
Income tax expense on conversion of S Corporation to C corporation 5,552 - -
Deferred income taxes (1,940) (3,332) (3,910)
Series A 14% Exchangeable Preferred Stock and 14% Senior Exchangeable
Notes original issue discount - - 1,639
Stock compensation charge - - 14,254
Extraordinary loss on write-off of deferred financing costs - - 3,242
Gain on sale of assets - - (773)
Decrease (increase) in assets:
Restricted cash and investments held in escrow - 12,587 (3,448)
Accounts receivable 481 (1,343) (3,608)
Inventory (373) (2,257) (2,088)
Prepaid expenses (648) 1,792 (1,644)
Real estate developed for sale 2,523 (21,976) (25,950)
Other assets (836) (872) (10,319)
Increase (decrease) in liabilities:
Accounts payable and other current liabilities (3,601) 6,794 2,413
Deposits and deferred revenue 944 838 (866)
Other long-term liabilities 490 (1,304) 2,586
-------------- ------------- ----------------
Net cash provided by operating activities 7,465 6,788 3,621
-------------- ------------- ----------------
Cash flows from investing activities:
Payments for purchases of businesses, net of cash acquired (97,079) (6,959) (291,773)
Long-term investments (450) 836 1,110
Capital expenditures (25,054) (23,267) (106,917)
Proceeds from sale of property and equipment - 2,626 7,227
Cash payments on note receivable - 250 100
Proceeds from sale of businesses - 14,408 5,702
Other - (1,964) 248
-------------- ------------- ----------------
Net cash used in investing activities $(122,583) $(14,070) $(384,303)
-------------- ------------- ----------------
F-6
Consolidated Statement of Cash Flows
(In thousands) Continued
Year Ended
-------------------------------------
July 28, July 27, July 26,
1996 1997 1998
Cash flows from financing activities:
Net proceeds from (repayment of) Old Credit Facility $ 40,301 $ 14,766 $ (59,623)
Net borrowings under New Credit Facility - - 194,227
Net repayment of line of credit (5,776) - -
Net repayment of revolving credit loan (17,101) - -
Proceeds from (repayment of) subordinated notes and debentures, net of
investments held in escrow 121,126 - (23,223)
Proceeds from (repayment of) long-term debt (11,806) (6,654) 11,686
Deferred financing costs (8,485) (1,567) (4,355)
Payments on demand note, Principal Shareholder - (3,267) (87)
Advances to Principal Shareholder (156) -
Distributions to shareholder (3,158) - -
Proceeds from issuance of mandatorily redeemable securities - 16,377 17,500
Capital contribution 1,020 - -
Issuance of shares of common stock 976 - -
Proceeds from initial public offering, net - - 244,329
Proceeds from exercise of stock options - - 40
------------- -------------- ---------------
Net cash provided by financing activities 116,941 19,655 380,494
------------- -------------- ---------------
Net increase (decrease) in cash and cash equivalents 1,823 12,373 (188)
Cash and cash equivalents, beginning of year 1,362 3,185 15,558
------------- -------------- ---------------
Cash and cash equivalents, end of year $ 3,185 $ 15,558 $ 15,370
------------- -------------- ---------------
Supplemental disclosures of cash flow information:
Cash paid for interest $ 2,408 $ 20,998 $ 36,583
Cash paid (refunded) for income taxes 15 (1,492) 43
Supplemental schedule of noncash investing and financing activities:
Property acquired under capitalized leases $ 435 $ 7,824 $ 9,832
Notes payable issued for purchase of assets - - 14,232
Liabilities assumed associated with purchased companies 58,497 1,826 17,205
Deferred tax asset (liability) associated with purchased companies (28,372) - 1,650
Purchase price adjustments - 1,541 -
Purchase price adjustments related to deferred taxes - 1,317 1,226
Note payable issued for distribution to shareholder 5,200 - -
Note payable issued for purchase of a business - 6,500 -
Note receivable received for sale of businesses - 2,750 -
Purchase of minority interest - 626 375
Accretion of discount and issuance costs and dividends accrued on
mandatorily redeemable preferred stock - 444 5,346
Exchange of mandatorily redeemable securities for 10 1/2%
Repriced Convertible Preferred Stock - - 36,626
Intangible asset assumed to purchase subsidiary - - 1,883
F-7
American Skiing Company
Notes to Consolidated Financial Statements
- - --------------------------------------------------------------------------------
1. Basis of Presentation
American Skiing Company ("ASC") is organized as a holding company and
operates through various subsidiaries. ASC and its subsidiaries (collectively,
the "Company") operate in two business segments, ski resorts and real estate
development. ASC East and ASC West are holding companies which are wholly-owned
subsidiaries of ASC. ASC East and its wholly-owned subsidiaries (collectively
"ASC East") operate the following resorts: Sugarloaf and Sunday River in Maine,
Attitash Bear Peak in New Hampshire, and Killington, Mount Snow/Haystack and
Sugarbush in Vermont. ASC West and its subsidiaries (collectively "ASC West")
operate the following resorts: The Canyons in Utah, Steamboat Ski & Resort
Corporation ("Steamboat") in Colorado, and Heavenly Valley Ski & Resort
Corporation ("Heavenly") in California/Nevada. The Company performs its real
estate development through two wholly-owned subsudairies, Grand Summit Rsort
Properties, Inc. ("GSRP") and American Skiing Company Resort Properties, Inc.
The Company owns and operates resort facilities, real estate development
companies, golf courses, ski and golf schools, retail shops and other related
companies. For periods prior to June 17, 1997, the term "the Company" refers to
ASC East and its subsidiaries, and after such date, to American Skiing Company
and its subsidiaries (including ASC East). In 1997, the Company formed ASC Utah,
a wholly-owned subsidiary, for the purpose of acquiring the Wolf Mountain ski
area in Utah, which was subsequently renamed The Canyons. In August 1997, the
Company formed ASC West for the purpose of acquiring Steamboat and Heavenly.
ASC was formed on June 17, 1997, when Les Otten (the "Principal
Shareholder") exchanged his 96% ownership interest in ASC East for 100% of the
Common Stock of ASC. In conjunction with the formation of ASC, the Company
recorded the 4% minority interest in ASC East. The minority interest in ASC East
of $626,000 at July 27, 1997 is comprised of the fair market value of the stock
when issued to the minority shareholders of $976,000, less the minority interest
in the fiscal 1996 and 1997 losses of $100,000 and $250,000, respectively. On
January 23, 1998, the Company and the holders of the minority interest in ASC
East entered into an agreement whereby the Company issued 615,022 shares of
Common Stock in exchange for all shares of ASC East common stock held by the
minority shareholders.
On October 10, 1997, the Company approved an increase in authorized
shares of Common Stock, a new issue of Class A Common Stock, the conversion of
100% of the outstanding Common Stock to Class A Common Stock and a 14.76 for 1
stock split of Class A Common Stock. The stock split was given retroactive
effect in the accompanying consolidated financial statements as of July 27,
1997.
The Company consummated an initial public offering (the "Offering") on
November 6, 1997. The Company sold 14.75 million shares of common stock in the
Offering at a price of $18.00 per share. Net proceeds to the Company after
expenses of the Offering totaled $244.3 million. Of the 14.75 million shares
sold in the Offering, 833,000 shares were purchased by the Principal Shareholder
of the Company.
F-8
1. Basis of Presentation (continued)
The Company acquired Heavenly and Steamboat on November 12, 1997 for
approximately $300.5 million, including closing costs and adjustments. The
acquisition was accounted for using the purchase method of accounting. The
accompanying consolidated financial statements reflect the results of operations
of Steamboat and Heavenly subsequent to November 12, 1997.
2. Summary of Significant Accounting Principles
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of American Skiing Company and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Fiscal Year
The Company's fiscal year is a fifty-two week or fifty-three week
period ending on the last Sunday of July. The periods for 1996, 1997 and 1998
consisted of fifty-two weeks.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with a
remaining maturity of three months or less to be cash equivalents.
Restricted Cash
Restricted cash represents deposits that relate to pre-sales of real
estate developed for sale held in escrow and guest advance deposits for lodging
reservations. The cash will be available to the Company when the real estate
units are sold or the lodging services are provided. Restricted cash classified
as long-term represents deposits held in escrow relating to pre-sales with
anticipated closing dates subsequent to fiscal 1999.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market, and consist primarily of retail goods, food and beverage products and
mountain operating supplies.
Property and Equipment
Property and equipment are carried at cost, net of accumulated
depreciation. Depreciation is calculated using the straight-line method over the
assets' estimated useful lives which range from 9 to 40 years for buildings, 3
to 12 years for machinery and equipment, 10 to 50 years for leasehold
improvements and 5 to 30 years for lifts, lift lines and trails. Assets under
capital leases are amortized over the shorter of their useful lives or their
respective lease lives. Due to the seasonality of the Company's business, the
Company records a full year of depreciation relating to its operating assets
over the second and third quarters of its fiscal year.
F-9
2. Summary of Significant Accounting Principles (continued)
Real Estate Developed for Sale
The Company capitalizes as real estate developed for sale the original
acquisition cost of land, direct construction and development costs, property
taxes, interest incurred on costs related to real estate under development, and
other related costs (engineering, surveying, landscaping, etc.) until the
property reaches its intended use. The cost of sales for individual parcels of
real estate or quartershare units within a project is determined using the
relative sales value method. Selling costs are charged to expense in the period
in which the related revenue is recognized. Interest capitalized on real estate
development projects during fiscal years 1996, 1997, and 1998 totaled $0,
$473,000, and $2.4 million, respectively.
Intangible Assets
Intangible assets consist of goodwill and various other intangibles.
The Company has classified as goodwill the excess of fair value of the net
assets (including tax attributes) of companies acquired in purchase transactions
and also the purchase of a minority interest. Intangible assets are recorded net
of accumulated amortization in the accompanying consolidated balance sheet and
are amortized using the straight-line method over their estimated useful lives
as follows:
Goodwill 40 years
Tradenames 40 years
Other intangibles 16 - 20 years
Deferred Financing Costs
Costs incurred in connection with the issuance of debt are included in
deferred financing costs, net of accumulated amortization. Amortization is
calculated using the straight-line method over the respective original lives of
the applicable issues. Amortization calculated using the straight-line method is
not materially different from amortization that would have resulted from using
the interest method.
Long-Term Investments
Long-term investments are comprised of U.S. Treasury Securities,
Obligations of U.S. Government corporations and agencies and corporate bonds. It
is management's intent to hold these securities until maturity. These securities
are carried at amortized cost, which approximates quoted market values at July
27, 1997 and July 26, 1998. Contractual maturities relating to these investments
range from less than one year to five years at July 26, 1998. At July 26, 1998,
long-term investments also include a 50% interest in a residential real estate
partnership that was acquired with the purchase of Steamboat. The partnership
interest, which is accounted for under the equity method, has a carrying value
of $5.2 million at July 26, 1998.
Long-Lived Assets
The Company evaluates potential impairment of long-lived assets and
long-lived assets to be disposed of in accordance with Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121
establishes procedures for review of recoverability and measurement of
impairment if necessary, of long-lived assets, goodwill and certain identifiable
intangibles held and used by an entity. SFAS 121 requires that those assets be
reviewed for impairment whenever events or circumstances indicate that the
carrying amount of an asset may not be recoverable. SFAS 121 also requires that
long-lived assets and certain identifiable
F-10
2. Summary of Significant Accounting Principles (continued)
intangibles to be disposed of be reported at the lower of their carrying amount
or fair value less estimated selling costs. As of July 26, 1998, management
believes that there has not been any impairment of the Company's long-lived
assets, real estate developed for sale, goodwill or other identifiable
intangibles.
Revenue Recognition
Resort revenues include sales of lift tickets, tuition from ski
schools, golf course fees and other recreational activities, sales from
restaurants, bars and retail shops, and real estate rentals. Daily lift ticket
revenue is recognized on the day of purchase. Lift ticket season pass revenue is
recognized in equal amounts over the ski season, which is the Company's second
and third quarters of its fiscal year. The Company's remaining revenue is
generally recognized as the services are performed. Real estate revenues are
recognized under the full accrual method when title has been transferred.
Amounts received from pre-sales of real estate are recorded as deposits and
deferred revenue in the accompanying consolidated balance sheet until the
revenue is recognized. Deposits and deferred revenue classified as long-term
represent deposits held in escrow relating to pre-sales with anticipated closing
dates subsequent to fiscal 1999.
Interest
Interest is expensed as incurred except when it is capitalized in
connection with major capital additions and real estate developed for sale. The
amounts of interest capitalized are determined by applying current interest
rates to the funds required to finance the construction. During 1996, 1997 and
1998, the Company incurred total interest cost of $5.1 million, $24.3 million,
and $37.5 million respectively, of which $444,000, $575,000 and $2.9 million,
respectively, have been capitalized to property and equipment and real estate
developed for sale.
Employee Benefits
As of July 27, 1997, the Company maintained a number of profit sharing and
savings plans pursuant to Section 401(k) of the Internal Revenue Code. In August
1997, the Company established the ASC 401(k) Retirement Plan pursuant to Section
401(k) of the Internal Revenue Code (the "Plan") and subsequently rolled the
previously existing plans into the Plan. The Plan allows employees to defer up
to 15% of their income and provides for the matching of participant
contributions at the Company's discretion. The Company made no contributions to
the profit sharing plans for 1996, 1997 and 1998. Contributions to the savings
plans for 1996 and 1997 totaled $87,000 and $301,000, respectively, while
contributions to the Plan for 1998 totaled $225,000, excluding contributions to
the Steamboat and Heavenly plans. On January 1, 1998, the Heavenly profit
sharing plan was merged into the Plan. Management anticipates merging the
Steamboat 401(k) plan into the Plan subsequent to year end. Contributions to the
Steamboat and Heavenly plans for fiscal 1998 totaled $220,000 and $43,000,
respectively.
Advertising Costs
Advertising costs are expensed the first time the advertising takes
place. At July 27, 1997 and July 26, 1998, advertising costs of $384,000 and
$407,000, respectively, were recorded in prepaid expenses in the accompanying
consolidated balance sheet. Advertising expense for the years ended July 28,
1996, July 27, 1997 and July 26, 1998 was $5.7 million, $5.2 million and $7.6
million, respectively.
F-11
2. Summary of Significant Accounting Principles (continued)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts and disclosures reported in the accompanying
consolidated financial statements. Actual results could differ from those
estimates.
Seasonality
The occurrence of adverse weather conditions during key periods of the
ski season could adversely affect the Company's operating results. In addition,
the Company's revenues are highly seasonal in nature, with the majority of its
revenues historically being generated in the second and third fiscal quarters,
of which a significant portion is produced in two key weeks - the Christmas and
Presidents' Day vacation weeks.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"). This pronouncement supersedes the previous methodology for the
calculation of earnings per share as promulgated under APB Opinion No. 15. SFAS
128 requires presentation of "basic" earnings per share (which excludes dilution
as a result of unexercised stock options and the 10 1/2% Repriced Convertible
Preferred Stock) and "diluted" earnings per share. The Company adopted SFAS 128
in fiscal 1998 and all prior periods presented were retroactively restated. For
the years ended July 28, 1996, July 27, 1997 and July 26, 1998, basic and
diluted loss per share are the same.
Stock Compensation
The Company's stock option plan is accounted for in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." The Company has adopted the disclosure requirements of Statement of
Financial Accounting Standards No. 123, ("SFAS 123"), "Accounting for
Stock-Based Compensation" (Note 14).
Fair Value of Financial Instruments
The recorded amounts for cash and cash equivalents, restricted cash,
accounts receivable and accounts payable and other current liabilities
approximate fair value due to the short-term nature of these financial
instruments. The fair value of amounts outstanding under the Company's Senior
Credit Facility and certain other debt instruments approximates their recorded
values in all material respects, as determined by discounting future cash flows
at current market interest rates as of July 26, 1998. The fair value of the
Company's Senior Subordinated Notes has been estimated using quoted market
values. The fair value of the Company's other subordinated debentures have been
estimated using discounted cash flow analyses based on current borrowing rates
for debt with similar maturities and ratings.
F-12
2. Summary of Significant Accounting Principles (continued)
The estimated fair values of the Senior Subordinated Notes and other
subordinated debentures at July 26, 1998 are presented below (in thousands):
Carrying Fair
amount value
12% Senior Subordinated Notes $ 117,002 $ 134,400
Other subordinated debentures $ 10,950 $ 8,667
Income Taxes
The Company utilizes the asset and liability method of accounting for
income taxes, as set forth in Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the financial statement and tax
bases of assets and liabilities, utilizing currently enacted tax rates. The
effect of any future change in tax rates is recognized in the period in which
the change occurs.
As described in Note 10, certain of the Company's subsidiaries had
previously elected to be taxed under the provisions of Subchapter S of the
Internal Revenue Code of 1986, as amended, with income or loss and credits
passed through to the Principal Shareholder. Concurrent with the acquisition of
S-K-I, the subsidiaries' election to be treated as S Corporations terminated.
Reclassifications
Certain amounts in the prior year financial statements and related
notes have been reclassified to conform with the fiscal 1998 presentation.
F-13
3. Business Acquisitions and Divestments
Kamori Combined Enterprises Acquisition
On November 12, 1997, the Company acquired all of the outstanding
shares of common stock of Kamori Combined Entities (the "Kamori Acquisition")
which included the Steamboat Ski & Resort Corporation in Steamboat Springs,
Colorado ("Steamboat"), the Heavenly Valley Ski & Resort Corporation in Lake
Tahoe, California/Nevada ("Heavenly") and the Sabal Point Golf Course in
Orlando, Florida ("Sabal Point") for approximately $300.5 million, including
closing costs and adjustments. Steamboat and Heavenly are major destination ski
resorts while Sabal Point is a golf, tennis and swimming club. The acquisition
was accounted for using the purchase method of accounting and, accordingly, the
results of operations subsequent to November 12, 1997 are included in the
accompanying consolidated financial statements. The purchase price was allocated
to the assets acquired and the liabilities assumed based on their fair market
values at the date of acquisition as follows (in thousands):
Fair value of
net assets
acquired
Cash $ 8,771
Accounts receivable 129
Inventory 3,983
Prepaid expenses 486
Property and equipment, net 183,922
Asset held for sale 5,780
Real estate developed for sale 25,624
Goodwill 60,177
Intangible assets 22,200
Long-term investments 5,000
Other assets 177
Deferred income taxes 2,443
-----------------
Total assets 318,692
-----------------
Accounts payable and other current liabilities (10,289)
Deposits and deferred revenue (6,702)
Deferred income taxes (793)
Minority interest (364)
-----------------
Total liabilities (18,148)
-----------------
Net assets acquired $ 300,544
-----------------
Amortization of goodwill and intangible assets charged to depreciation
and amortization was $1.3 million and $544,000, respectively, for fiscal 1998.
F-14
3. Business Acquisitions and Divestments (continued)
The asset held for sale per above of $5.8 million represents the
carrying value of Sabal Point. Sabal Point was subsequently sold on February 2,
1998 for total proceeds of $5.7 million. As Sabal Point was identified as held
for sale as of the Kamori Acquisition date, the operating results of Sabal Point
from that date through February 2, 1998 were excluded from the Company's
consolidated operating results and were included in the determination of the
carrying value of $5.8 million. No gain or loss was recognized from the sale of
Sabal Point as the difference between the carrying value and the proceeds was
treated as an adjustment to the original purchase price allocation.
The minority interest of $375 at July 26, 1998 is comprised of the
balance of $364 as of the Kamori Acquisition date and the minority interest in
the income of the subsidiary of $11 for fiscal 1998. This amount is included in
the minority interest in loss of subsidiary in the accompanying consolidated
statement of operations.
Amortization of goodwill and intangible assets charged to depreciation
and amortization was $1.3 million and $544,000, respectively, for fiscal 1998.
The following unaudited pro forma financial information for the
Company gives effect to the Kamori Acquisition as if the transaction had
occurred on July 29, 1996 (in thousands, except per share amounts):
Year Year
ended ended
July 27, July 26,
1997 1998
(unaudited) (unaudited)
Revenues $ 263,923 $ 344,026
-------------- ---------------
Loss from continuing operations $ (3,874) $ (9,416)
Net loss $ (4,318) $ (19,843)
-------------- ---------------
Basic and diluted loss per common share:
Continuing operations $ (0.13) $ (0.31)
Extraordinary loss - (0.17)
Net loss available to
common shareholders $ (0.15) $ (0.66)
-------------- ---------------
These pro forma comparative purposes
only and do not purport to be indicative of the results of operations which
actually would have resulted had the transactions occurred on the date
indicated.
S-K-I Acquisition
On June 28, 1996, the Company acquired all the outstanding shares of common
stock of S-K-I (the "S-K-I Acquisition") for approximately $104.6 million,
including direct costs and liabilities assumed (excluding deferred taxes) of
$58.5 million. The significant companies purchased in the S-K-I Acquisition
included SKI Insurance and the Killington, Mount Snow/Haystack, Waterville
Valley and Sugarloaf ski resorts. Subsequent to the S-K-I Acquisition, all
companies were wholly-owned, except for Sugarloaf, which was 51% owned. The
S-K-I Acquisition was accounted for using the purchase method of accounting and,
accordingly, the results of operations subsequent to June 28, 1996 are included
in the accompanying consolidated financial statements.
F-15
3. Business Acquisitions and Divestments (continued)
Amortization of goodwill charged to depreciation and amortization
amounted to $14,000, $217,000 and $274,000 for 1996, 1997 and 1998,
respectively. Accumulated amortization of goodwill amounted to $231,000 and
$505,000 at July 27, 1997 and July 26, 1998, respectively.
Pursuant to a consent decree with the U.S. Department of Justice in
connection with the S-K-I Acquisition, the Company sold the assets constituting
the Mt. Cranmore and Waterville Valley resorts for $17.2 million on November 27,
1996.
The following unaudited pro forma financial information presents the
consolidated results of operations as if the S-K-I Acquisition, the divestitures
of Mt. Cranmore and Waterville Valley, the purchase of the remaining 49%
minority interest of Sugarloaf, and the termination of the S Corporation status
of certain of the Company's wholly-owned subsidiaries had occurred on July 31,
1995 (in thousands except per share amounts):
Year ended
July 28,
1996
(unaudited)
Revenues $ 171,666
--------------------
Net loss $ (3,785)
--------------------
Net loss per share $ (3.87)
--------------------
These pro forma results have been prepared for comparative purposes
only and do not purport to be indicative of the results of operations which
actually would have resulted had the transactions occurred on the date
indicated.
Other Acquisitions
On August 30, 1996, the Company purchased the remaining 49% minority
interest in Sugarloaf for $2.0 million cash. In connection with the purchase,
the Company recorded a liability in the amount of $492,000 to provide for
contingent consideration that may be paid pursuant to the purchase agreement.
During 1998, the Company paid contingent consideration of $331,000. The
remaining balance of the liability at July 26, 1998 of $161,000 is included in
other long-term liabilities in the accompanying consolidated balance sheet. In
connection with the purchase of Sugarloaf, the Company paid certain debt in
advance of its maturity and incurred a prepayment penalty of $600,000. The
prepayment penalty is recorded in interest expense in the accompanying
consolidated statement of operations for the year ended July 27, 1997.
In November 1996, the Company purchased the Pico Ski Resort for a
total purchase price of $5.0 million. The purchase price includes a cash payment
of $3.4 million and assumed liabilities of $1.6 million.
In July 1997, the Company purchased The Canyons for a total purchase
price of $8.3 million. The purchase price includes a cash payment of $1.6
million, assumed liabilities of $200,000 and the issuance of a note payable in
the amount of $6.5 million.
F-16
4. Property and Equipment
Property and equipment consists of the following (in thousands):
July 27, July 26,
1997 1998
Buildings and grounds .................................................... $ 69,635 $159,841
Machinery and equipment .................................................. 61,218 108,046
Lifts and lift lines ..................................................... 60,769 158,074
Trails ................................................................... 11,667 36,072
Land improvements ........................................................ 18,096 24,612
-------- --------
221,385 486,645
Less - accumulated depreciation and amortization ......................... 36,940 69,817
-------- --------
184,445 416,828
Land ..................................................................... 49,160 73,755
Construction-in-process .................................................. 18,741 30,556
-------- --------
Property and equipment, net .............................................. $252,346 $521,139
-------- --------
Property and equipment includes approximately $10.7 million and $19.3
million of machinery and equipment and lifts held under capital leases at July
27, 1997 and July 26, 1998, respectively. At July 27, 1997 and July 26, 1998,
related accumulated amortization on property and equipment under capital leases
was approximately $2.3 million and $3.8 million, respectively. Amortization
expense for property and equipment under capital leases was approximately
$493,000, $1.6 million and $2.2 million for 1996, 1997 and 1998, respectively.
Total depreciation and amortization expense relating to all property and
equipment was $6.7 million, $16.6 million and $34.0 million for 1996, 1997 and
1998, respectively.
5. Note Receivable
In connection with the sale of Mt. Cranmore and Waterville Valley in
November 1996, the Company received a promissory note in the amount of $2.8
million. Interest on the note is charged at a rate of 12% per annum and is
payable semi-annually on December 31 and June 30. The note is payable in annual
installments ranging from $100,000 to $350,000 beginning in January 1997 through
January 2003, with the remaining balance to be paid in June 2004. The balance of
the note at July 27, 1997 and July 26, 1998 was $2.5 million and $2.4 million,
respectively and is included in other assets in the accompanying consolidated
balance sheet.
F-17
6. Demand Note, Principal Shareholder
In June 1996, prior to the S-K-I Acquisition, the Company delivered to
the Principal Shareholder a demand note in the principal amount of $5.2 million
for the amount expected to become payable by the Principal Shareholder in 1996
and 1997 for income taxes with respect to the Company's income as an S
Corporation through the date of the S-K-I Acquisition. The demand note is
unsecured and bears interest at 5.4% per annum, the applicable federal rate in
effect at the time of issuance. The amount in the accompanying consolidated
balance sheet at July 26, 1998 of $1.8 million will remain payable until all
related open tax years are closed.
7. Long-Term Debt
Long-term debt consists of (dollar amounts in thousands):
July 27, July 26,
1997 1998
Senior Credit Facility (Note 9) .................................................... $55,067 $194,227
Real estate development note payable with a face value of $55,000. The note
bears interest at 10% per annum which is accrued monthly. Principal and interest
on the note are payable as real estate quartershares are sold. Any remaining
principal and accrued interest are due in January 2001. The note is
collateralized by the real estate developed for sale of GSRP ....................... -- 31,411
Note payable with a face value of $2,250. The note bears interest at 9% per
annum which is payable monthly beginning January 1998 for a
15-year term. The principal is due in full in December 2012 ...................... -- 2,250
Note payable with a face value of $2,000. The note bears interest at 10% per
annum which is payable upon the maturity of the note. A principal payment of $1,000 is
due in June 1999. The remaining principal and
accrued interest are due in June 2000 ............................................. -- 2,000
Subordinated debentures issued with an original face value of $2,151. The
initial coupon rate is 6% per annum and is adjusted annually in accordance with
the agreement. Interest is payable annually in May beginning in 1995, net
debentures mature in April 2002 ................................................... 1,777 1,844
Note payable with a face value of $1,720. The note bears interest at 12% per
annum which is payable quarterly, in arrears, beginning October 1998.
The principal is due in full in July 2000 ......................................... -- 1,720
Note payable with a face value of $1,600. Interest is payable monthly beginning
January 1998 for a 30-year term. The interest rate is 7% per annum for the first
10 years, 8.44% per annum for the second 10 years and 10.55% per annum for the
final 10 years. The principal is due in full in December 2027 ...................... -- 1,600
Note payable with a face value of $1,000. The note bears interest at 14% per
annum which is payable monthly beginning in August 1997. The principal is due in
full in July 2000 ......................................... ...................... -- 1,000
F-18
7. Long-Term Debt (continued)
July 27, July 26,
1997 1998
Vermont Industrial Development Bonds, with interest rates that fluctuate between
4.03% and 4.50%. Principal is due in varying installments through 1999 and is
secured by certain machinery, equipment and real estate. ..................... $1,005 $ 520
Note payable in an aggregate principal amount of $6,500 to finance the
acquisition of The Canyons resort. The note bore interest at 12% per annum and
was payable monthly. The principal was payable in two installments: $4,200 upon
the effective date of the Company's Offering and $2,300 in January 1998. ..... 6,500 -
Note payable with a face value of $8,500 to finance the acquisition of land for
a hotel at the Attitash Bear Peak resort. The note bore interest at a rate of
9.5% per annum. The debt was paid in full in fiscal 1998...................... 4,250 -
Note payable with an original face value of $6,120 (a discount has been
reflected based on an imputed interest rate of 9.5%) and an interest rate of
6.25%. Interest was payable quarterly beginning in June 1995. A principal
payment of $620 was made in November 1995 and the remaining principal and
accrued interest outstanding were due in December 1999. The note was
collateralized by certain assets as defined in the loan agreement. In connection
with the prepayment of this debt, the Company recorded an extraordinary loss
before income tax benefit of $325 representing the unamortized original issue
discount...................................................................... 5,128 -
Note payable in the amount of $2,311. The note bore interest at the greater
of 9% or prime plus 1%, which was due in June of each year beginning in 1995.
Principal payments of $154 were due in June beginning in 1997 and the balance
was due in June 2003. The Company paid this debt in full in fiscal 1998 prior
to its maturity. ......................... ................................... 2,158 -
Note payable with face value of $1,000 to finance the purchase of a retail
store. The note does not accrue interest. The principal is due as follows: $300
in August 1998; $200 in August 1999; $200 in August 2000 and $300 in August
2001. ..................................................................... - 1,000
Note payable with face value of $2,294. The note bears interest at 7.83% per
annum. Interest and principal payments of $22 are payable monthly beginning
March 1998. The remaining principal and accrued interest are due in February
2003. .................................................................... - 2,255
Obligations under capital leases .......................................... 7,840 12,664
Other notes payable ....................................................... 2,856 2,777
----------- ---------
$ 86,581 $ 255,268
----------- ---------
Less: current portion .................................................... 39,748 43,698
----------- ----------
Long-term debt, excluding current portion ................................ $ 46,833 $ 211,570
----------- -----------
F-19
7. Long-Term Debt (continued)
The carrying values of the above debt instruments approximate their
respective fair values in all material respects, determined by discounting
future cash flows at current market interest rates as of July 26, 1998.
The non-current portion of long-term debt matures as follows (in
thousands):
2000 $ 12,263
2001 31,336
2002 6,042
2003 4,177
2004 and thereafter 159,860
Interest related to capitalized leases (1,768)
Debt discount (340)
--------------------
$ 211,570
--------------------
At July 26, 1998, the Company had letters of credit outstanding
totaling $4.3 million.
8. Subordinated Notes and Debentures
On June 25, 1996, in connection with the S-K-I Acquisition, ASC East
issued $120.0 million of 12% Senior Subordinated Notes (the "Notes"), $39.1
million of 13.75% Subordinated Discount Notes (the "Subordinated Notes") and
39,132 shares of its common stock in a private placement. Pursuant to a
registration rights agreement, ASC East filed a registration statement with
respect to an offer to exchange the Notes and Subordinated Notes for a new issue
of notes of ASC East registered under the Securities Act of 1933, with identical
terms. The registration statement became effective in November 1996. The Notes
and Subordinated Notes are general unsecured obligations of ASC East,
subordinated in right of payment to all existing and future senior debt of ASC
East, including all borrowings of the Company under the Senior Credit Facility.
The Notes and Subordinated Notes mature July 15, 2006 and January 15, 2007,
respectively, and will be redeemable at the option of ASC East, in whole or in
part, at any time after July 15, 2001. ASC East incurred deferred financing
costs totaling $7.9 million in connection with the issuance of the Notes and
Subordinated Notes which are recorded as deferred financing costs, net of
accumulated amortization, in the accompanying consolidated balance sheet.
Amortization expense included in the accompanying consolidated statement of
operations for the years ended July 28, 1996, July 27, 1997 and July 26, 1998
amounted to $58,000, $781,000 and $ 712,600, respectively.
The Notes were issued with an original issue discount of $3.4 million.
Interest on the Notes is payable semi-annually on January 15 and July 15 of each
year, commencing on January 15, 1997. Interest expense on the Notes amounted to
$1.1 million in 1996 and $14.6 million in both 1997 and 1998.
F-20
8. Subordinated Notes and Debentures (continued)
Concurrently with the Offering, the Company solicited and received the
required consents from the holders of the Notes to amend the Notes indenture to
permit the consummation of the Offering without requiring the Company to make a
Change of Control Offer (as defined). In connection with the consent
solicitation, the Company paid a customary fee to the consenting holders of the
Notes.
The Company entered into two cancelable interest rate swap agreements
(the "Swap Agreements") with BankBoston, N.A. ("BankBoston") with an effective
date of February 9, 1998 (the "Effective Date") to manage the interest rate risk
associated with the Notes. The notional amount of both Swap Agreements of $120.0
million is equal to the face value of the Notes. The first Swap Agreement
matures on July 15, 2001, the date on which the related Notes first become
redeemable at the option of the Company. The second Swap Agreement matures on
July 15, 2006, the date on which the related Notes mature. From the Effective
Date through July 15, 2001, the Swap Agreements effectively reduce the Company's
cash outflow relating to the payment of interest on the Notes from 12% to 9.01%,
with the Company's payment of interest to BankBoston at 9.01% of the notional
amount and BankBoston's payment of interest to the Company at 12% of the
notional amount. The reduction in the net cash outflow for interest had no
impact on the accompanying consolidated statement of operations as the net swap
receipt from BankBoston of $1.6 million for the period from the Effective Date
through July 26, 1998 is included in other long-term liabilities in the
accompanying consolidated balance sheet. The Company will accrue interest
expense on the cumulative net swap receipt over the period of the first Swap
Agreement. This other long-term liability, including accrued interest thereon,
will be amortized as a credit to interest expense over the period from July 15,
2001 to July 15, 2006. Under the second Swap Agreement, which will remain in
effect for the period from July 15, 2001 to July 15, 2006, the Company will make
interest payments to BankBoston at 9.01% of the notional amount while BankBoston
will make interest payments back to the Company at the LIBOR rate in effect at
that time. Depending on the LIBOR rate in effect during the second Swap
Agreement, the Company's interest rate exposure and its related impact on
interest expense and net cash outflow may increase or decrease from the fixed
rate under the Notes of 12%. The Company is exposed to credit loss in the event
of nonperformance by the other party to the Swap Agreements; however,
nonperformance is not anticipated.
The Subordinated Notes were issued with an original issue discount of
$19.0 million. Under the terms of the indenture, interest on the Subordinated
Notes was not to accrue prior to July 15, 2001; thereafter, interest was to
accrue at the rate of 13.75% per annum and was to be payable semi-annually on
January 15 and July 15 of each year, commencing on January 15, 2002. Interest
expense on the Subordinated Notes amounted to $206,000, $2.9 million and $1.4
million in 1996, 1997 and 1998, respectively. The shares of common stock issued
with the Subordinated Notes represented 4% of the total common stock outstanding
of ASC East and were valued at $976,000 as of June 28, 1996.
On January 26, 1998, the Company and the holders of the 4% of the
outstanding shares of ASC East entered into an agreement whereby the Company
issued 615,022 shares of its Common Stock in exchange for all ASC East common
stock shares not owned by the Company. In connection with the exchange, the
Company recorded $8.5 million of goodwill which represented the excess of the
fair market value of the common stock exchanged relative to the carrying value
of the minority interest. Amortization expense relating to the goodwill was
$127,000 for the year ended July 26, 1998.
F-21
8. Subordinated Notes and Debentures (continued)
A portion of the proceeds from the New Credit Facility (Note 9) were
used to redeem all of the outstanding Subordinated Notes. The indenture relating
to the Subordinated Notes provided for a redemption price equal to 113.75% of
the carrying value of the Subordinated Notes on the redemption date. The Company
recorded extraordinary losses before any benefit for income taxes of
approximately $4.3 million related to the prepayment of the Subordinated Notes
and $1.0 million related to the write-off of deferred financing costs. These
losses are included in the total extraordinary loss in the accompanying
consolidated statement of operations for the year ended July 26, 1998.
Other subordinated debentures owed by the Company at July 26, 1998 are
due as follows (in thousands):
Interest Principal
Year Rate Amount
1999 6% $ 455
2000 6% 673
2001 8% 525
2002 8% 549
2003 8% 1,074
2004 8% 1,466
2010 8% 1,292
2012 6% 1,155
2013 6% 1,065
2015 6% 1,500
2016 6% 1,196
------------
$ 10,950
------------
9. Senior Credit Facility
In connection with the Offering, the Company entered into a new credit
facility (the "New Credit Facility") with BankBoston on November 12, 1997 and
repaid the indebtedness under the Company's then existing credit facility (the
"Old Credit Facility"). In connection with the repayment of the Old Credit
Facility, the Company wrote-off deferred financing costs of $1.2 million and
incurred prepayment penalties of $433,000. These amounts are included in the
total extraordinary loss in the accompanying consolidated statement of
operations. On November 13, 1997, BankBoston, as agent, syndicated the New
Credit Facility to a group of participating lenders (the "Banks").
The New Credit Facility is divided into two sub-facilities, $75.0
million of which is available for borrowings by ASC East and its subsidiaries
(the "East Facility") and $140.0 million of which is available for borrowings by
the Company excluding ASC East and its subsidiaries (the "West Facility"). The
East Facility consists of a six-year revolving credit facility in the amount of
$45.0 million and an eight-year
F-22
9. Senior Credit Facility (continued)
term facility in the amount of $30.0 million. The West Facility consists of a
six-year revolving facility in the amount of $75.0 million and an eight-year
term facility in the amount of $75.0 million.
The revolving facilities are subject to an annual requirement to
reduce the outstanding debt to a balance of not more than $10.0 million for the
East Facility and not more that $45.0 million for the West Facility for a period
of 30 days. The maximum availability under the revolving facilities will reduce
over the term of the New Credit Facility by certain prescribed amounts. The term
facilities amortize at a rate of approximately 1.0% of the principal amount for
the first six years with the remaining portion of the principal due in two
substantially equal installments in years seven and eight. Beginning July 1999,
the New Credit Facility requires mandatory prepayment of 50% of excess cash
flows during any period in which the ratio of the Company's total senior debt to
earnings before interest expense, income taxes, depreciation and amortization
("EBITDA") exceeds 3.50 to 1. In no event, however, will such mandatory
prepayments reduce either revolving facility commitment below $35.0 million. The
New Credit Facility contains affirmative, negative and financial covenants
including maintenance of debt to EBITDA, minimum net worth, EBITDA to interest
expense, and cash flow to debt service financial ratios. Except for the debt to
EBITDA and minimum net worth ratios, which are calculated at both the ASC
consolidated level and at the ASC East and ASC West levels, compliance with
financial covenants is determined on a consolidated basis notwithstanding the
bifurcation of the New Credit Facility into sub-facilities.
At July 26, 1998, the revolving portion of the East and West
Facilities had outstanding borrowings of $28.0 million and $54.0 million,
respectively under LIBOR contracts which bear interest at rates ranging from
8.09% to 8.48% per annum. At July 26, 1998, both the East and West Facilities
had outstanding borrowings of $1.0 million in Money Market accounts which bear
interest at rates ranging from 8.06% to 8.47%. The balance of the borrowings
outstanding at year end under the East and West Facilities of $537,000 and
$895,000, respectively, bear interest at the greater of BankBoston's base rate
or the Federal Funds Rate plus 1% per annum. At July 26, 1998, the LIBOR, Money
Market and Base rates were 8.16%, 8.06% and 9.5%, respectively. At July 26,
1998, the term portion of the East and West Facilities had outstanding
borrowings of $30.0 million and $75.0 million, respectively, and bear interest
at rates ranging from 8.59% to 8.98%. Both the revolving and term portions of
the New Credit Facility accrue interest daily and pay interest quarterly, in
arrears, commencing January 31, 1998. At July 26, 1998, accrued interest for the
East and West Facilities were $1.2 million and $2.6 million, respectively. The
East Facility is secured by substantially all the assets of ASC East and its
subsidiaries, except the real estate development subsidiaries, which are not
borrowers under the New Credit Facility. The West Facility is secured by
substantially all the assets of ASC West and its subsidiaries.
In November 1997, the Company paid financing fees with respect to the
New Credit Facility of 1.75% of the total commitment, or $3.8 million to the
Banks. The Company has capitalized these fees and certain other debt related
costs and is amortizing them over the term of the New Credit Facility. Total
unamortized financing fees relating to the New Credit Facility recorded in
deferred financing costs in the accompanying consolidated balance sheet were
$3.9 million at July 26, 1998.
F-23
10. Income Taxes
Prior to June 28, 1996, certain subsidiaries of the Company (the "S
Corporations") had elected to be taxed under the provisions of Subchapter S of
the Internal Revenue Code of 1986, as amended. Accordingly, no income tax
provision or liability was made for these companies for the period July 31, 1995
to June 28, 1996. For federal and state income tax purposes, taxable income,
losses, and tax credits were passed through to the Principal Shareholder, who
was individually responsible for reporting his share of such items. The Company
distributed to the Principal Shareholder amounts sufficient to pay his personal
income taxes based on the S Corporations' earnings.
In conjunction with the S-K-I Acquisition, the S Corporations changed
from S Corporation status to C Corporation status. As a result, the income or
loss of the former S Corporations from June 29, 1996 will be subject to
corporate income tax. The income tax provisions described below include the
income taxes related to the S Corporations since June 29, 1996.
At the time of the conversion of the S Corporations to C Corporation
status, a net deferred tax liability of $5.6 million was recorded through the
income tax provision. This deferred tax liability was primarily comprised of the
tax effect of the cumulative book and tax basis differences of property and
equipment at the time of the conversion.
Deferred income taxes reflect the tax impact of temporary differences
between the amounts of assets and liabilities for financial reporting purposes
and such amounts as measured by tax laws and regulations. Under SFAS 109, the
benefit associated with future deductible temporary differences and operating
loss or credit carryforwards is recognized if it is more likely than not that a
benefit will be realized. Deferred tax provision (benefit) represents the change
in the net deferred tax asset or liability balance.
F-24
10. Income Taxes (continued)
The provision (benefit) for income taxes charged to continuing
operations was as follows (in thousands):
Year ended
July 28, July 27, July 26,
1996 1997 1998
Current tax provision
Federal $ - $ - $ -
State - - -
-------------- -------------- --------------
- - -
-------------- -------------- --------------
Deferred tax provision (benefit)
Federal (1,330) (2,815) 580
State (316) (798) (1,354)
-------------- -------------- --------------
(1,646) (3,613) (774)
-------------- -------------- --------------
Change in tax status from S Corporation
to C Corporation 5,552 - -
-------------- -------------- --------------
Total provision (benefit) $ 3,906 $ (3,613) $ (774)
-------------- -------------- --------------
F-25
10. Income Taxes (continued)
Deferred tax liabilities (assets) are comprised of the following at
July 27, 1997 and July 26, 1998 (in thousands):
July 27, July 26,
1997 1998
Property and equipment basis differential ......................... $ 40,040 $ 43,992
Other ............................................................. 907 880
-------------- --------------
Gross deferred tax liabilities .................................... 40,947 44,872
-------------- --------------
Tax loss and credit carryforwards ................................. (16,766) (15,017)
Capitalized cost .................................................. (543) (1,042)
Original issue discount on Subordinated Notes ..................... (1,212) -
Stock option compensation ......................................... - (4,939)
Reserves and accruals ............................................. (1,361) (3,527)
Other ............................................................. (228) (1,488)
-------------- --------------
Gross deferred tax assets ......................................... (20,110) (26,013)
Valuation allowance ............................................... 7,255 2,447
-------------- --------------
$ 28,092 $ 21,306
-------------- --------------
The provision (benefit) for income taxes differs from the amount of
income tax determined by applying the applicable U.S. statutory income tax rate
of 35% to income (loss) before provision (benefit) for income taxes, minority
interest in loss of subsidiary and extraordinary loss as a result of the
following differences (in thousands):
Year ended
July 28, July 27, July 26,
1996 1997 1998
Income tax provision (benefit) at the statutory U.S. tax rates ... $ 546 $ (3,271) $ (1,080)
Increase (decrease) in rates resulting from:
Change in tax status from S Corporation to C Corporation ...... 5,552 - -
Income from S Corporations not taxable for corporate
income tax purposes ......................................... (2,371) - -
State taxes, net .............................................. - (798) (1,354)
Change in valuation allowance ................................. - 71 250
Stock compensation ............................................ - - 1,019
Nondeductible items ........................................... 41 243 634
Other ......................................................... 138 142 (243)
-------------- -------------- -------------
Income tax provision (benefit) at the effective tax rates ....... $ 3,906 $(3,613) $ (774)
-------------- -------------- -------------
F-26
10. Income Taxes (continued)
At July 26, 1998, the Company has federal net operating loss ("NOL")
carryforwards of approximately $29.8 million which expire in varying amounts
through the year 2013 and a federal capital loss carryover of $900,000 that
expires in the year 2003. Internal Revenue Code Section 382 limits the amount of
net operating loss carryforwards incurred before a change in ownership, as
defined, that can be used annually against income generated after the change in
ownership. In November 1997 as a result of the Offering, the Company experienced
a change in ownership. The Company's overall annual limitation under Section 382
is approximately $15.0 million. Because of recent acquisitions, the limitation
is required to be allocated to the various subsidiaries based on their relative
fair market values. In addition, certain subsidiaries have separate pre-change
in ownership losses which are subject to lower annual limitations as a result of
previous changes in ownership. Subsequent changes in ownership could further
affect the limitations in future years.
In addition to the limitations under Section 382, approximately $11.4
million of the federal NOL carryovers are from the separate return years, as
defined in the regulations to the Internal Revenue Code, of certain subsidiaries
(or sub-groups), and may only be used to offset each subsidiary's (or sub-group)
contribution to consolidated taxable income in future years.
A valuation allowance is provided when it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Management
believes that the valuation allowance of $2.5 million at July 26, 1998 is
appropriate because, due to the change of ownership and the resulting annual
limitations, the Company will not be able to use all the potential tax benefits
from existing NOLs and investment tax credits as of July 26, 1998.
The Company has elected to treat a substantial portion of the loss
carryforwards acquired in the acquisition of Sugarloaf as expiring immediately
prior to its purchase of Sugarloaf. Due to the limitations on loss carryforwards
discussed above, the Company did not expect to utilize any of the tax benefits
associated with these loss carryforwards and a full valuation allowance was
established. In computing the deferred tax liabilities (assets) as of July 26,
1998, both the asset related to the loss carryforward and the corresponding
valuation allowance have been eliminated. This election was made to avoid a
reduction in the tax basis of Sugarloaf's stock when the loss carryforwards
expire.
11. Mandatorily Redeemable Securities
Pursuant to a Securities Purchase Agreement (the "Agreement") dated
July 2, 1997 (as amended July 16, 1997), the Company issued 17,500 shares of its
Series A 14% Exchangeable Preferred Stock (the "Preferred Stock") in a private
offering to an institutional investor. The Company incurred $1.1 million in
expenses in connection with the issuance of the Preferred Stock. These amounts
were recorded as a reduction of the carrying value of the Preferred Stock in the
accompanying consolidated balance sheet at July 27, 1997.
F-27
11. Mandatorily Redeemable Securities (continued)
Pursuant to the Agreement, the Company issued $17.5 million aggregate
principal amount of its 14% Senior Exchangeable Notes Due 2002 (the
"Exchangeable Notes") on July 28, 1997 in a private offering to an institutional
investor. The Company incurred deferred financing costs totaling $1.1 million in
connection with the issuance of the Exchangeable Notes. These costs were
recorded as deferred financing costs in the accompanying consolidated balance
sheet at July 27, 1997. The Exchangeable Notes bore interest at a rate of 14%
per annum and mature on July 28, 2002. Inteest on the Exchangeable Notes was
payable in cash or additional Exchangeable Notes, at the option of the Company.
On November 15, 1997, subsequent to the completion of the Offering,
each share of Preferred Stock and the Exchangeable Notes were converted into
shares of 10 1/2% Repriced Convertible Preferred Stock. The total number of 10
1/2% Repriced Convertible Preferred Stock shares issued in association with the
exchange were 36,626 and have a face value of $1,000 per share. The carrying
value of the Preferred Stock and Exchangeable Notes just prior to the conversion
were $18.4 million and $18.2 million, respectively. The Company incurred an
extraordinary loss before income tax benefit of $1.0 million upon the conversion
of the Preferred Stock and Exchangeable Notes as a result of the write-off of
unamortized deferred financing costs relating to the Exchangeable Notes.
Under the Agreement, the 10 1/2% Repriced Convertible Preferred Stock
shares are exchangeable at the option of the holder into shares of the Company's
Common Stock at a conversion price of $17.10 for each common share. In the event
the 10 1/2% Repriced Convertible Preferred Stock is held to the maturity date of
November 15, 2002, the Company will be required to pay the holder in cash the
face value of $36.6 million plus cumulative dividends in arrears.
In the event of a default, as defined in the Agreement, there shall be
a mandatory redemption of the 10 1/2% Repriced Convertible Preferred Stock by
the Company unless the holder of the stock elects instead to have visitation
rights to meetings of both the Board of Directors and Management Committees
until the event of default is cured.
The 10 1/2% Repriced Convertible Preferred Stock ranks senior in
liquidation preference to all Common Stock and Class A Common Stock outstanding
at July 26, 1998 as well as any Common Stock and Class A Common Stock issued in
the future.
12. Related Party Transactions
The Principal Shareholder's wife is employed by the Company as
director of retail purchasing and is actively involved in the Company's retail
sales activities. During fiscal 1996, 1997 and 1998, the Principal Shareholder's
wife received total compensation of $55,000, $52,000 and $52,000, respectively.
During the first quarter of fiscal 1998, the Company granted the Principal
Shareholder's wife fully vested options to purchase up to 20,060 shares of
Common Stock at a price of $2.00 per share.
Western Maine Leasing Co., a corporation wholly-owned by the Principal
Shareholder, leases heavy equipment to Sunday River under short-term leases. In
fiscal 1996, 1997 and 1998, payments under such leases totaled $37,000, $24,000
and $17,000, respectively.
F-28
12. Related Party Transactions (continued)
Sunday River provided lodging management services for Ski Dorm, Inc. ("Ski
Dorm"), a corporation owned by the Principal Shareholder and his mother, which
owns a ski dorm located near the Sunday River resort. During fiscal 1996, 1997
and 1998, payments by Ski Dorm to Sunday River totaled $90,000, $258,000 and
$2,000, respectively. In addition, Ski Dorm issued to Sunday River a promissory
note in 1995 with a principal amount of $265,000, of which $250,000 was
outstanding at July 26, 1998. This note is secured by a mortgage on real estate
and related improvements owned by Ski Dorm. Interest on the note is charged at
the prime rate plus 1 1/2% and principal and any accrued interest are due in
December 1999.
The Principal Shareholder borrowed funds from ING (U.S.) Capital
Corporation to purchase Common Stock in the Offering and has pledged shares of
Common Stock and Class A Common Stock to secure the loan. In connection with the
loan, the Company entered into a registration rights agreement with the lender
containing customary provisions pursuant to which the lender has the right to
require the Company to register with the Securities and Exchange Commission, at
the Company's expense, the shares pledged by the Principal Shareholder to secure
the loan.
13. Commitments, Lease Contingencies and Contingent Liabilities
The Company leases certain land and facilities used in the operations
of its resorts under several operating lease arrangements. These lease
arrangements expire at various times from the year 2010 through the year 2060.
Lease payments are generally based on a percentage of revenues. Total rent
expense under these operating leases as recorded in resort operating expenses in
the accompanying consolidated statement of operations for 1996, 1997 and 1998
was $744,000, $2.2 million and $2.5 million, respectively.
Significant portions of the land underlying certain of the Company's
ski resorts are leased or subleased by the Company or used pursuant to renewable
permits or licenses. If any such lease, sublease, permit or license were to be
terminated or not renewed upon expiration, or renewed on terms materially less
favorable to the Company, the Company's ability to possess and use the land
subject thereto and any improvements thereon would be adversely affected,
perhaps making it impossible for the Company to operate the affected resort. A
substantial portion of the land constituting skiable terrain at Attitash Bear
Peak, Sugarbush, Mount Snow/Haystack and Steamboat is located on federal land
that is used under the terms of the permits with the United States Forest
Service (the "Forest Service"). Generally, under the terms of such permits, the
Forest Service has the right to review and comment on the location, design and
construction of improvements in the permit area and on many operational matters.
The permits can be terminated or modified by the Forest Service to serve the
public interest. A termination or modification of any of the Company's permits
could have a material adverse effect on the results of operations of the
Company. The Company does not anticipate any limitations, modifications, or
non-renewals which would adversely affect the Company's operations.
In connection with the purchase of The Canyons, the Company entered
into an operating lease arrangement with the seller for the lease of certain
land to be used in the operation of the resort and for future real estate
development. The arrangement provides for an initial lease term of 50 years,
with the option to extend for three additional 50 year periods for a fee of $1.0
million for each
F-29
13. Commitments, Lease Contingencies and Contingent Liabilities (continued)
extension period. Lease payments are based on a percentage of gross
skiing and lodging revenues. The arrangement also provides for additional
one-time payments ranging from $250,000 to $3.0 million upon achievement of
annual skier visit level increases in 100,000 visit increments up to 1,000,000.
Total rent expense under this arrangement, as recorded in resort operating
expenses in the accompanying consolidated statement of operations for 1997 and
1998 was $0 and $473,000, respectively. In addition, the Company has the option
to purchase parcels of land covered under the operating lease for real estate
development. Payments for these options total $20.6 million and are payable at
various times and in varying amounts, at the Company's discretion, through July
2001. The Company is not required to make the option payments for all parcels of
land in order to develop and sell real estate on the land covered under the
lease. Option payments for the year ended July 27, 1997 and July 26, 1998 were
$0 and $7.6 million, respectively, and are included in other assets in the
accompanying consolidated balance sheet.
In addition to the leases described above, the Company is committed
under several operating and capital leases for various facilities, machinery and
equipment. Rent expense under all operating leases was $994,000, $4.2 million
and $6.4 million for the years ended 1996, 1997 and 1998, respectively.
Future minimum lease payments for lease obligations at July 26, 1998
are as follows (in thousands):
Capital Operating
leases leases
1999 ................... $ 4,073 $ 11,234
2000 ................... 3,944 9,789
2001 ................... 3,419 3,716
2002 ................... 2,255 1,325
2003 and thereafter..... 1,679 11,259
--------------- --------------
Total payments ......... $ 15,370 $ 37,323
--------------
Less interest .......... 2,706
---------------
Present value of net
minimum payments ....... 12,664
Less current portion ... 4,862
---------------
Long-term obligations .. $ 7,802
---------------
In the fourth quarter of fiscal 1998, the Company began construction
on two hotel projects at The Canyons and one at Steamboat. Total construction
costs under these three projects are estimated to be $190.0 million. Two of
these hotel projects are being financed through a $145.0 million construction
loan facility with TFC Textron and a $30.0 million bridge financing arrangement
(See Note 18). The Company expects to finance substantially all of the third
hotel project through an additional construction loan facility with the balance
financed under a bridge loan arrangement. The Company anticipates repaying the
bridge loans with the proceeds from an $85.0 million subordinated debt, private
placement financing arrangement ("Private Placement Financing") which the
Company is currently pursuing. In the event the Company is unable to obtain the
Private Placement Financing, the Company will seek alternative financing or
reduce its future real estate development, and will be required to refinance the
bridge loans.
On July 22, 1998, the Company entered into an agreement with Marriott
Ownership Resorts, Inc. ("Marriott") for the future sale of land parcels at the
Company's Killington, Sunday River, The Canyons, Steamboat and Heavenly resorts
(the "Marriott Agreement"). Under the Marriott Agreement, Marriott intends to
develop luxury vacation ownership properties at each of the five aforementioned
properties. In accordance with the Marriott Agreement, the Company has granted
to Marriott certain development and marketing rights at the related resorts. In
return, the Company will receive proceeds for the sale of the land parcels and
will receive a percentage of
F-30
13. Commitments, Lease Contingencies and Contingent Liabilities (continued)
the Marriott sales of the luxury vacation ownership properties. The
land parcels to be sold had not been identified as of July 26, 1998. Prior to
year end, the Company received a cash deposit of $1.6 million from Marriott
relating to the future land sales. The deposit is recorded as deposits and
deferred revenue in the accompanying consolidated balance sheet at July 26,
1998.
Certain claims, suits and complaints associated with the ordinary
course of business are pending or may arise against the Company, including all
of its direct and indirect subsidiaries. In the opinion of management, all
matters are adequately covered by insurance or, if not covered, are without
merit or are of such kind, or involve such amounts as would not have a material
effect on the financial position, results of operations or cash flows of the
Company if disposed of unfavorably.
14. Stock Option Plan
Effective August 1, 1997, the Company established a fixed stock option
plan, the American Skiing Company Stock Option Plan (the "Plan"), to provide for
the grant of incentive and non-qualified stock options for the purchase of up to
5,688,699 shares of the Company's common stock by officers, management employees
of the Company and its subsidiaries and other key persons (eligible for
nonqualified stock options only) as designated by the Options Committee. The
Options Committee, which is appointed by the Board of Directors, is responsible
for the Plan's administration. The Options Committee determines the term of each
option, option exercise price, number of shares for which each option is granted
and the rate at which each option is exercisable. Options granted under the Plan
generally expire ten years from the date of grant and vest either immediately or
over a five-year term. Incentive stock options shall not have an exercise price
less than the fair market value of the common stock at the date of grant.
Nonqualified stock options shall be granted at an exercise price as determined
by the Options Committee.
The Company accounts for stock-based compensation using the method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees". During fiscal 1998, the Company granted nonqualified
options under the Plan to certain key members of senior management to purchase
501,500 shares of common stock with an exercise price of $2.00 per share when
the fair market value of the stock was estimated to be $18.00 per share.
Accordingly, the Company recognized stock compensation expense of $8.1 million
relating to the grants based on the intrinsic value of $16.00 per share. Under
these grant agreements, the Company agreed to pay the optionees a fixed tax
"bonus" in the aggregate of $5.7 million to provide for certain fixed tax
liabilities that the optionees will incur upon exercise. In addition, the
Company granted options under the Plan to certain members of management to
purchase 160,480 shares of common stock with an exercise price of $2.00 per
share when the fair market value of stock was estimated to be $18.00 per share.
These options vested 20% on the date of grant and will vest ratably to 100% over
the following four years. For fiscal 1998, the Company recognized $500,000 of
stock compensation expense relating to these options. The total stock
compensation charge including the tax bonus recorded for fiscal 1998 of $14.3
million is reflected in the accompanying consolidated statement of operations.
The liability of $5.7 million for the fixed tax bonus to be paid to the
optionees is reflected in accounts payable and other current liabilities in the
accompanying consolidated balance sheet at July 26, 1998.
F-31
14. Stock Option Plan (continued)
Immediately following the Offering, the Company granted the Principal
Shareholder and certain employees incentive stock options under the Plan to
purchase 1,853,197 and 168,350 shares, respectively, of common stock with an
exercise price equal to the fair market value on the date of grant of $18.00 per
share. Also during fiscal 1998, the Company granted to members of the Board of
Directors nonqualified options to purchase 22,500 shares of common stock under
the Plan with an exercise price equal to the fair market value on the date of
grant of $14.19 per share. These incentive and nonqualified stock options were
all 100% vested on the date of grant. As all these options were granted with an
exercise price equal to the fair market value at the date of grant, no
compensation expense has been recorded in the accompanying consolidated
statement of operations for fiscal 1998.
Weighted
average
Exercise exercise
Number of price price
options per share per share
Granted ............................................. 2,706,027 $ 2.00-$18.00 $ 14.05
Exercised (20,000) $ 2.00 $ 2.00
.................................................... -------------
Outstanding at July 26, 1998 ........................ 2,686,027 $ 2.00-$18.00 $ 14.14
------------- -------------
Exercisable at July 26, 1998 ........................ 2,557,643 $ 14.75
------------- -------------
Available for future grants ......................... 2,982,672
-------------
The following table summarizes information about the stock options
outstanding under the Stock Plan at July 26, 1998:
Options Outstanding Options
Exercisable
----------------------------------------- ---------------------------
Number Weighted Number
outstanding average Weighted exercisable Weighted
at remaining average at average
July 26, contractual exercise July 26, exercise
Exercise Prices 1998 life price 1998 price
(years)
- - ---------------------------------------------------------------------------------------------------------
$2.00 ..................... 641,980 9 $ 2.00 513,596 $ 2.00
$14.19 .................... 22,500 9 $14.19 22,500 $ 14.19
$18.00 .................... 2,021,547 9 $18.00 2,021,547 $ 18.00
------------ -------------
2,686,027 2,557,643
------------ -------------
F-32
14. Stock Option Plan (continued)
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). Had stock compensation expense been determined based on the fair value at
the grant dates for the fiscal 1998 option grants consistent with the provisions
of SFAS 123, the Company's net loss and loss per share for the year ended July
26, 1998 would have been increased to the pro forma amounts indicated below
(dollar amounts in thousands):
July 26,
1998
Net loss - as reported ................................... $ (12,294)
Net loss - pro forma ..................................... (36,984)
Basic and diluted loss per share as reported ............. (.48)
Basic and diluted loss per share pro forma ............... (1.43)
The fair value of options granted at date of grant was estimated using
the Black-Scholes model with the following weighted average assumptions:
July 26,
1998
Expected life (years) .................................. 10.0
Interest rate .......................................... 5.6%
Volatility ............................................. 47.1%
Dividend yield ......................................... -
The weighted average grant date fair value for the options granted in fiscal
1998 with an exercise price of $2.00 per share was $16.92. The weighted average
grant date fair value for the options granted in fiscal 1998 with an exercise
price of $14.19 to $18.00 per share was $11.92.
15. Capital Stock
The Company has two classes of Common Stock outstanding, Class A
Common Stock and Common Stock. The rights and preferences of holders of Class A
Common Sock and Common Stock are substantially identical, except that, while any
Class A Common Stock is outstanding, holders of Class A Common Stock will elect
a class of directors that constitutes two-thirds of the Board of Directors and
holders of Common Stock will elect a class of directors that constitutes
one-third of the Board of Directors. Each share of Class A Common Stock will be
convertible into one share of Common Stock (i) at the option of the holder at
any time, (ii) automatically upon transfer to any person that is not an
affiliate of the Principal Shareholder and (iii) automatically if, at any time,
the number of shares of Class A Common Stock outstanding represents less than
20% of outstanding shares of Common Stock and Class A Common Stock. The
Principal Shareholder holds 100% of the Class A Common Stock, representing
approximately 51% of the combined voting power of all outstanding shares of
Common Stock and Class A Common Stock.
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16. Business Segment Information
The Company currently operates in two business segments, Resorts and
Real Estate. Data by segment is as follows:
Year ended
July 28, July 27, July 26,
1996 1997 1998
Net revenues:
Resorts ........................................... $ 63,489 $ 166,923 $ 278,577
Real estate ....................................... 9,933 8,468 61,843
------------- ------------- -------------
$ 73,422 $ 175,391 $ 340,420
------------- ------------- -------------
Income from operations:
Resorts ........................................... $ 3,680 $ 19,782 $ 40,698
Real estate ....................................... 4,089 1,655 17,551
Corporate ......................................... (62) (7,052) (26,760)
------------- ------------- -------------
$ 7,707 $ 14,385 $ 31,489
------------- ------------- -------------
Depreciation and amortization:
Resorts ........................................... $ 6,678 $ 16,934 $ 35,579
Real estate ....................................... - - 385
Corporate ......................................... 105 1,359 2,002
------------- ------------- -------------
$ 6,783 $ 18,293 $ 37,966
------------- ------------- -------------
Capital expenditures:
Resorts ........................................... $ 25,054 $ 23,267 $ 106,917
Real estate ....................................... 3,321 28,789 70,242
------------- ------------- -------------
$ 28,375 $ 52,056 $ 177,159
------------- ------------- -------------
Identifiable assets:
Resorts ........................................... $ 272,541 $ 621,633
Real estate ....................................... 30,249 120,957
Corporate ......................................... 34,128 36,896
-------------- -------------
$ 336,918 $ 779,486
------------- -------------
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17. Quarterly Financial Information (Unaudited)
Following is a summary of unaudited quarterly information (amounts in
thousands, except per share amounts):
First Second Third Fourth
Quarter Quarter Quarter Quarter
Year ended July 27, 1997:
Net sales $ 13,297 $ 61,158 $ 89,275 $ 11,661
Income (loss) from operations .................. (9,088) 6,175 27,027 (9,729)
Income (loss) from continuing operations ....... (10,293) 383 13,079 (8,651)
Net income (loss) available to common shareholders (10,293) 383 13,079 (9,095)
Basic and diluted earnings (loss) per common share:
Continuing operations ....................... (10.52) 0.39 13.37 (8.85)
Net income (loss) available to common shareholders (10.52) 0.39 13.37 (9.30)
Year ended July 26, 1998:
Net sales ...................................... 14,621 115,315 185,555 24,929
Income (loss) from operations .................. (26,717) 17,218 61,225 (20,237)
Extraordinary loss, net of income tax benefits . - 5,081 - -
Income (loss) from continuing operations ....... (20,995) 4,955 32,781 (18,608)
Net income (loss) available to common
shareholders ................................ (23,426) (866) 31,690 (19,692)
Basic earnings (loss) per common share:
Continuing operations ....................... (1.59) 0.18 1.08 (0.61)
Extraordinary loss .......................... - (0.18) - -
Net income (loss) available to common shareholders (1.59) (0.03) 1.05 (0.65)
Diluted earnings (loss) per common share:
Continuing operations ...................... (1.59) 0.17 1.07 (0.61)
Extraordinary loss ......................... - (0.18) - -
Net income (loss) available to common shareholders (1.59) (0.03) 1.03 (0.65)
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18. Subsequent Event (Unaudited)
Real Estate Development Financing
On September 25, 1998, GSRP entered into a $145 million construction
loan facility with TFC Textron (the "Textron Facility). The Textron Facility
bears interest at the rate of prime plus 1.5% per annum, payable monthly in
arrears, subject to a 9.25% floor, and matures on September 24, 2002. The
principal is payable based on 80% of the net proceeds from the sales of GSRP
quartershare units at the time of each closing. The Textron Facility is secured
by mortgages against the project sites and is subject to customary covenants,
representations and warranties for this type of construction facility.
On September 30, 1998, the Company entered into a $30 million credit
arrangement with BankBoston and Morgan Stanley Capital Funding (the "Bridge
Financing"). The Bridge Financing bears interest at a rate of 14% per annum,
payable monthly in arrears and matures on December 4, 1998. The Bridge Financing
is collateralized by security interests in, and mortgages on, substantially all
assets financed under the credit arrangement. Management expects to repay the
Bridge Financing with the proceeds from an $85 million subordinated debt private
placement financing arrangement, which the Company is currently pursuing.
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