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 333-9763
ASC East, Inc.
(Formerly 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)
01-0503382
(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)
None None
Securities registered pursuant to Section 12(g) of the Act:
(Name of exchange on
Title of Each Class which registered)
None None
The registrant meets the conditions set forth in General Instruction (I)(1)(a)
and (b) of Form 10-K and is therefor filing this Form with the reduced
disclosure format provided for therein.
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. [ X ]
As of November 9, 1998, there was no established public trading market for the
shares of the Registrant's common stock and no shares of common stock were held
by non-affiliates of the Registrant.
As of November 9, 1998, 978,300 shares of the Registrant's common stock were
outstanding.
Form 10-K Annual Report, for the year ended July 26, 1998
ASC East, Inc. and Consolidated Subsidiaries
Table of Contents
Part I Page
Item 1. Business. ...........................................................1
Item 2. Properties. ........................................................8
Item 3. Legal. .............................................................8
Item 4. Submission of Matters to a Vote of Security Holders. ..............9
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters. ..................................................9
Item 6. Selected Financial Data. ..........................................10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . ......................10
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ........14
Item 8. Financial Statements and Supplementary Data. ......................15
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure. ..................................16
Part III
Item 10. Directors and Executive Officers of the Registrant. ...............16
Item 11. Executive Compensation. ...........................................16
Item 12. Security Ownership of Certain Beneficial Owners and Management. ...16
Item 13. Certain Relationships and Related Transactions. ...................16
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. ..17
Signatures ..................................................................21
PART I
Item 1
Business
The presentation in this Item has been reduced in scope pursuant to
General Instruction (I) of Form 10K.
The Company
The Company is a direct, wholly owned subsidiary of American Skiing
Company (the "Parent"), a publicly traded company (NYSE: "SKI") and the largest
operator of alpine resorts in the United States. The Company owns and operates
six ski resorts in the northeastern United States. The Company's resorts include
Sunday River and Sugarloaf in Maine; Attitash Bear Peak in New Hampshire; and
Killington, Mount Snow/Haystack and Sugarbush in Vermont. The Company's revenues
and earnings before interest expense, income taxes, depreciation and
amortization ("EBITDA"), excluding the stock compensation charge, for its 1998
Fiscal year were $240.2 million and $53.4 million, respectively.
The Company's resorts include several of the top resorts in the United
States, including: (i) Killington, the fourth largest resort in the United
States with over 1.0 million skier visits in the 1997-98 ski season; (ii) three
of the four largest resorts in the Northeast (Killington, Sunday River and Mount
Snow/Haystack) in the 1997-98 ski season; and (iii) 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 owned by the Company or the Parent 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 resorts owned by the Company's Parent, at The Canyons in Utah,
and Steamboat in Colorado. The Company also operates golf courses at its resorts
and conducts other off-season activities which accounted for approximately 13.9%
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 25.2% in the
1997-98 ski season (after giving pro forma effect to its acquisition of the
Killington/Pico, Mount Snow/Haystack and Sugarloaf ski resorts).
1
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 205 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.
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.
2
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.
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 763
acres of skiable terrain serviced by 26 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.
3
The Company is expanding Mount Snow's lodges to provide additional
space for guest services, food and beverage services, retail sales, and a
childrens' 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 over 10,000 square feet of retail space in
the Grand Summit Hotel.
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 126 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.
4
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 13 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.
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, additional lift upgrades and further additions to the
summer operations.
5
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 44.1% of total resort revenues for fiscal 1998.
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.
Fiscal Year Ended July 26, 1998
Resort Revenues Percentage of
Revenue Category (in millions) Resort Revenues
- ---------------- ------------- ---------------
Lift Tickets . . . . . . . . . . . . . . . . . . . $ 79.2 44.1%
Food and Beverage . . . . . . . . . . . . . . . . 24.8 13.8%
Retail Sales . . . . . . . . . . . . . . . . . . 24.9 13.9%
Skier development . . . . . . . . . . . . . . . . 11.6 6.5%
Golf, other summer activities and miscellaneous . 15.4 8.6%
Lodging and property . . . . . . . . . . . . . . . 23.5 13.1%
--- -----
Total Resort Revenues . . . . . . . . . . . . $179.4 100.0%
Real Estate Development
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.
6
The Company's real estate development program generated $105 million in
purchase commitments 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 its New England resorts and commenced construction of three new hotels
at western resorts owned by the Parent 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
selling out the remaining inventory. More than 50% of the inventory in those
hotels is currently sold, with over $41 million in contracts established to
date.
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 final western hotel under construction is the Company's
prototype condominium hotel at The Canyons called Sundial Lodge.
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.
These 12 projects will make up the first phase in Management's
comprehensive development strategy, which envisions the full development of five
alpine resort villages at Sunday River, Killington, Steamboat, The Canyons and
Heavenly. Each of these villages is currently in master planning and ranges in
size from approximately one million square feet of development at Heavenly to as
much as five million square feet of development at The Canyons over the next 10
years. 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.
7
Item 2 Properties
The presentation in this Item has been reduced in scope pursuant to
General Instruction (I) of Form 10K.
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 11(1) 89.7 2 233
------------ -------- ------------ --------- ------------
Total 4,722 763 122(21) 25 3,210
See the Item 1 Section entitled "Business-Resorts" for a more detailed
description of the Company's resorts.
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.
8
Item 4
Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5
Market for the Registrant's Common Stock and Related Security Holder Matters.
Market Information
There has been no established public trading market for shares of the
Company's common stock (the "Common Stock") and there can be no expectation that
such a market will develop and, therefore, holders of Common Stock may be unable
to resell shares of Common Stock due to the lack of a market. The Company does
not intend to register its Common Stock or list the Common Stock on any exchange
or on any automated dealer quotation system.
Recent Sales of Unregistered Securities
No equity securities were sold during fiscal 1998.
Holders
As of October 23, 1998, there was one holder of record of Common Stock.
Dividend Policy
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 Note 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.
9
Item 6
Selected Financial Data
Omitted pursuant to the reduced disclosure format permitted under
General Instruction (I) of Form 10-K.
Item 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations
The presentation in this Item has been reduced in scope pursuant to
General Instruction (I) of Form 10-K.
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% 74.7%
Real estate ........................................... 13.5 4.8 25.3
----- ----- -----
Total revenues ................................... 100.0 100.0 100.0
----- ----- -----
Operating expenses:
Resort .................................................. 56.9 62.6 49.5
Cost of real estate sold 8.0 3.9 17.7
Marketing, general and administrative ................... 15.4 14.9 10.6
Stock compensation charge . . . . . . . . . . . . . . . . -- -- 1.4
Depreciation and amortization ........................... 9.2 10.4 8.9
----- ----- -----
Total operating expenses ......................... 89.5 91.8 88.1
----- ----- -----
Income from operations ..................................... 10.5 8.2 11.9
Commitment fee ............................................. 2.0 -- --
Interest expense ........................................... 6.4 13.5 10.9
----- ----- -----
Income (loss) before provision for income taxes
and minority interest in loss of subsidiary ........... 2.1 (5.3) 1.0
Provision (benefit) for income taxes ....................... 5.3 (2.1) 0.4
----- ----- -----
Income (loss) before minority interest in loss of
subsidiary ............................................ (3.2) (3.2) 0.6
Minority interest in loss of subsidiary .................... 0.2 0.1 --
----- ----- -----
Net income (loss) from continuing operations................ (3.0)% (3.1)% 0.6%
----- ----- -----
Extraordinary expense 1.9%
----- ----- -----
Net income (loss) available to common shareholders (3.0)% (3.1)% (1.3)%
10
Year ended July 26, 1998 ("Fiscal 1998") versus Year Ended July 27,
1997 ("Fiscal 1997")
Resort revenues increased $12.6 million or 7.6% from $166.8 million to
$179.4 million. This increase is primarily attributable to skier days which
increased 6.1% from 3,026,000 to 3,210,000, as well as the opening of four new
retail locations, a new restaurant and three new hotels in fiscal 1998.
Real Estate revenues increased $52.3 million from $8.5 million to $60.8
million. This increase is attributable to the completion of the Company's new
Grand Summit Hotels at Killington, Mount Snow and Sunday River, and the closings
of quartershare unit sales in those projects.
Cost of resort operations increased $9.2 million or 8.4% from $109.7
million to $118.9 million. The increase is primarily attributable to increased
skier visits and new restaurants, retail outlets and hotels as outlined above.
Cost of real estate operations increased $35.6 million from $6.8
million to $42.4 million due to increased sales and also to non-capitalizable
costs associated with future projects currently under development.
Marketing, general and administrative costs decreased $0.7 million or
2.7% from $26.1 million in fiscal 1997 to $25.4 million in fiscal 1998. The
decrease is primarily attributable to the assumption of certain corporate,
marketing and administrative expenses by the Company's parent, American Skiing
Company, beginning in November, 1997.
In Fiscal 1998, the Company's Parent incurred a stock compensation
charge associated with the grant of non-qualified stock options to certain key
members of senior management. A portion of the Parent's stock compensation
charge ($3.3 million) was allocated to ASC East based on an approximation of the
actual time the management employees comprising the stock compensation charge
spent on ASC East-related activities during the year ended July 26, 1998.
Depreciation and amortization expense increased $3.1 million or 16.9%
from $18.3 million to $21.4 million, due primarily to capital expenditures made
in the summer of 1997.
Interest expense increased $2.6 million or 11.0% from $23.7 million to
$26.3 million, due primarily to increased levels of debt outstanding associated
with completed but unsold quartershare units and with increased levels of
capital expenditures.
The provision for income taxes increased by $4.6 million from a benefit
of $3.6 million to a provision of $1.0 million. This increase is attributable to
the increase in income before taxes which increased from a loss of $9.4 million
to income of $2.4 million.
The extraordinary loss recorded by the Company relates to early
retirement of the Company's revolving line of credit, subordinated notes and
indebtedness related to the acquisition of Sugarbush.
11
Fiscal Year Ended July 27, 1997 Compared to Fiscal Year Ended July 28, 1996
("Fiscal 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.
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.
12
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; 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; 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 1998 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.
13
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 $241 million and an
estimated fair value of $256 million.
The Company has entered into two interest rate protections agreements.
These agreements are in connection with the Company's Senior Credit Facility and
effectively swap variable interest rate borrowings to fixed rate borrowings. The
total amount of the Senior Credit Facility that is effected by this agreement is
$29.3 million. The rate for this portion of the Senior 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 Senior Credit Facility are $60.8
million, leaving $31.5 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
Senior Credit Facility debt, was $179.9 million, carries an average interest
rate of 10.90% and matures as follows: $7.0 million in fiscal 1999, $7.3 million
in fiscal 2000, $30.3 million in fiscal 2001, $5.4 million in fiscal 2002, $2.6
million in fiscal 2003, and $127.2 million in fiscal 2004 and after.
The Company has also entered into two noncancelable interest rate swap
agreements. The notional amount of both agreements is $120 million. The first
swap agreement matures on July 15, 2001 and from this swap agreement the Company
receives interest at a rate of 12% per annum and pays interest 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
which, as of November 9, 1998, was 5.19%.
14
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 10-K and includes all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the financial results set forth herein.
Results of operations for any 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. 28, Jul. 26,
1996 1997 1997 1997 1997 1998 1998 1998
(in thousands)
Revenues:
Resort ...................... $ 11,728 $59,418 $86,601 $ 9,071 $13,655 $70,849 $83,694 $11,184
Real estate ................. 1,569 1,740 2,674 2,485 810 7,890 39,990 12,092
------- ------- ------- -------- -------- ------- ------- --------
Total revenues .............. 13,297 61,158 89,275 11,556 14,465 78,739 123,684 23,276
------- ------- ------- -------- -------- ------- ------- --------
Operating expenses:
Cost of operations ........ 15,034 38,995 42,163 13,547 17,533 44,202 42,888 14,305
Cost of real estate sold .. 1,032 935 2,913 1,933 925 5,223 27,311 8,971
Marketing, general and
administrative .......... 4,792 7,709 9,097 4,528 6,540 7,256 5,965 5,639
Stock compensation charge .. -- -- -- -- 3,271 -- -- --
Depreciation and
amortization ............ 1,527 7,344 8,075 1,347 1,450 8,151 10,092 1,746
------- ------- ------- -------- -------- ------- ------- --------
Total operating expenses .... 22,385 54,983 62,248 21,355 29,719 64,832 86,256 30,661
------- ------- ------- -------- -------- ------- ------- --------
Income (loss) from operations $( 9,088) $ 6,175 $27,027 $ (9,799) ($15,254) $13,907 $37,428 ($7,385)
------- ------- ------- -------- -------- ------- ------- --------
15
Item 9
Changes in and Disagreements with Accountants over Accounting and
Financial Disclosures
None
PART III
Item 10
Directors and Executive Officers
Omitted pursuant to the reduced disclosure format permitted under
Instruction (I) of Form 10-K.
Item 11
Executive Compensation
Omitted pursuant to the reduced disclosure format permitted under
Instruction (I) of Form 10-K.
Item 12
Security Ownership of Certain Beneficial Owners and Management
Omitted pursuant to the reduced disclosure format permitted under
Instruction (I) of Form 10-K.
Item 13
Certain Relationships and Related Transactions
Omitted pursuant to the reduced disclosure format permitted under
Instruction (I) of Form 10-K.
16
PART IV
Item 14
Exhibits, Financial Statements 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 Balance Sheet ......................... F-2
Consolidated Statement of Operations ................ F-3
Consolidated Statement of Changes
in Shareholders' Equity .......................... F-4
Consolidated Statement of Cash Flows ................ F-5
Notes to Consolidated Financial Statements .......... F-7
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-4, Registration No. 333-9763)
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.
333-9763).
10.1 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 the
Company's Registration Statement on Form S-4, Registration No.
333-9763).
10.2 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 Parent's
Registration Statement on Form S-1 Registration No. 333-33483).
10.3 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 the Company's
Registration Statement on Form S-4, Registration No. 333-9763).
17
10.4 Indenture dated as of June 28, 1996 among the Company, 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 the Company's Registration
Statement on Form S-4, Registration No. 333-9763).
10.5 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 the Company's Registration Statement on
Form S-4, Registration No. 333-9763).
10.6 Purchase Agreement dated as of April 13, 1994, among Mt. Attitash Lift
Corporation, certain of its shareholders and L.B.O. Holding, Inc.
(incorporated by reference to Exhibit 10.35 to the Company's
Registration Statement on Form S-4, Registration No. 333-9763).
10.7 Stock Purchase Agreement dated August 17, 1994, between Sugarloaf
Mountain Corporation and S-K-I Ltd. (incorporated by reference to
Exhibit 10.36 to the Company's Registration Statement on Form S-4,
Registration No. 333-9763).
10.8 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 the Company's
Registration Statement on Form S-4, Registration No. 333-9763).
10.9 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 The Company's Registration Statement on
Form S-4, Registration No. 333-9763).
10.10 Lease/Option dated July 19, 1984, between John Blake and L.B.O.
Holding, Inc. (incorporated by reference to Exhibit 10.41 to The
Company's Registration Statement on Form S-4, Registration No.
333-9763).
10.11 Lease Agreement dated as of July 1, 1993, between Snowridge, Inc. and
Mountain Water Company (incorporated by reference to Exhibit 10.42 to
The Company's Registration Statement on Form S-4, Registration No.
333-9763).
10.12 Lease Agreement dated as of March 1, 1988, between Snowridge, Inc. and
Mountain Wastewater Treatment, Inc., (incorporated by reference to
Exhibit 10.43 to The Company's Registration Statement on Form S-4,
Registration No. 333-9763).
10.13 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 The Company's Registration Statement
on Form S-4, Registration No. 333-9763).
18
10.14 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 The Company's Registration Statement on Form S-4,
Registration No. 333-9763).
10.15 Lease Agreement dated April 24, 1995, between Sargent, Inc. and Mount
Snow, Ltd. (incorporated by reference to Exhibit 10.47 to The
Company's Registration Statement on Form S-4, Registration No.
333-9763).
10.16 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 The Company's Registration Statement on Form S-4,
Registration No. 333-9763).
10.17 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 The Company's Registration Statement
on Form S-4, Registration No. 333-9763).
10.18 Purchase and Sale Agreement dated as of August 30, 1996, among
Waterville Valley Ski Area, Ltd., Cranmore, Inc., the Company and
Booth Creek Ski Acquisition Corp. (incorporated by reference to
Exhibit 10.61 to the Company's Registration Statement on Form S-4,
Registration No. 333-9763).
10.19 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 the Company's Registration Statement on
Form S-4, Registration No. 333-9763).
19
10.20 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 Parnet's
Registration Statement on Form S-1, Registration No. 333-33483).
10.21 $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 the Company (incorporated by
reference to Exhibit 10.72 to the Parent's Registration Statement on
Form S-1, Registration No. 333-33483).
10.22 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 the Company's Registration Statement on
Form S-4, Registration No. 333-9763).
10.23 Amended and Restated Credit Agreement dated as of November 12, 1997,
among the Company, 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 Parent's quarterly report on Form 10-Q/A
for the quarter ended October 26, 1997).
10.24 First Amendment to Amended and Restated Credit Agreement dated as of
July 20, 1998, among the Company, 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.
10.25 ISDA Master Lease Agreement between BankBoston, N.A. and the Company
dated as of May 12, 1998.
10.26 Credit Support Annex to ISDA Master Agreement between BankBoston, N.A.
and the Company dated as of May 12, 1998.
10.27 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.
10.28 Purchase and Development Agreement by and among the Parent, American
Skiing Company Resort Properties, Inc., and Marriott Ownership
Resorts, Inc., dated as of July 22, 1998.
11.1 Computation of earnings per share.
24.1 Power of Attorney
27.1 Financial Data Schedule.
20
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 9th day of November 1998.
ASC East, Inc.
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
------------------------------
Gordon M. Gillies, Director
21
Report of Independent Accountants
To the Board of Directors and Shareholders of ASC East, Inc.
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
ASC East, Inc. 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.
PricewaterhouseCoopers LLP
October 14, 1998
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 .................................................. $ 2,634 $ 4,157
Restricted cash ............................................................ 2,812 1,769
Accounts receivable ........................................................ 3,801 7,138
Inventory .................................................................. 7,282 10,226
Prepaid expenses ........................................................... 1,579 1,705
Deferred financing costs ................................................... 1,338 875
Deferred income taxes ...................................................... 422 1,289
-------------- ---------------
Total current assets ..................................................... 19,868 27,159
Property and equipment, net .................................................. 242,617 296,756
Real estate developed for sale ............................................... 23,540 38,023
Goodwill ..................................................................... 10,664 19,702
Intangible assets ............................................................ - 2,050
Deferred financing costs ..................................................... 6,996 5,768
Long-term investments ........................................................ 3,507 2,202
Other assets ................................................................. 4,998 4,691
Due from affiliate ........................................................... 1,260 -
-------------- ---------------
Total assets ............................................................. $ 313,450 $ 396,351
-------------- ---------------
Liabilities and Shareholders' Equity
Current liabilities
Current portion of long-term debt .......................................... $ 33,248 $ 27,645
Current portion of subordinated notes and debentures ....................... - 455
Accounts payable and other current liabilities ............................. 25,738 26,557
Deposits and deferred revenue .............................................. 4,379 3,574
Demand note, Principal Shareholder ......................................... 1,933 1,846
Due to affiliates .......................................................... - 17,132
-------------- ---------------
Total current liabilities ................................................ 65,298 77,209
Long-term debt, excluding current portion .................................. 46,833 85,045
Subordinated notes and debentures, excluding current portion ............... 149,749 127,497
Other long-term liabilities ................................................ 6,932 7,313
Deferred income taxes ...................................................... 28,514 26,873
-------------- ---------------
Total liabilities ........................................................ 297,326 323,937
Commitments, lease contingencies and contingent liabilities (Note 13)
Shareholders' Equity
Common stock, par value of $.01 per share; 1,000,000 shares authorized;
978,300 issued and outstanding ............................................. 10 10
Additional paid-in capital ................................................... 3,762 63,136
Retained earnings ............................................................ 12,352 9,268
-------------- ---------------
Total shareholders' equity ............................................... 16,124 72,414
-------------- ---------------
Total liabilities and shareholders' equity ............................... $ 313,450 $ 396,351
-------------- ---------------
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 $ 166,818 $ 179,382
Real estate ................................................. 9,933 8,468 60,782
------------ ------------ ------------
Total net revenues ....................................... 73,422 175,286 240,164
------------ ------------ ------------
Operating expenses:
Resort ...................................................... 41,799 109,739 118,928
Real estate ................................................. 5,844 6,813 42,430
Marketing, general and administrative ....................... 11,289 26,126 25,400
Stock compensation charge ................................... - - 3,271
Depreciation and amortization ............................... 6,783 18,293 21,439
------------ ------------ ------------
Total operating expenses ................................. 65,715 160,971 211,468
------------ ------------ ------------
Income from operations ......................................... 7,707 14,315 28,696
------------ ------------ ------------
Other expenses:
Commitment fee .............................................. 1,447 - -
Interest expense ............................................ 4,699 23,707 26,273
------------ ------------ ------------
Income (loss) before provision (benefit) for income
taxes and minority interest in loss of subsidiary ............ 1,561 (9,392) 2,423
Provision (benefit) for income taxes ........................... 3,906 (3,613) 1,043
Minority interest in loss of subsidiary ........................ (108) - -
------------ ------------ ------------
Income (loss) from continuing operations ....................... (2,237) (5,779) 1,380
------------ ------------ ------------
Extraordinary loss, net of income tax benefit of $2,854 ........ - - 4,464
------------ ------------ ------------
Net loss ....................................................... $ (2,237) $ (5,779) $ (3,084)
------------ ------------ ------------
Basic and diluted loss per share (Note 2):
Continuing operations ....................................... $ (2.37) $ (5.91) $ 1.41
Extraordinary loss .......................................... - - (4.56)
------------ ------------ ------------
Net loss .................................................... $ (2.37) $ (5.91) $ (3.15)
------------ ------------ ------------
Weighted average shares outstanding ............................ 942 978 978
------------ ------------ ------------
F-3
Consolidated Statement of Changes in Shareholders' Equity
(In thousands, except share amounts)
Additional
Common stock paid-in Retained
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 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
Net loss ................................... - - - (5,779) (5,779)
----------------- ----------------- ----------------- ----------------- ---------
Balance at July 27, 1997 ...................... 978,300 10 3,762 12,352 16,124
Capital contributions from Parent .......... - - 59,374 - 59,374
Net loss ................................... - - - (3,084) (3,084)
----------------- ----------------- ----------------- ----------------- ---------
Balance at July 26, 1998 ...................... 978,300 $ 10 $ 63,136 $ 9,268 $ 72,414
----------------- ----------------- ----------------- ----------------- ---------
F-4
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) $ (5,779) $ (3,084)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Minority interest in loss of subsidiary ........................ (108) - -
Depreciation and amortization 6,783 18,293 21,439
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) (1,954)
Stock compensation charge ...................................... - - 3,271
Extraordinary loss on write-off of deferred financing costs .... - - 2,232
Gain on sale of assets ......................................... - - (323)
Decrease (increase) in assets:
Restricted cash and investments held in escrow ............... - 12,587 1,043
Accounts receivable .......................................... 481 (1,343) (3,337)
Inventory .................................................... (373) (2,257) (2,944)
Prepaid expenses ............................................. (648) 1,792 (126)
Real estate developed for sale ............................... 2,523 (21,976) (14,483)
Other assets ................................................. (836) 528 110
Due to/from affiliate ........................................ - (1,260) 16,170
Increase (decrease) in liabilities:
Accounts payable and other current liabilities ............... (3,601) 6,794 819
Deposits and deferred revenue ................................ 944 838 (805)
Other long-term liabilities .................................. 490 (2,270) 381
----------- ----------- -----------
Net cash provided by operating activities ...................... 7,465 5,915 19,929
----------- ----------- -----------
Cash flows from investing activities:
Payments for purchases of businesses, net of cash acquired ........ (97,079) (5,359) -
Long-term investments ............................................. (450) 836 1,305
Capital expenditures .............................................. (25,054) (21,638) (64,152)
Proceeds from sale of property and equipment ...................... - 2,626 732
Cash payments on note receivable .................................. - 250 100
Proceeds from sale of businesses .................................. - 14,408 -
Other ............................................................. - (1,964) -
----------- ----------- -----------
Net cash used in investing activities .......................... $(122,583) $ (10,841) $ (62,015)
----------- ----------- -----------
F-5
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 ..................... - - 30,332
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)
Deferred financing costs ..................................... (8,485) (470) (1,495)
Proceeds from (repayment of) long-term debt .................. (11,806) (6,654) 49,075
Payments on demand note, Principal Shareholder ............... - (3,267) (87)
Advances to Principal Shareholder ............................ (156) -
Distributions to Principal Shareholder ....................... (3,158) - -
Capital contributions......................................... 1,020 - 48,630
Issuance of shares of common stock ........................... 976 - -
------------ ------------ ------------
Net cash provided by financing activities ................. 116,941 4,375 43,609
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ...... 1,823 (551) 1,523
Cash and cash equivalents, beginning of year .................... 1,362 3,185 2,634
------------ ------------ ------------
Cash and cash equivalents, end of year .......................... $ 3,185 $ 2,634 $ 4,157
------------ ------------ ------------
Supplemental disclosures of cash flow information:
Cash paid for interest ....................................... $ 2,408 $ 20,975 $ 6,686
Cash paid (refunded) for income taxes ........................ 15 (1,492) -
Supplemental schedule of noncash investing and financing activities:
Property acquired under capitalized leases ................... $ 435 $ 7,802 $ 3,309
Notes payable issued for purchase of assets .................. - - 6,418
Liabilities assumed associated with purchased companies ...... 58,497 1,626 -
Deferred tax liability associated with purchased companies ... 28,372 - -
Purchase price adjustments ................................... - 4,341 -
Purchase price adjustments related to deferred taxes ......... - 1,226
Note payable issued for distribution to Principal Shareholder 5,200 - -
Note receivable received for sale of resorts ................. - 2,750 -
Intangible asset assumed to purchase subsidiary .............. - - 1,883
F-6
Notes to Consolidated Financial Statements
1. Basis of Presentation
ASC East is organized as a holding company and operates through various
subsidiaries. ASC East and its subsidiaries (collectively, the
"Company") operate in two business segments, ski resorts and real
estate development. The Company is a wholly-owned subsidiary of
American Skiing Company (the "Parent"). ASC East operates the following
resorts: Sugarloaf and Sunday River in Maine, Attitash Bear Peak in New
Hampshire, and Killington, Mount Snow/Haystack and Sugarbush in
Vermont. The Company performs its real estate development through its
wholly-owned subsidiary, Grand Summit Resort Properties, Inc. ("GSRP").
The Company was originally formed on December 7, 1995, at which time
the entity operated under the name American Skiing Company. Prior to
June 28, 1996, the Company was a combined group of separate entities
which were wholly-owned by Les Otten (the "Principal Shareholder"). On
June 28, 1996, the Principal Shareholder exchanged all of the
outstanding shares of the combined group for 939,168 shares of the
Company's stock (the "Exchange"). Contemporaneously with the Exchange,
the Company purchased all the outstanding shares of common stock of
S-K-I Limited, Inc. ("S-K-I") for $18.00 per share. Upon the
acquisition of S-K-I, the companies from the combined group and the
S-K-I companies were formed into a consolidated entity. In conjunction
with the Exchange and the acquisition of S-K-I, the Company issued
39,132 shares of common stock, representing a 4% minority interest in
the Company, to an institutional investor in a private offering. The
fair market value of the common stock was $976,000 at the date of
issuance and was recorded as additional paid-in capital.
The Company's Parent was formed on June 17, 1997, when the Principal
Shareholder exchanged his 96% ownership interest in the Company for
100% of the common stock of the Parent. In conjunction with the
formation of the Parent, the Parent recorded the 4% minority interest
in the Company. On January 26, 1998, the Parent and the holders of the
minority interest in the Company entered into an agreement whereby the
Parent issued 615,022 shares of common stock in exchange for all shares
of the Company held by the minority shareholders. In connection with
the Parent's exchange of its common stock for the minority interest,
the Company recorded additional paid-in capital of $8.5 million,
representing the excess of the fair market value of the Parent's stock
exchanged on January 26, 1998 over the carrying value of the minority
interest.
The Company's Parent consummated an initial public offering (the
"Offering") on November 6, 1997. The Parent sold 14.75 million shares
of common stock in the Offering at a price of $18.00 per share.
2. Summary of Significant Accounting Principles
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of ASC East 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.
F-7
2. Summary of Significant Accounting Principles (continued)
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.
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.
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 tradenames. The Company has
classified as goodwill the excess of fair value of the net assets
(including tax attributes) of companies acquired in purchase
transactions. 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
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.
F-8
2. Summary of Significant Accounting Principles (continued)
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.
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 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.
Interest
Interest is expensed as incurred except when it is capitalized in
conjunction 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 $28.9 million
respectively, of which $444,000, $575,000 and $2.6 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 Parent 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 Parent's
discretion. The Parent 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 $217,000.
F-9
2. Summary of Significant Accounting Principles (continued)
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 $153,000, 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 $5.8 million, respectively.
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" 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 earnings per share are the same.
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-10
2. Summary of Significant Accounting Principles (continued)
The estimated fair values of the Senior Subordinated Notes and the
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.
Reclassification
Certain amounts in the prior year financial statements and related
notes have been reclassified to conform with the fiscal 1998
presentation.
3. Business Acquisitions and Divestments
S-K-I Acquisition and Purchase of a Minority Interest
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.
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.
F-11
3. Business Acquisitions and Divestments (continued)
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
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 in 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.
F-12
4. Property and Equipment
Property and equipment consists of the following (in thousands):
July 27, July 26,
1997 1998
Buildings and grounds $ 69,635 $ 99,530
Machinery and equipment 61,218 55,435
Lifts and lift lines 60,769 103,064
Trails 11,667 11,952
Land improvements 18,096 14,972
-------------- ---------------
221,385 284,953
Less - accumulated depreciation and amortization 36,940 55,753
-------------- ---------------
184,445 229,200
Land 49,160 50,772
Construction-in-process 9,012 16,784
-------------- ---------------
Property and equipment, net $ 242,617 $ 296,756
-------------- ---------------
Property and equipment includes approximately $10.7 million and $17.7
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 $3.5
million, respectively. Amortization expense for property and equipment
under capital leases was approximately $493,000, $1.6 million and $1.9
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 $19.9 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-13
6. Demand Note, 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 on
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 $ 60,762
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 substantially all 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
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. The debentures mature in April 2002. 1,777 1,844
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
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
collateralized by certain machinery, equipment and real estate. 1,005 520
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 -
F-14
7. Long-Term Debt (continued)
July 27, July 26,
1997 1998
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
Obligations under capital leases 7,840 11,542
Other notes payable 2,856 1,761
-------------- --------------
80,081 112,690
-------------- --------------
Less: current portion 33,248 27,645
-------------- --------------
Long-term debt, excluding current portion $46,833 $ 85,045
-------------- --------------
F-15
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 ...................................................... $ 6,974
2001 ...................................................... 30,055
2002 ...................................................... 5,169
2003 ...................................................... 1,817
2004 and thereafter ....................................... 43,026
Interest related to capitalized leases .................... (1,656)
Debt discount ............................................. (340)
---------------
$ 85,045
---------------
At July 26, 1998, the Company had letters of credit outstanding
totaling $928,000.
8. Subordinated Notes and Debentures
On June 25, 1996, in connection with the S-K-I Acquisition, the Company
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, the Company filed a
registration statement with respect to an offer to exchange the Notes
and Subordinated Notes for a new issue of notes of the Company
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 the Company,
subordinated in right of payment to all existing and future senior debt
of the Company, 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 the Company, in whole or in part, at any time after July
15, 2001. The Company 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-16
8. Subordinated Notes and Debentures (continued)
Concurrently with the Parent's Offering, the Company solicited and
received the required consent 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 such consent solicitation, the Company paid a
customary consent payment to the consenting holders of the Notes.
The Company entered into two noncancelable 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 Company's total common stock
outstanding and were valued at $976,000 as of June 28, 1996.
On January 26, 1998, the Parent and the holders of the 4% of the
outstanding shares of the Company entered into an agreement whereby the
Parent issued 615,022 shares of its common stock in exchange for all of
the Company 's common stock shares not owned by the Parent.
F-17
8. Subordinated Notes and Debentures (continued)
A portion of the proceeds from the Senior 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 an extraordinary loss 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 extraordinary losses are
included 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 Parent's Offering, the Company entered into a
new credit facility (the "East 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 East Facility to a group of
participating lenders (the "Banks").
Under the terms of the East Facility, the Company is able to borrow up
to $65.0 million which consists of a six-year revolving credit facility
in the amount of $35.0 million and an eight-year term facility in the
amount of $30.0 million.
F-18
9. Senior Credit Facility (continued)
The revolving facility is subject to an annual requirement to reduce
the outstanding debt to a balance of not more than $10.0 million for a
period of 30 days. The maximum availability under the revolving
facility will be reduced over the term of the East Facility by certain
prescribed amounts. The term facility amortizes 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 East
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 the revolving facility commitment
below $35.0 million. The East 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.
At July 26, 1998, the revolving portion of the East Facility had
outstanding borrowings of $28.0 million under LIBOR contracts which
bear interest at rates ranging from 8.09% to 8.48% per annum. At July
26, 1998, the East Facility 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
of $537,000 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 Facility had
outstanding borrowings of $30.0 million which bear interest at rates
ranging from 8.59% to 8.98%. Both the revolving and term portions of
the East Facility accrue interest daily and pay interest quarterly, in
arrears, commencing January 31, 1998. At July 26, 1998, interest
accrued for the East Facility was $1.2 million. The East Facility is
collateralized by substantially all the assets of the Company, except
for the assets of the real estate development subsidiary, which is not
a borrower under the East Facility.
In November 1997, the Company paid financing fees with respect to the
East Facility of 1.75% of the total commitment, or $1.3 million. The
Company has capitalized these fees and certain other debt related costs
and is amortizing them over the term of the East Facility. Total
unamortized financing fees relating to the East Facility recorded in
deferred financing costs in the accompanying consolidated balance sheet
were $1.3 million at July 26, 1998.
F-19
10. Guarantors of Debt
The 12% Senior Subordinated Notes due 2006 are fully and
unconditionally guaranteed by the Company and all of its subsidiaries
with the exception of Ski Insurance, Killington West, Ltd., Mountain
Water Company, Uplands Water Company, and Club Sugarbush, Inc., (the
non-guarantors). The guarantor subsidiaries are wholly-owned
subsidiaries of the Company and the guarantees are full,
unconditional, and joint and several. Certain 1997 data has been
reclassified to conform with the fiscal 1998 presentation. The
guarantor information for the years ended July 26, 1998 and July 27,
1997, is as follows:
Statement of Operations for the year ended July 26, 1998 (in thousands)
ASC East Guarantor Non- Elimination Consolidated
Subsidiaries Guarantor Entries ASC East
Subsidiaries
Net revenues:
Resort .......................................... $ 2,771 $ 176,455 $ 1,777 $ (1,621) $ 179,382
Real estate ..................................... - 60,782 - - 60,782
------------- --------------- -------------- -------------- ----------------
Total net revenues ........................... 2,771 237,237 1,777 (1,621) 240,164
------------- --------------- -------------- -------------- ----------------
Operating expenses:
Resort .......................................... 717 119,010 822 (1,621) 118,928
Real estate ..................................... - 42,430 - - 42,430
Marketing, general and administrative ........... 3,138 22,230 32 - 25,400
Stock compensation charge ....................... 3,271 - - - 3,271
Depreciation and amortization ................... 1,463 19,916 60 - 21,439
------------- --------------- -------------- -------------- ----------------
Total operating expenses ..................... 8,589 203,586 914 (1,621) 211,468
------------- --------------- -------------- -------------- ----------------
Income (loss) from operations ...................... (5,818) 33,651 863 - 28,696
------------- --------------- -------------- -------------- ----------------
Other expenses:
Commitment fee .................................. - - - - -
Interest expense ................................ 16,971 9,320 (18) - 26,273
------------- --------------- -------------- -------------- ----------------
Income (loss) before provision (benefit) for income
taxes and minority interest in loss of subsidiary (22,789) 24,331 881 - 2,423
Provision (benefit) for income taxes ............... (6,662) 7,239 466 - 1,043
Minority interest in loss of subsidiary ............ - - - - -
------------- --------------- -------------- -------------- ----------------
Income (loss) from continuing operations ........... (16,127) 17,092 415 - 1,380
------------- --------------- -------------- -------------- ----------------
Extraordinary loss, net of income tax benefit ...... 4,266 198 - - 4,464
------------- --------------- -------------- -------------- ----------------
Net loss ......................................... $ (20,393) $ 16,894 $ 415 $ - $ (3,084)
------------ --------------- -------------- -------------- ----------------
F-20
Balance Sheet at July 26, 1998
(in thousands)
ASC East Guarantor Non Guarantor Elimination Consolidated
Subsidiaries Subsidiaries Entries ASC East
Assets
Current assets
Cash and cash equivalents ........................... $ 179 $ 2,994 $ 984 $ - $ 4,157
Restricted cash ..................................... - 1,745 24 - 1,769
Accounts receivable ................................. 689 10,526 1,690 (5,767) 7,138
Inventory ........................................... 1,562 8,664 - - 10,226
Prepaid expenses .................................... - 1,705 - - 1,705
Deferred financing costs ............................ 875 - - - 875
Deferred income taxes ............................... - 1,289 - - 1,289
Investment in subsidiaries .......................... 146,252 117,698 - (263,950) -
-------------- -------------- ------------- ------------- --------------
Total current assets .............................. 149,557 144,621 2,698 (269,717) 27,159
Property and equipment, net ........................... 50 295,994 712 - 296,756
Real estate developed for sale ........................ - 38,023 - - 38,023
Goodwill .............................................. 17,513 2,189 - - 19,702
Intangible assets ..................................... - 2,050 - - 2,050
Deferred financing costs .............................. 5,768 - - - 5,768
Long-term investments ................................. - - 2,202 - 2,202
Other assets .......................................... - 4,691 - - 4,691
Due from affiliate .................................... - - - - -
-------------- -------------- ------------- ------------- --------------
Total assets ...................................... $ 172,888 $ 487,568 $ $ (269,717) $ 396,351
5,612
-------------- -------------- ------------- ------------- --------------
Liabilities and Shareholders' Equity
Current liabilities
Current portion of long-term debt ................... $ 21,062 $ 8,546 $ - $ (1,963) $ 27,645
Current portion of subordinated notes and debentures - 455 - - 455
Accounts payable and other current liabilities ...... 1,502 25,800 515 (1,260) 26,557
Deposits and deferred revenue ....................... 521 3,039 14 - 3,574
Demand note, Principal Shareholder .................. - 1,846 - - 1,846
Due to affiliates ................................... (55,540) 72,779 (107) - 17,132
-------------- -------------- ------------- ------------- --------------
Total current liabilities ......................... (32,455) 112,465 422 (3,223) 77,209
Long-term debt, excluding current portion ........... 39,700 47,841 48 (2,544) 85,045
Subordinated notes and debentures, excluding current
portion ............................................. 117,002 10,495 - - 127,497
Other long-term liabilities ......................... 1,715 2,366 3,232 - 7,313
Deferred income taxes ............................... (8,187) 35,615 (555) - 26,873
-------------- -------------- ------------- ------------- --------------
Total liabilities ................................. 117,775 208,782 3,147 (5,767) 323,937
Shareholders' Equity
Common stock, par value of $.01 per share;
1,000,000 shares authorized; 978,300 issued and
outstanding ......................................... 10 181 2 (183) 10
Additional paid-in capital ............................ 63,136 228,158 1,651 (229,809) 63,136
Retained earnings ..................................... (8,033) 50,447 812 (33,958) 9,268
-------------- -------------- ------------- ------------- --------------
Total shareholders' equity ........................ 55,113 278,786 2,465 (263,950) 72,414
-------------- -------------- ------------- ------------- --------------
Total liabilities and shareholders' equity ........ $ 172,888 $ 487,568 $ 5,612 $ (269,717) $ 396,351
-------------- -------------- ------------- ------------- --------------
F-21
Statement of Cash Flows for the year ended July 26, 1998
(in thousands)
ASC East Guarantor Non- Guarantor Elimination Consolidated
Subsidiaries Subsidiaries Entries ASC East
Net loss ................................................... $ (20,393) $ 16,893 $ 416 $ - $ (3,084)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization ........................... 1,463 19,916 60 - 21,439
Amortization of discount on subordinated notes and
debentures and other liabilities ........................ 1,425 95 - - 1,520
Deferred income taxes ................................... 430 (2,503) 119 - (1,954)
Stock compensation charge ............................... 3,271 - - - 3,271
Extraordinary loss on write-off of deferred financing
costs ................................................... 2,232 - - - 2,232
Gain on sale of assets .................................. - (323) - - (323)
Decrease (increase) in assets:
Restricted cash and investments held in escrow ........ - 1,060 (17) - 1,043
Accounts receivable ................................... (548) (6,692) (604) 4,507 (3,337)
Inventory ............................................. (1,278) (1,666) - - (2,944)
Prepaid expenses ...................................... 365 (491) - - (126)
Real estate developed for sale ........................ - (14,483) - - (14,483)
Other assets .......................................... 250 (140) - - 110
Due to/from affiliate ................................. (3,461) 19,772 (141) - 16,170
Increase (decrease) in liabilities:
Accounts payable and other current liabilities ........ (687) 1,373 133 - 819
Deposits and deferred revenue ......................... (16) (788) (1) - (805)
Other long-term liabilities ........................... 1,223 126 (968) - 381
----------- ------------- -------------- ------------ --------------
Net cash provided by operating activities ............... (15,724) 32,149 (1,003) 4,507 19,929
----------- ------------- -------------- ------------ --------------
Long-term investments ...................................... - - 1,305 - 1,305
Capital expenditures ....................................... 1,278 (60,923) - (4,507) (64,152)
Proceeds from sale of property and equipment ............... - 569 163 - 732
Cash payments on note receivable ........................... - 100 - - 100
----------- ------------- -------------- ------------ --------------
Net cash used in investing activities ................... 1,278 (60,254) 1,468 (4,507) (62,015)
----------- ------------- -------------- ------------ --------------
Net proceeds from (repayment of) Old Credit Facility ....... (59,623) - - - (59,623)
Net borrowings under New Credit Facility ................... 30,332 - - - 30,332
Proceeds from (repayment of) subordinated notes and
debentures, net of investments held in escrow .............. (23,223) - - - (23,223)
Deferred financing costs ................................... (1,495) - - - (1,495)
Proceeds from (repayment of) long-term debt ................ 34,986 14,107 (18) - 49,075
Payments on demand note, Principal Shareholder ............. - (87) - - (87)
Capital contribution ....................................... 33,630 15,000 - - 48,630
----------- ------------- -------------- ------------ --------------
Net cash provided by financing activities ............... 14,607 29,020 (18) - 43,609
----------- ------------- -------------- ------------ --------------
Net increase (decrease) in cash and cash equivalents .... 161 915 447 - 1,523
Cash and cash equivalents, beginning of year 18 2,079 537 - 2,634
----------- ------------- -------------- ------------ --------------
Cash and cash equivalents, end of year $ 179 $ 2,994 $ 984 $ - $ 4,157
----------- ------------- -------------- ------------ --------------
F-22
Statement of Operations for the year ended July 27, 1997
(in thousands)
ASC East Guarantor Non- Eliminating Consolidated
Subsidiaries Guarantor Entries ASC East
Subsidiaries
Net revenues:
Resort $ 644 $ 165,328 $ 2,514 $ (1,668) $ 166,818
Real Estate - 8,468 - - 8,468
--------------- --------------- ------------- -------------- --------------
Total net revenues 644 173,796 2,514 (1,668) 175,286
--------------- --------------- ------------- -------------- --------------
Operating expenses:
Resort 618 108,496 2,293 (1,668) 109,739
Real estate - 6,813 - - 6,813
Marketing, general and administrative 5,740 20,260 126 - 26,126
Depreciation and amortization 1,359 16,915 19 - 18,293
--------------- --------------- ------------- -------------- --------------
Total operating expenses 7,717 152,484 2,438 (1,668) 160,971
--------------- --------------- ------------- -------------- --------------
Income (loss) from operations (7,073) 21,312 76 - 14,315
--------------- --------------- ------------- -------------- --------------
Other expenses:
Commitment fee - - - - -
Interest expense 15,790 10,324 (2,407) - 23,707
--------------- --------------- ------------- -------------- --------------
Income (loss) before provision (benefit) for income
taxes and minority interest in loss of subsidiary (22,863) 10,988 2,483 - (9,392)
Provision (benefit) for income taxes (8,850) 4,282 955 - (3,613)
Minority interest in loss of subsidiary - - - - -
--------------- --------------- ------------- -------------- --------------
Net loss $ (14,013) $ 6,706 $ 1,528 $ - $ (5,779)
---------------- --------------- ------------- --------------- --------------
F-23
Balance Sheet at July 27, 1997
(in thousands)
ASC East Guarantor Non Eliminating Consolidated
Subsidiaries Guarantor Entries ASC East
Subsidiaries
Assets
Current assets
Cash and cash equivalents $ 18 $ 2,079 $ 537 $ - $ 2,634
Restricted cash - 2,805 7 - 2,812
Accounts receivable 141 3,570 1,041 (951) 3,801
Inventory 284 6,998 - - 7,282
Prepaid expenses 366 1,169 44 - 1,579
Deferred financing costs 1,338 - - - 1,338
Deferred tax assets - 422 - - 422
Investment in subsidiaries 120,118 138,800 - (258,918) -
------------- ------------- ------------- ------------- --------------
Total current assets 122,265 155,843 1,629 (259,869) 19,868
Property and equipment, net 1,328 240,501 788 - 242,617
Real estate developed for sale - 23,540 - - 23,540
Goodwill 10,664 - - - 10,664
Intangible assets - - - - -
Deferred financing costs 6,996 - - - 6,996
Long-term investments - - 3,507 - 3,507
Other assets 349 4,649 - - 4,998
Due from affiliate 54,928 77,669 30,935 (162,272) 1,260
------------- ------------- ------------- ------------- --------------
Total assets $ 196,530 $502,202 $ 36,859 $(422,141) $ 313,450
============= ============= ============= ============= ==============
Liabilities and Shareholders' Equity
Current liabilities
Current portion of long-term debt $ 25,067 $ 9,019 $ 113 $ (951) $ 33,248
Accounts payable and other current liabilities 2,198 23,208 340 (8) 25,738
Deposits and deferred revenue 537 3,810 32 - 4,379
Demand note, Principal Shareholder - 1,933 - - 1,933
Due to affiliates 250 162,109 (87) (162,272) -
------------- ------------- ------------- ------------- --------------
Total current liabilities 28,052 200,079 398 (163,231) 65,298
Long-term debt, excluding current portion 30,000 16,767 66 - 46,833
Subordinated notes and debentures, excluding current 138,799 10,950 - - 149,749
portion
Other long-term liabilities 492 2,241 4,199 - 6,932
Deferred income taxes (8,703) 37,119 98 - 28,514
------------- ------------- ------------- ------------- --------------
Total liabilities 188,640 267,156 4,761 (163,231) 297,326
Shareholders' Equity
Common stock, par value of $.01 per share;
1,000,000 shares authorized; 978,300 issued and 10 181 2 (183) 10
outstanding
Additional paid-in capital 3,762 209,876 30,383 (240,259) 3,762
Retained earnings 4,118 24,989 1,713 (18,468) 12,352
------------- ------------- ------------- ------------- --------------
Total shareholders' equity 7,890 235,046 32,098 (258,910) 16,124
------------- ------------- ------------- ------------- --------------
Total liabilities and shareholders' equity $ 196,530 $ 502,202 $ 36,859 $ (422,141) $ 313,450
============= ============= ============= ============= ==============
F-24
Statement of Cash Flows for the year ended July 27, 1997
(in thousands)
ASC East Guarantor Non- Eliminating Consolidated
Subsidiaries Guarantor Entries ASC East
Subsidiaries
Net loss $(14,013) $ 6,706 $ 1,528 $ - $ (5,779)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 1,359 16,915 19 - 18,293
Amortization of discount on subordinated notes and
debentures and other liabilities 2,957 343 - - 3,300
Deferred income taxes (8,850) 4,499 1,019 - (3,332)
Decrease (increase) in assets:
Restricted cash and investments held in escrow 14,497 (1,903) (7) - 12,587
Accounts receivable (141) (1,167) (986) 951 (1,343)
Inventory (284) (1,988) 15 - (2,257)
Prepaid expenses (366) 2,720 (562) - 1,792
Real estate developed for sale - (21,976) - - (21,976)
Other assets (349) 270 607 - 528
Investment in subsidiaries - 411 (411) - -
Due to/from affiliate (6,657) 7,805 (2,408) - (1,260)
Increase (decrease) in liabilities: -
Accounts payable and other current liabilities 399 7,392 (46) (951) 6,794
Deposits and deferred revenue 537 1,055 (754) - 838
Other long-term liabilities - (1,709) (561) - (2,270)
------------ ------------ ------------ ------------- -------------
Net cash provided by operating activities (10,911) 19,373 (2,547) - 5,915
------------ ------------ ------------ ------------- -------------
Payments for purchase of business (2,000) (3,359) - - (5,359)
Long-term investments - - 836 - 836
Capital expenditures (1,367) (20,272) 1 - (21,638)
Proceeds from sale of property and equipment - 2,301 325 - 2,626
Cash payments on note receivable - 250 - - 250
Proceeds from sale of business - 14,408 - - 14,408
Other - (1,964) - - (1,964)
------------ ------------ ------------ ------------- -------------
Net cash used in investing activities (3,367) (8,636) 1,162 - (10,841)
------------ ------------ ------------ ------------- -------------
Net proceeds from senior credit facility 14,766 - - - 14,766
Deferred financing costs (470) - - - (470)
Proceeds from long-term debt - 4,692 636 - 5,328
Payments of long-term debt - (11,962) (20) - (11,982)
Payments on demand note, Principal Shareholder - (3,267) - - (3,267)
------------ ------------ ------------ ------------- -------------
Net cash provided by financing activities 14,296 (10,537) 616 - 4,375
------------ ------------ ------------ ------------- -------------
Net increase (decrease) in cash and cash equivalents 18 200 (769) - (551)
Cash and cash equivalents, beginning of year - 1,879 1,306 - 3,185
------------ ------------ ------------ ------------- -------------
Cash and cash equivalents, end of year $ 18 $ 2,079 $ 537 $ - $ 2,634
------------ ------------ ------------ ------------- -------------
F-25
The guarantor-related information for the year ended July 28, 1996
represents Non-Guarantor information as the Non-Guarantors were
inconsequential. The guarantor information for the year ended July 28,
1996 is as follows:
Non-Guarantor
As of
July 28, 1996
-------------
Current assets $1,380,000
Non-current assets 7,200,000
---------
Total Assets $8,580,000
=========
Current liabilities $1,226,000
Non-current liabilities 4,847,000
---------
Total liabilities $6,073,000
=========
Non-Guarantor
For the Year Ended
July 28, 1996
----------------
Revenues 280,000
Cost of Sales 147,000
---------
Operating Income $ 133,000
Net Income $ 67,300
=========
The summarized information shown above for the Non-Guarantors as of
July 28, 1996 and for the year then ended gives effect to the
acquisition of the Non-Guarantors of S-K-I, which were acquired by the
Company on June 28, 1996.
F-26
11. Income Taxes
Prior to the formation of the Company's Parent in May of 1997, ASC East
and its subsidiaries filed separate income tax returns. Effective for
the year ended July 27, 1997, the Company joined in the filing of
consolidated federal and state tax returns with the Parent and its
subsidiaries. Income tax expense or benefit for the year is determined
for each subsidiary of the Parent as if it had filed a separate federal
and state income tax return. An amount payable to, or receivable from,
the Parent is determined based on the tax expense or tax benefit
determined in each subsidiary's separate income tax return calculation.
The Company had a net amount due from the Parent of $0 and $1.2 million
at July 27, 1997 and July 26, 1998, respectively, related to tax losses
generated by ASC East and its subsidiaries and used to increase the
taxable loss of the Parent and its subsidiaries. The amount due at July
26, 1998 is included in due to affiliates in the accompanying
consolidated balance sheet.
Prior to June 28, 1996, certain companies that comprised 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 has been made for
these companies for the period July 31, 1995 to June 26, 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 (the "Conversion").
As a result, the income or loss of the former S Corporations subsequent
to June 28, 1996 will be subject to corporate income tax. The income
tax provisions described below include the income taxes related to the
former S Corporations since June 29, 1996. At the time of the
Conversion, 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 expense (benefit) represents the change in the net deferred tax
asset or liability balance.
F-27
11. 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) 1,131
State .............................................. (316) (798) (88)
------------- ------------- -------------
(1,646) (3,613) 1,043
------------- ------------- -------------
Change in tax status from S Corporation
to C Corporation .................................... 5,552 - -
------------- ------------- -------------
Total provision (benefit) ............................. $ 3,906 $ (3,613) $ 1,043
------------- ------------- -------------
F-28
11. 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 $ 40,855
Other ........................................................... 907 890
--------------- ---------------
Gross deferred tax liabilities .................................. 40,947 41,745
--------------- ---------------
Tax loss and credit carryforwards ............................... (16,766) (13,514)
Capitalized cost ................................................ (543) (935)
Stock compensation charge ....................................... - 1,149
Original issue discount on Subordinated Notes ................... (1,212) -
Reserves and accruals ........................................... (1,361) (1,377)
Other ........................................................... (228) (1,274)
--------------- ---------------
Gross deferred tax assets ....................................... (20,110) (18,244)
Valuation allowance ............................................. 7,255 2,083
--------------- ---------------
$ 28,092 $ 25,584
--------------- ---------------
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 and minority interest in loss of subsidiary 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) $ 848
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) (88)
Change in valuation allowance ................................ - 71 -
Stock compensation charge .................................... - - 238
Nondeductible items .......................................... 41 243 307
Other ........................................................ 138 142 (262)
------------ ------------ ------------
Income tax provision (benefit) at the effective tax rates ....... $ 3,906 $ (3,613) $ 1,043
------------ ------------ ------------
F-29
11. Income Taxes (continued)
At July 26, 1998, the Company has federal net operating loss ("NOL")
carryforwards of approximately $28.5 million which expire in varying
amounts through the year 2013. 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. As a result of the Parent's
Offering in November 1997, the Company experienced a change in
ownership. The Parent's consolidated tax group's overall annual
limitation under Section 382 is approximately $15.0 million. In
addition, certain subsidiaries have separate pre-change 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 of 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 $2.1 million at
July 26, 1998 is appropriate because, due to the change of ownership
and 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 Parent, as the common agent for the consolidated group, 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. The election was made to avoid a reduction in the tax basis
of Sugarloaf's stock when the loss carryforwards expire.
12. Related Party Transactions
In fiscal 1998, the Company's Parent incurred certain common expenses
that were allocable to ASC East, including stock compensation,
marketing, management information systems and other overhead related
costs. The total allocation of these costs charged to the Company of
$4.3 million for the year ended July 26, 1998 is included in the stock
compensation charge and marketing, general and administrative
components in the accompanying statement of operations. The allocation
of the stock compensation charge is based on management's analysis of
the actual time spent by such employees on ASC East-related activities
during the period. The marketing, management information systems and
other overhead related cost were allocated to the Company based on the
estimate of amounts benefiting ASC East. It is management's opinion
that the methods used to allocate the stock compensation charge and
other common costs are reasonable.
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
Parent 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 the Company under short-term
leases. In fiscal 1996, 1997 and 1998, payments under such leases
totaled $37,000, $24,000 and $17,000, respectively.
F-30
12. Related Party Transactions (continued)
The Company provides 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 the Company
totaled $90,000, $258,000 and $2,000, respectively. In addition, Ski
Dorm issued to the Company 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.
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
$933,000, 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 and Mount Snow/Haystack 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 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 $4.6 million for the years ended 1996, 1997
and 1998, respectively.
F-31
13. Commitments, Lease Contingencies and Contingent Liabilities (continued)
Future minimum lease payments for lease obligations at July 26, 1998
are as follows (in thousands):
Capital Operating
leases leases
1999 $ 3,652 $ 9,484
2000 3,523 8,783
2001 2,998 3,170
2002 2,239 882
2003 and thereafter 1,679 2,214
-------------- --------------
Total payments 14,091 $ 24,533
--------------
Less interest 2,549
--------------
Present value of net minimum payments 11,542
Less current portion 4,516
--------------
Long-term obligations $ 7,026
--------------
In the fourth quarter of fiscal 1998, the Company and its Parent 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 and its Parent 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 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 and cash flows of the Company if disposed of
unfavorably.
F-32
15. 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 $ 166,818 $ 179,382
Real estate ........................... 9,933 8,468 60,782
-------------- -------------- -------------
$ 73,422 $ 175,286 $ 240,164
-------------- -------------- -------------
Income from operations:
Resorts ............................... $ 3,680 $ 19,642 $ 16,051
Real estate ........................... 4,089 1,655 18,352
Corporate ............................. (62) (6,982) (5,707)
-------------- -------------- -------------
$ 7,707 $ 14,315 $ 28,696
-------------- -------------- -------------
Depreciation and amortization:
Resorts ............................... $ 6,678 $ 16,973 $ 19,561
Real estate ........................... - - 385
Corporate ............................. 105 1,320 1,493
-------------- -------------- -------------
$ 6,783 $ 18,293 $ 21,439
-------------- -------------- -------------
Capital expenditures:
Resorts ............................... $ 25,054 $ 21,638 $ 64,152
Real estate ........................... 3,321 28,789 56,913
-------------- -------------- -------------
$ 28,375 $ 50,427 $ 121,065
-------------- -------------- -------------
Identifiable assets:
Resorts ............................... $ 262,623 $ 273,081
Real estate ........................... 30,249 96,908
Corporate ............................. 20,156 25,073
-------------- -------------
$ 313,028 $ 395,062
-------------- -------------
F-33
16. 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 $ 11,556
Income (loss) from operations ...................... (9,088) 6,175 27,027 (9,799)
Income (loss) from continuing operations ........... (10,293) 383 13,079 (8,948)
Net income (loss) .................................. (10,293) 383 13,079 (8,948)
Basic and diluted earnings (loss) per share:
Net income (loss) ............................... (10.52) 0.39 (9.15)
13.37
Year ended July 26, 1998:
Net sales .......................................... 14,465 78,739 123,684 23,276
Income (loss) from operations ...................... (15,254) 13,907 37,428 (7,385)
Extraordinary loss, net of income tax benefits ..... - 4,464 - -
Income (loss) from continuing operations ........... (13,528) 4,497 19,313 (8,902)
Net income (loss) .................................. (13,528) 33 19,313 (8,902)
Basic and diluted earnings (loss) per share:
Continuing operations ............................ (13.83) 4.59 19.75 (9.10)
Extraordinary loss ............................... - (4.56) - -
Net income (loss) ................................ (13.83) 0.03 19.75 (9.10)
F-34
17. Subsequent Event (Unaudited)
Real Estate Development Financing
On September 25, 1998, Grand Summit Resort Properties ("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.
F-34