UNITED STATES
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 25, 1999
Commission file number 1-13507
American Skiing Company
(Exact name of registrant as specified in its charter)
Delaware 7990
(State or other jurisdiction of (Primary Standard Industrial
incorporation or organization) Classification Code Number)
04-3373730
(I.R.S. Employer
Identification Number)
Sunday River Access Road
Bethel, Maine 04217
(207) 824-8100
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of
the Act:
Common Stock, $.01 par value New York Stock Exchange
(Title of Each Class) (Name of exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
None None
(Title of Each Class) (Name of exchange on which registered)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for at least the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-X is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's outstanding common stock held by
non-affiliates of the registrant on October 20,1999, determined using the per
share closing price thereof on the New York Stock Exchange Composite tape, was
approximately $62.3 million. As of October 20, 1999, 30,286,773 shares of common
stock were issued and outstanding, of which 14,760,530 shares were Class A
common stock.
American Skiing Company
Form 10-K Annual Report, for the year ended July 25, 1999
American Skiing Company and Consolidated Subsidiaries
Table of Contents
Part I
Page
Item 1 Business .............................................................1
Item 2 Properties ..........................................................14
Item 3 Legal Proceedings....................................................15
Item 4 Submission of Matters to a Vote of Security Holders .................15
Part II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters .................................................16
Item 6 Selected Financial Data .............................................17
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................19
Item 7A Quantitative and Qualitative Disclosures about
Market Risk .........................................................30
Item 8 Financial Statements and Supplementary Data .........................31
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................................32
Part III
Item 10 Directors and Executive Officers of the Registrant...................33
Item 11 Executive Compensation...............................................33
Item 12 Security Ownership of Certain Beneficial Owners and
Management...........................................................33
Item 13 Certain Relationships and Related Transactions.......................33
Part IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K..................................................33
Signatures....................................................................38
(i)
PART I
Item 1 Business
The Company
American Skiing Company (the "Parent") is organized as a holding
company and operates through various subsidiaries. The Parent and its
subsidiaries (collectively, the "Company") is the largest operator of alpine ski
and snowboard resorts in the United States. In the 1998-99 ski season, the
Company's resorts generated approximately 5.1 million skier visits representing
approximately 9.8% of total skier visits in the United States. The Company's
business includes nine ski resorts, several of which are among the largest in
the United States including: (i) Steamboat, the fourth largest ski resort in the
United States with over 1.0 million skier visits during the 1998-99 ski season,
(ii) Killington, the fifth largest resort in the United States with
approximately 978,000 skier visits during the 1998-99 season, (iii) Heavenly,
which ranked as the second largest resort in the Pacific West region and the
eighth largest resort in the United States with approximately 932,000 skier
visits during the 1998-99 ski season; and (iv) three of the four largest resorts
in the Northeast (Killington, Sunday River, and Mount Snow/Haystack) where THE
COMPANY enjoys a 24% market share. In addition, management believes that its
portfolio of resorts includes one of the most significant growth opportunities
in North American skiing at The Canyons in Utah. The Canyons' dramatic terrain
is favorably located, with direct highway access to the Salt Lake International
Airport, and is in close proximity to most alpine venues of the 2002 Winter
Olympic Games.
In addition to operating alpine resorts, the Company develops
mountainside real estate which complements the expansion of its on-mountain
operations. The Company has created a unique interval ownership product, the
Grand Summit Hotel, in which individuals purchase quartershare interval
interests while the Company retains ownership of core hotel and commercial
properties. The initial sale of quartershare units typically generates a high
profit margin, and the Company derives a continuing revenue stream from
operating the hotel's retail, restaurant and conference facilities and from
renting quartershare interval interests when not in use by their owners. The
Company is developing alpine resort villages at prime locations within five of
its resorts designed to fit that resort's individual characteristics. The
Company currently operates six Grand Summit Hotels -- two hotels at Sunday River
and one hotel each at Attitash, Mount Snow, Sugarloaf and Killington. Two
additional Grand Summit Hotels are under construction at The Canyons and
Steamboat. The Company also operates golf courses at its resorts and conducts
other off-season activities, which accounted for approximately 12% of the
Company's resort revenues for fiscal 1999.
The Company's revenues, earnings before interest expense, income taxes,
depreciation and amortization ("EBITDA") and net loss available to common
shareholders for its 1999 fiscal year were $317.1 million, $40.6 million, and
$32.3 million, respectively. Resort revenues and resort EBITDA for fiscal 1999
were $292.6 million and $42.9 million, respectively . Real estate revenues and
real estate earnings before interest and income taxes ("EBIT") for fiscal 1999
were $24.5 million and a loss of $2.3 million, respectively
Resorts
The Canyons. When acquired in July, 1997, The Canyons, located in the
Wasatch Range of the Rocky Mountains adjacent to Park City, Utah, was primarily
an undeveloped ski resort with significant potential for future operational and
real estate development. The Canyons is one of the most accessible destination
resorts in the world, with the Salt Lake International Airport only 32 miles
away. In its first season of operation under the Company's management (1997-98),
the resort generated over 167,000 skier visits, increasing to over 220,000 in
1998-99. Currently, the resort has approximately 3,300 acres of skiable terrain,
serviced by 13 lifts, with an elevation of 9,990 feet and a 3,190 foot vertical
drop. The area has two new base lodges and two additional on-mountain
restaurants.
Since its acquisition in July, 1997, the Company has invested
approximately $40 million to develop and construct: (i) an eight passenger
high-speed gondola, (ii) seven new quad lifts (including five high-speed quads),
(iii) an increase in skiable terrain to approximately 3,300 acres, and (iv) two
on-mountain lodges. The resort's new Red Pine lodge will serve as the
cornerstone of the Company's planned High Mountain Meadows real estate
development located on a plateau at an elevation of 8,000 feet.
Management believes that The Canyons has significant growth potential
due to its proximity to Salt Lake City and Park City, its undeveloped ski
1
terrain and its real estate development opportunities. The resort is located
approximately 25 miles from Salt Lake City and is accessed by a major state
highway. The Utah Winter Sports Park, which is located immediately adjacent to
the resort, is scheduled to serve as the venue for the ski jumping, bobsled and
luge events in the 2002 Winter Olympic Games.
The Company has invested significant capital and created a substantial
on-mountain skiing infrastructure which management believes is capable of
supporting substantial skier visit growth at The Canyons. The Company intends to
gradually invest additional capital to improve and expand on-mountain facilities
and skiable terrain as skier visits grow. The Company currently has two
significant real estate projects under construction at The Canyons, a Grand
Summit Hotel and the Sundial Lodge. Both are expected to open during the
upcoming ski season. Additional real estate projects at The Canyons are expected
to be launched and begin construction during the 2000 and 2001 fiscal years. The
Company is in the final stages of approval of a master development plan for the
resort which is expected to entitle approximately 5 million square feet of
development.
Steamboat. Steamboat ski area is located in the Medicine Bow/Routt
National Forest, Routt County, Colorado on the westerly slopes of Mt. Werner,
approximately 2.5 miles southeast of downtown Steamboat Springs, Colorado. The
area consists of 2,694 acres of land licensed under a Special Use Permit issued
by the Forest Service and 245 acres of private land owned by Steamboat located
at the base of the ski area. The trail network consists of 141 trails covering
2,939 permit acres that are serviced by 20 ski lifts. Steamboat receives a high
level of natural dry snow, averaging 330 inches annually the past 10 ski
seasons. Steamboat has recorded more than 1 million skier visits in each of the
past ten seasons.
Restaurant facilities are currently located in the base area and at
three other points throughout the resort. Within the ski area, the Company
operates food and beverage outlets at ten restaurants, bars and outdoor serving
facilities with total indoor seating capacity of approximately 1,944 and outdoor
seating capacity of 790. These facilities are complemented by a number of
independently operated bars and restaurants in the base area and in downtown
Steamboat Springs and are considered adequate to meet current skier needs. The
Company is currently constructing a 300 room Grand Summit Hotel at Steamboat,
which will bring both additional beds and enhanced levels of amenities to the
Steamboat base area.
Heavenly. Located on the south shore of Lake Tahoe with three base area
complexes, one in South Lake Tahoe, California and two in Stateline, Nevada,
Heavenly consists of two peaks with a maximum elevation of approximately 10,060
feet, and a 3,500 foot vertical drop with approximately 4,800 acres of skiable
terrain and 82 trails serviced by 27 lifts. Heavenly is the second largest
resort in the Pacific West Region with about 932,000 skier visits for the
1998-99 ski season. Access to the resort is primarily through the Reno Tahoe
International Airport and by automobile via Route 50 from San Francisco and
Sacramento, California. There are three base lodges and four on-mountain lodge
restaurants. Heavenly has a well developed bed base in the greater South Lake
Tahoe, Stateline area.
The Company's strategy at Heavenly is to add new accommodations and a
gondola lift system in the South Lake Tahoe commercial area through the
acquisition or control of development rights in the Park Avenue Redevelopment
area. That development is expected to create express gondola service to the
resort from the center of South Lake Tahoe and allow construction of two large
hotel projects over the next three to five years. Pre-sales have commenced for
the first of the two projects, a 194 room Grant Summit Hotel. In addition,
existing development rights may be exploited at Heavenly's Stagecoach base area
with the sale and construction of a mixed use condominium project over the same
period.
Killington. Killington, located in central Vermont, is the largest ski
resort in the northeast and the fifth largest in the United States, with over
978,000 skier visits in 1998-99. Killington is a seven mountain resort
consisting of approximately 1,200 acres with 200 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 Company's real estate strategy at Killington is to expand the
existing Grand Summit Hotel, begin the first phases of a new destination resort
2
village and expand the bed base surrounding the company-owned golf course in an
area approved for development. The current master plan for the proposed
Killington resort village development includes over 4,450 units encompassed in
over 5.3 million square feet of total development.
Sunday River. Sunday River, located in the western mountains of Maine
and approximately a three hour drive from Boston, is New England's third largest
ski resort with over 526,000 skier visits during the 1998/1999 season. Extending
across eight interconnected mountains, its facilities consist of approximately
654 acres of skiable terrain and 126 trails serviced by 18 lifts, with an
additional 7,000 acres of undeveloped terrain. The resort has a 3,140 foot
summit, a 2,340 foot vertical drop and four lodges. Sunday River is planning and
developing a Resort Village at the Jordan Bowl Area (the most westerly peak).
Plans for the resort village include over 1,350 units and 1.1 million square
feet of total development
Mount Snow/Haystack. Mount Snow, located in West Dover, Vermont, is the
fourth largest ski resort in the Northeast United States with over 513,000 skier
visits in 1998/99, and is the southernmost of the Company's eastern resorts. A
large percentage of the skier base for Mount Snow derives from Massachusetts,
Connecticut and New York. The resort consists of two mountains separated by a
three-mile ridge. Its facilities consist of 133 trails and approximately 631
acres of developed skiable terrain serviced by 25 lifts. The resort has a 3,600
foot summit and a 1,700 foot vertical drop. The resort has five full-service
base lodges.
Sugarloaf. Sugarloaf is located in the Carrabassett Valley of Maine.
Sugarloaf is a single mountain with approximately 1,400 acres of terrain and 126
trails and glades covering approximately 530 acres, of which 490 acres have
snowmaking coverage serviced by 14 lifts. 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 East, containing numerous restaurants,
retail shops and an abundance of lodging. Sugarloaf is widely recognized for its
challenging terrain, including its snow fields, which represent the only
lift-serviced above-tree line 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.
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 439 acres of skiable terrain
and 115 trails serviced by 18 lifts. The Slide Brook Express Quad connects the
Lincoln Peak and Mount Ellen base areas via a 9 minute scenic ride through the
Green Mountains. 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 mid-mountain
lodges. The on-mountain accommodations at Sugarbush consist of approximately
2,200 beds. There is also an ample off-mountain bed base within the Mad River
Valley. The resort operates ski shops, full-service and cafeteria-style
restaurants. The Company also owns and operates the Sugarbush Inn, a
championship golf course, a sports center and a conference center and manages
185 condominium units.
Attitash Bear Peak. Attitash Bear Peak is one of New Hampshire's
premier family vacation resorts. Attitash Bear Peak offers 68 trails covering
280 skiable acres on two interconnected mountain peaks. Attitash's 12 lifts
(including three quad chairs) make up one of New Hampshire's largest lift
networks. The summit elevation of 2,350 feet and a base of 600 feet gives the
resort a vertical drop of 1,750 feet. Attitash Bear Peak is located in the heart
of the Mount Washington Valley which boasts over 200 factory outlet stores,
hundreds of bars and restaurants and a large variety of lodging options
including Attitash Bear Peak's own 143 room slopeside Grand Summit Resort Hotel
and Conference Center.
Alpine Resort Industry
There are approximately 750 ski areas in North America. In the United
States, approximately 509 ski areas generated approximately 52 million skier
visits during the 1998-99 ski season. Since 1985, the ski resort industry has
undergone a period of consolidation and attrition, resulting in a significant
decline in the total number of ski areas in North America. The number of ski
resorts in the United States has declined from approximately 735 in 1983 to
approximately 509 in 1999, although the number of skier visits has remained
relatively flat. Despite the recent consolidation trend overall, ownership of
the smaller regional ski resorts remains highly fragmented. The Company believes
that technological advances and rising infrastructure costs are the primary
reasons for the ski resort industry consolidation, and that further
consolidation is likely as smaller regional resorts are acquired by larger
resort operators with more sophisticated management capabilities and increased
availability of capital. In addition, the ski resort industry is characterized
3
by significant barriers to entry because the number of attractive sites is
limited, the costs of resort development are high, and environmental regulations
impose significant restrictions on new development.
The following chart shows a comparison of the industry-wide skier
visits compared to the Company's skier visits in the U.S. regional ski markets
during the 1998-99 ski season:
- --------------------- ----------------- ------------------ ----------------- ---------------- ------------------------
Geographic Region 1998-99 Percentage of Skier Visits at Company Company Resorts
Total Skier Total Skier Company Resorts Regional
Visits (in Visits (in millions) Market Share
millions)
- --------------------- ----------------- ------------------ ----------------- ---------------- ------------------------
Northeast 12.3 23.7% 2.9 23.8% Killington, Sugarbush,
Mount Snow/Haystack,
Attitash/Bear Peak,
Sunday River,
Sugarloaf USA
Southeast 4.3 8.2% --- ---
Midwest 6.0 11.6% --- ---
Rocky Mountain 18.3 35.2% 1.3 6.7% The Canyons, Steamboat
Pacific West 11.1 21.3% 0.9 8.4% Heavenly
- --------------------- ----------------- ------------------ ----------------- ---------------- ------------------------
U.S. Overall 52.0 100.0% 5.1 9.8%
- --------------------- ----------------- ------------------ ----------------- ---------------- ------------------------
(*) Source: Kottke National End of Season Survey 1998/99 Final Report
United States ski resorts range from small operations which cater
primarily to day skiers from nearby population centers to larger resorts which
attract both day skiers and destination resort guests. Management believes that
day skiers focus primarily on the quality of the skiing and travel time, while
destination travelers are attracted to the total ski and riding experience,
including the non-skiing amenities and activities available at the resort, as
well as the perceived overall quality of the vacation experience. Destination
guests generate significantly higher resort operating revenue per skier day than
day skiers because of their additional spending on lodging, food and other
retail items over a multiple-day period.
Since 1985, the total number of skier visits in the United States has
been relatively flat. However, according to the National Ski Area Association,
the number of skier visits represented by snowboarders in the United States has
increased from approximately 6.4 million in the 1994-95 ski season to
approximately 12.3 million in the 1998-99 ski season, a compound annual growth
rate of approximately 17.8%. Management believes that snowboarding will continue
to be an important source of lift ticket, skier development, retail and rental
revenue growth for the Company.
The Company believes that it is well positioned to capitalize on
certain favorable trends and developments affecting the alpine resort industry
in the United States, including: (i) the 66.7 million members of the "baby boom"
generation that are now approaching the 40 to 59 year age group where
discretionary income, personal wealth and pursuit of leisure activities are
maximized (this group is estimated to grow by 16.7% over the next 23 years);
(ii) the "echo boom" generation (children of baby boomers) is emerging as a
significant economic force as they begin to enter the prime entry age for
skiing, snowboarding and other "on-snow" sports; (iii) advances in ski equipment
technology such as development of parabolic skis which facilitate learning and
make the sport easier to enjoy; (iv) the continued growth of snowboarding as a
significant and enduring segment of the industry, which is increasing youth
participation in alpine sports; and (v) a greater focus on leisure and fitness.
There can be no assurance, however, that such trends and developments will have
a favorable impact on the ski industry.
Operating Strategy
The Company believes that the following key operating strategies will
allow it to increase revenues and profitability by capitalizing on its position
as a leading mountain resort operator and real estate developer.
Capitalize on Recent Facilities Expansion and Upgrades. The Company
has invested over $145 million in expansion and upgrading of its on-mountain
facilities over the past 2 fiscal years. This investment has substantially
re-tooled the physical plant at all of the Company's recently acquired resorts.
Following this investment, management believes that the Company now offers the
most state-of-the-art on-mountain facilities in each of its markets.
Capitalizing on this investment is one of the primary focuses of the Company's
fiscal 2000 strategic plan.
4
Multi-Resort Network. The Company's network of resorts provides both
geographic diversity and significant operating benefits. The Company believes
its geographic diversity: (i) reduces the risks associated with unfavorable
weather conditions, (ii) insulates the Company from economic slowdowns in any
particular region, (iii) increases the accessibility and visibility of the
Company's network of resorts to the overall North American skier population, and
(iv) enables the Company to offer a wide range of mountain vacation
alternatives.
The Company believes that its ownership of multiple resorts also
provides the opportunity to (i) create the industry's largest cross-marketing
program, (ii) achieve efficiencies and economies of scale in purchasing goods
and services, (iii) strengthen the distribution network of travel agents and
tour operators by offering a range of mountain resort alternatives, consistent
service quality, convenient travel booking and incentive packages, (iv)
establish performance benchmarks for operations across all of the Company's
resorts, (v) utilize specialized individuals and cross-resort teams at the
corporate level as resources for the entire Company, and (vi) develop and
implement consumer information and technology systems for application across all
of the Company's resorts.
Increase Revenues Per Skier. The Company seeks to increase revenues per
skier by managing ticket yields and expanding revenue sources at each resort.
Management seeks to increase non-lift ticket revenue sources by increasing
point-of-sale locations and sales volume through retail stores, food and
beverage services, equipment rentals, skier development and lodging and property
management. In addition, management believes that aggressive cross-selling of
products and programs (such as the Company's frequent skier and multi-resort
programs) to resort guests increases resort revenues and profitability. The
Company believes it can increase ticket yields by managing ticket discounts,
closely aligning ticket programs to specific customer market segments, offering
multi-resort ticket products and introducing a variety of programs that offer
packages which include tickets with lodging and other services available at its
resorts. During the 1998-99 ski season, the Company increased its average yield
per skier visit by approximately 10% as compared to the 1997-98 ski season.
Season pass revenue for the 1998-99 ski season at the resorts increased by 8.5%
as compared to the 1997-98 ski season.
Innovative Marketing Programs. The Company's marketing programs are
designed to: (i) establish a nationally recognized high-quality name and image,
while promoting the unique characteristics of its individual resorts, (ii)
capitalize on cross-selling opportunities, and (iii) enhance customer loyalty.
The company utilizes a number of innovative techniques to achieve those goals.
Partnership Marketing: Management believes that joint
marketing programs create a quality image and a strong market presence
on a regional and national basis. The Company, because of the
demographics of its customers and its high profile image, is a very
attractive asset to major marketers. The company has entered into
promotional agreements, some of which include television, radio and
special events programs, with major corporations including Sprint,
Mobil, Budweiser, Pepsi/Mountain Dew, Motorola, Vermont Pure, Veryfine,
Kodak, Swatch, and Green Mountain Coffee Roasters.
Loyalty programs: The Company created the first frequent skier
program in the world, and that program has evolved into The Edge, a
private-label program in which participants receive credits towards
lift tickets across the United States. The Company's new mEticket
program is believed to be the first nation-wide program targeted at
retaining skiers who ski three to fourteen days each season, which the
Company's research indicates represents the majority of the ski
population. By giving guests an incentive to purchase their skiing for
the year up front with the special values offered by mEticket, the
Company believes it can encourage guests to ski more often and do the
majority of their skiing at the Company's resorts.
Broadcast: The Company utilizes a variety of marketing media
including direct mail, radio, television and the Internet. Television
and radio marketing efforts include both strategic and tactical
messaging; the strategic advertising promotes the sports and the
resorts themselves, and the tactical messaging provides current
information related to ski conditions as a means of promoting visits.
In addition, each resort utilizes local cable television networks to
provide current information and cross-sell resort products and
services.
5
Internet: The Company's resorts were among the first in the
industry to embrace Internet marketing, and among the first to
successfully engage in on-line sales. Internet activities include
individual resort websites which provide current snow conditions,
special deals and interactive programs, a real estate sales website
promoting the Company's Grand Summit Hotels and Resort Villages, a site
promoting summer vacation activities, a dedicated site for mEticket,
on-line retail sales and a special site promoting learning to ski or
snowboard. All sites are linked through the Company's own site
(www.peaks.com).
Increasing the skier and rider market: The Company has
developed a new and proprietary skier development system. It combines
the unique learning method of the Company's trademarked Perfect Turn
instructional method with graduated length skis, a new sales process
and specially designed Sprint Discovery Centers, which are specifically
designed for first time skiers and riders. Management believes this new
system will significantly increase the retention rate of first time
skiers and riders.
Develop new programs to serve and attract new guests: The
Company has created new programs to augment winter programming and
increase summer visits. Winter activities at Company resorts have been
greatly expanded with the addition of new Fun Centers. These Fun Center
programs are designed to reflect the needs of each individual resort.
Activities offered at the Company's resorts include ice skating,
snowmobiling, snow tubing, snowshoeing, snowcat rides, arcades and
other indoor and outdoor activities. As part of an ongoing effort to
expand summer revenues, the Company has created Grand Summer Vacations,
which package the many summer activities available at Company resorts
including water slides, canoeing, mountain biking, climbing walls,
chairlift rides, golf, tennis, hay rides, alpine slides, BMX parks, and
swimming.
Mountainside Real Estate Development. The Company's real estate
development strategy is designed to capitalize on and support its substantial
investment in its on-mountain facilities over the last several years. The
Company's resort real estate development strategy is centered around the
creation of alpine resort villages at five of its resorts, The Canyons,
Heavenly, Killington, Steamboat and Sunday River. Each village consists of
carefully planned communities integrated with condominiums, luxury townhouses,
single family luxury dwellings or lots and commercial properties. Each village
is anchored by a Grand Summit Hotel, a full service hotel operated in a
quarter-ownership format. Residential units in Grand Summit Hotels are sold in
quartershare interval interests that allow each of four quartershare unit owners
to use the unit for 13 weeks divided evenly over the year. The Company's primary
focus over the next several years is expected to be capitalizing upon its
opportunities at The Canyons and Heavenly. Development at other villages is
expected to continue, albeit at a slower pace than these two resorts.
Expand Golf and Convention Business. The Company is one of the largest
owners and operators of resort golf courses in New England and seeks to
capitalize on this status to increase off-season revenues. Sugarloaf,
Killington, Mount Snow/Haystack and Sugarbush all operate championship resort
golf courses. The Sugarloaf course, designed by Robert Trent Jones, Jr., has
been rated as one of the top 25 upscale courses in the country according to a
Golf Digest magazine survey. The Company also operates eight golf schools at
locations along the East Coast from Florida to Maine. The Company's golf program
and other recreational activities draw off-season visitors to the Company's
resorts and support the Company's growing off-season convention business, as
well as its real estate development operations.
Resort Operations
The Company's resort revenues are derived from a wide variety of
sources including lift ticket sales, food and beverage, retail sales including
rental and repair, skier development, lodging and property management, golf,
other summer activities and miscellaneous revenue sources. Lift ticket sales
represent the single largest source of resort revenues and produced
approximately 46% of total resort operations revenue for fiscal 1999.
6
The following chart reflects the Company's sources of resort revenues
across certain revenue categories as well as the percentage of resort revenues
contributed by each category for the fiscal year ended July 25, 1999.
---------------------------------------------------------------------------
Fiscal Year Ended July 25, 1999
Resort Revenues Percentage of
(in thousands) Resort Revenues
---------------------------------------------------------------------------
Revenue Category:
Lift Tickets $ 134,504 46.0%
Food and beverage 13.1%
38,259
Retail sales 14.2%
41,463
Lodging and property 10.8%
31,672
Skier development 8.3%
24,159
Golf, summer activities and 7.6%
miscellaneous 22,501
---------------------------------------------------------------------------
Total Resort Revenues $ 292,558 100.0%
---------------------------------------------------------------------------
Lift Ticket Sales. The Company manages its lift ticket programs and
products so as to increase the Company's ticket yields. Lift tickets are sold to
customers in packages including accommodations in order to maximize occupancy.
In order to maximize skier visits during non-peak periods and to attract
specific market segments, the Company offers a wide variety of incentive-based
lift ticket programs. The Company manages its ticket yields during peak periods
so as to maximize aggregate lift ticket revenues.
Food and Beverage. Food and beverage sales provide significant revenues
for the Company. The Company owns and operates the food and beverage facilities
at its resorts, with the exception of the Sugarloaf resort, which is under a
long-term concession contract that pre-existed the Company's ownership. The
Company's food and beverage strategy is to provide a wide variety of
restaurants, bars, cafes, cafeterias and other food and beverage outlets. The
Company's control of its on-mountain and base area food and beverage facilities
allows it to capture a larger proportion of guest spending as well as to ensure
product and service quality. The Company currently owns and operates over 40
different food and beverage outlets.
Retail Sales. Across all of its resorts, the Company owns over 80
retail and ski rental shops. The large number of retail locations operated by
the Company allows it to improve margins through large quantity purchase
agreements and sponsorship relationships. On-mountain shops sell ski accessories
such as goggles, sunglasses, hats, gloves, skis, snowboards, boots and larger
soft goods such as jackets and snowsuits. In addition, all locations offer the
Company's own logo-wear which generally provides higher profit margins than
other retail products. In the non-winter seasons, the shops sell mountain bikes,
in-line skates, tennis equipment and warm weather apparel. In addition, in 1997,
the Company expanded its retail operations by expanding and opening new off-site
retail facilities in high traffic areas, such as stores on the Killington Access
Road, in downtown South Lake Tahoe, and in the Freeport, Maine and North Conway,
New Hampshire retail districts.
Lodging and Property Management. The Company's lodging and property
management departments manage their own properties as well as properties owned
by third parties. Currently, the Company's lodging departments manage
approximately 1,750 lodging units at the Company's resorts. The lodging
departments perform a full complement of guest services including reservations,
property management, housekeeping and brokerage operations. Most resorts have a
welcome center to which newly arriving guests are directed. The center allocates
accommodations and provides guests with information on all of the resort's
activities and services. The Company's property management operation seeks to
maximize the synergies that exist between lodging and lift ticket promotions.
Skier Development. The Company has been an industry leader in the
development of learn to ski programs. Its Guaranteed Learn to Ski Program was
one of the first skier development programs to guaranty that a customer would
learn to ski in one day. The success of this program led to the development of
"Perfect Turn," which management believes was the first combined skier
development and marketing program in the ski industry. Perfect Turn ski
professionals receive specialized training in coaching, communication, skiing
and both selling related products and cross-selling other resort goods and
services. The Company operates a hard goods marketing program at each of its
resorts designed to allow customers to test skis and snowboards with ski
professionals, purchase their equipment from those professionals and receive
ongoing product and technological support through Perfect Turn. During the
1998-99 season the Company embarked upon a new skier development program that
focused on the marketing and sales of the entire mountain resort experience,
rather than simply traditional learn-to-ski concepts, the Company intends to
continue this plan for the 1999-2000 season.
7
Real Estate Development
In the spring of 1998, the Company formed American Skiing Company
Resort Properties, Inc. ("Resort Properties") as a real estate development
holding company through which substantially all of the Company's real estate
activities are conducted. As of October 7, 1999, Resort Properties has been
capitalized with $31.2 million in cash and land from the Company, and the
Company currently plans to contribute up to an additional $26 million during the
remainder of Fiscal 2000.
With the ski industry in a period of consolidation as costs of
infrastructure required to maintain competitiveness have increased, the
Company's acquisitions of large, well-known ski resorts in need of lodging and
after-ski activities is expected to provide a foundation for creating a highly
attractive supply of vacation home products.
The Company's real estate development strategy is centered upon the
creation of "resort villages" at five of the Company's largest resorts.
Development within these resort villages is focused upon projects which
management believes will generate the highest returns to the Company. While the
business plan contemplates the completion of projects at several of the
Company's resorts across the United States, there is a clear focus on The
Canyons and, to a slightly lesser extent, Heavenly. The strength of the existing
market in the Park City, Utah area combined with the impact of the 2002 Winter
Olympic Games makes The Canyons a unique development opportunity. The Salt Lake
City area has been one of the fastest growing regions in the United States over
the last several years. The Park City area is growing even more rapidly, at
twice the State average according to State of Utah authorities. The effect of
this rapid expansion on the real estate market is dramatically compounded by
this area hosting the 2002 Winter Olympic Games. Management believes that this
combination provides a unique real estate development opportunity, and has
adjusted the Resort Properties business plan to account for these factors.
The Resort Properties business plan also requires certain pre-sale
levels to be satisfied for projects prior to the commencement of project
construction, which management believes helps to ensure that projects with a
higher projected return and lower risk level will be developed. Projects are
developed through a combination of equity proceeds, proceeds from the Resort
Properties Term Facility (discussed below) and secured project financing, which
is generally without recourse to the Parent and its resort operating
subsidiaries. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources."
Resort Villages. The Company's strategy is to respond to the expected
increase in demand for vacation home products with a variety of product types,
from timeshare to whole-ownership, emphasizing the development of slopeside,
ski-in/ski-out real estate that complements the Company's mountain operations.
Key components of the strategy are the creation of "resort villages" at the
following resorts: The Canyons, Heavenly, Killington, Sunday River and
Steamboat. Each resort village is expected to consist of the following products:
o Quartershare hotels: The Company's quartershare hotels, known as "Grand
Summit Hotels", are the anchors of the pedestrian villages.
o Whole and fractional ownership condominium hotels: Whole-ownership
condominiums such as the Sundial Lodge at The Canyons and other fractional
ownership condominiums are expected to fill out the accommodation base in
the pedestrian villages.
o Townhouses and Single Family Homes: Expansion of the breadth and depth of
the real estate product available for purchase or rent through selling and
building stacked townhouses, townhouses, and single family homes at each
resort where market demand presents opportunities.
o Retail. The Company's retail leasing business is expected to directly lease
or sell to third parties for re-leasing all retail space created within the
resort villages. Management believes that retail opportunities present an
essential ingredient that enhances the after-ski experience.
The master plans for each resort village core consist of approximately
1,200 units of accommodation supported by 140,000 square feet of retail space. A
strong component of the retail space is outdoor recreation-related retail. Each
building within a village is expected to consist of at least one level of
underground parking, and will generally include ground floor retail and three to
five stories of residential units. In some cases (such as the Grand Summit
Hotels at The Canyons and Steamboat) heights of buildings will range to nine
stories utilizing steel and concrete construction. As building progresses to the
village periphery, residential density, parking and retail are intended to be
reduced.
8
Local approvals for these plans are at various stages of completion.
o The Canyons: The first phase of the resort village is fully vested and
approved, and the remainder is expected to be approved in the Fall of 1999.
o Heavenly: The redevelopment area of Park Avenue has already been approved
and the Company expects to sign a development agreement with the City of
South Lake Tahoe and commerce development in fiscal 2000.
o Killington: The master plan has received its initial Act 250 approval, but
must make its way through the appeal process. A re-zoning vote for a major
portion of the village is scheduled for November 1999. Entitlements for
individual projects may be obtained prior to final determination in master
plan approvals.
o Sunday River: The resort village master plan for Jordan Bowl is complete.
Individual permits for projects are all that is required for development.
o Steamboat: The mountain-town planning process will continue through a major
portion of fiscal 2000. No specific schedule has been established for its
conclusion.
The villages are designed to be the focal point of the guest experience
at each resort. Convenient access to the village on arrival, a stress free
walking experience while staying in the village, direct ski and lift access to
the mountains and easy access to golf are expected to characterize each
location.
The villages are each organized around a central plaza, forum or
activity center, with a strongly defined pedestrian retail spine anchored at
each end by either mountain lifts, large hotels or parking and people mover
systems. Pedestrian side streets from the central spine lead to additional
retail and accommodations. Ultimate ownership of infrastructure and public
facilities is expected to be transferred to a resort management company owned or
controlled by the Company.
Grand Summit Hotels. The Grand Summit Hotel is a unique interval
ownership product originated by the Company. Each hotel is a condominium
consisting of fully furnished residential and commercial units with a voluminous
atrium lobby, two or more restaurants, retail space, a grand ballroom,
conference space, a health club with an outdoor heated pool and other
recreational amenities. Residential units in the hotel are sold in quartershare
interests, and the balance of the hotel is typically retained by the Company.
Ground level hotel street frontage will be utilized as retail space taking
advantage of pedestrian traffic in the village core.
Each quartershare hotel unit consists of a 13-week ownership interest
spread evenly throughout the year. Weeks that are not used by an owner are
typically dedicated to the Company's optional rental program managed on a
traditional hotel format, which allows Resort Properties to retain a portion of
gross rental revenue. Consequently, the Company expects to benefit from revenue
generated by (i) the sale of units, (ii) the recurring revenues from lodging
rental, (iii) other hotel and commercial operations, and (iv) enhanced length of
stay by the ski visitor at the resort.
9
The following table summarizes Grand Summit pre-sales and sales
activity through October 3, 1999:
------------------ --------------- ------------------ --------------
Projects Pre-Sale Pre-Sales / Sales % of Total
Commencement ($000s) Project
Sell-Out(4)
------------------ --------------- ------------------ --------------
GSRCC (1) Dec. 1991 $ 24,451 100%
Attitash Nov. 1995 10,417 49%
Jordan Bowl Nov. 1996 23,795 72%
Mount Snow Nov. 1996 19,345 55%
Killington Nov. 1996 27,473 77%
Steamboat (2) Jan. 1998 30,855 29%
Canyons (2) Feb. 1998 61,781 50%
Heavenly(3) Feb. 1999 34,618 28%
------------------ --------------------- ------------------- --------------
(1) Grand Summit Resort and Conference Center at Sunday River
(2) Projects currently under construction
(3) Represents non-binding reservations, not binding pre-sales.
(4)Percentage of Total Project Sell-Out is an estimate based upon current sales
prices for remaining Project inventory, and actual results may differ based upon
adjustments in sales price of that inventory.
Whole Ownership Condominium Hotels. These hotels consist of fully
furnished upscale condominium units operated on a traditional hotel format. The
whole ownership structure satisfies this market segment's desire for traditional
real estate, but complements this traditional concept with both hotel-type
amenities and easy access to rental income generated through the hotel rental
management program. The Company retains ownership of the front desk and other
common areas of the condo/hotels with the expectation of operating these hotels
over the long term. By integrating the condo/hotels with its central reservation
system, the Company is enhancing its revenue opportunities through vertically
integrated resort operations, simplicity for guest reservations, and the revenue
splits associated with this type of product. The Sundial Lodge at The Canyons,
as in most of the resort village condominium products, also creates retail space
on the ground floor that supports the pedestrian village. The ground floor of
this building houses 31,800 square feet of retail and commercial space. This
space rests at the heart of the resort's retail center.
The condo/hotel product is marketed and sold using an "event marketing"
methodology that results in substantial sales from two marketing "events". The
first event is a reservation day, preceded by several weeks of intense
marketing. In the case of the Sundial Lodge at The Canyons, this event produced
over 225 reservations, each accompanied by a $5,000 deposit, for what was then a
75 unit project. Each reservation holder has the right to purchase two units. At
the second event held in August 1998, a fulfillment weekend, these Sundial Lodge
reservations were converted into sales contracts for 150 units in an expanded
project. For this type of product, the Company generally expects the event
marketing process to result in pre-sales of 80% to 100% of the project before
construction commences. In the case of Sundial Lodge, the marketing process
resulted in the project being 100% sold-out prior to construction.
Retail. The Company has completed retail needs programming studies for
each of the five resort village locations. Each study was conducted by a
consortium of some of the leading experts in retail in North America. The
Company is in the process of lease-up at The Canyons. While there is high
interest in the Company's retail program, identifying the timing of permanent
lease-up is challenging due to the high level of construction expected in the
village core over the next two years and the fact that the village's central
forum will not be completed until fall 2000.
Townhouses and Single Family. There is a component of resort real
estate purchasers that do not prefer core village areas, choosing instead to be
located in an area which is convenient to the resort, but removed from the
center of activity. There is also logical reasoning for decreasing densities of
development as one moves away from the core areas. Within each resort master
plan are areas that can accommodate stacked town houses of a site density of
about 20 to 30 units per acre, town houses ranging from 10 to 20 units per acre,
and single family homes structured as both small and large lot product.
10
Development Program
The Company's five year real estate business plan consists of the
development of up to 17 projects at its various resorts. This model anticipates
continuing sell-out and development of the Company's 7 existing projects. Four
projects (Grand Summit Hotels at Attitash, Jordan Bowl at Sunday River,
Killington and Mt. Snow) are fully constructed and operational. Three additional
projects are currently under construction: Grand Summit Hotels at The Canyons
and Steamboat, and the Sundial Lodge at The Canyons. An additional seven
projects are expected to commence pre-sales and planning during the Company's
current fiscal year. The remaining projects are expected to be launched in
fiscal 2001 or 2002.
Four Existing Grand Summit Hotels. The Company opened its first Grand
Summit Hotel known as the Grand Summit Resort and Conference Center at Sunday
River in December 1993. The Grand Summit Hotel at Attitash was opened in March
1997. During Fiscal 1998, the Company opened three additional Grand Summit
Hotels (at Jordan Bowl at Sunday River, Mount Snow and Killington). The Company
is currently selling quartershare units at the Attitash Grand Summit and the
three Grand Summits that opened during Fiscal 1998.
Three Projects Under Construction. The Company has commenced
construction of the following three hotels at its western resorts:
o 182 room Grand Summit quartershare (728 quartershares) hotel located
at the Steamboat resort in Steamboat Springs, Colorado;
o 213 room Grand Summit quartershare (852 quartershares) hotel located
at The Canyons resort in Utah;
o 150 unit whole-ownership Sundial Lodge condominium hotel also located
at The Canyons resort.
The conceptual framework for the Company's western Grand Summit Hotel projects
is the existing Grand Summit Hotels at eastern resorts. However, the western
prototype has a more upscale design, taking advantage of the perceived strong
demand for the product and complementing the destination nature of the Company's
western resorts. The Sundial Lodge condo hotel project at The Canyons is further
scaled to account for the expected strong demand surrounding the 2002 Winter
Olympics in Salt Lake City. Management expects that the upscale design at the
western locations will command higher price points, with a significant increase
in the average price per quartershare over eastern property pricing levels.
Multiple Projects Starting in Fiscal 2000. The projects commencing in
fiscal 2000 represent a clear focus on the Company's most substantial immediate
development opportunities at The Canyons and Heavenly, while simultaneously
generating a diversification of real estate product at a broader spectrum of The
Company's resorts. The new fiscal 2000 projects are expected to include several
projects at The Canyons, a Grand Summit Hotel at Heavenly, introduction of
Killington Grand Summit Hotel Phase II to the market in the latter part of the
upcoming ski season and the introduction to the market in the Spring of 2000 of
the Jordan Pond Townhome project at the Company's Sunday River resort.
Leased Properties
The Company's operations are wholly dependent upon its ownership or
control over the real estate constituting each resort. The following summarizes
certain non-owned real estate critical to operations at each of the Company's
resorts. Management believes each of the following leases, permits or agreements
is in full force and effect and that the Company is entitled to the benefit of
such agreements.
The Sunday River resort leases approximately 1,500 acres, which
constitute a substantial portion of its skiable terrain, under a 50-year lease
terminating on October 14, 2030. The lease renews automatically thereafter on a
year-to-year basis unless terminated by either the lessor or lessee. This lease
was amended on January 23, 1998 to allow Sunday River to purchase portions of
the leased property for real estate development at a predetermined amount per
acre. In January 1998, the Company acquired an undivided one-half interest in
the fee title to the leased parcel.
11
The Sugarbush resort uses approximately 1,915 acres pursuant to a
special use permit issued by the United States Forest Service. The permit has a
40-year term expiring April 30, 2035. The special use permit has a renewal
option which provides that it may be renewed if the use of the property remains
compatible with the special use permit, the site is being used for the purposes
previously authorized, and the ski area has been continually operated and
maintained in accordance with all the provisions of the permit.
The Mount Snow resort leases approximately 1,315 acres which constitute
a substantial portion of its skiable terrain. Of this total, 893 acres are
occupied by Mount Snow pursuant to a special use permit granted by the United
States Forest Service. The permit has a 40-year term expiring December 31, 2029,
which is subject to renewal at the option of Mount Snow if certain renewal
conditions are satisfied. Mount Snow also leases 252 acres, which constitute a
portion of its skiable terrain, from the Town of Wilmington, Vermont. The lease
expires November 15, 2030. There are no renewal options. In addition, Mount Snow
leases approximately 169 acres from Sargent Inc. pursuant to two separate leases
expiring September 30, 2018, and March 31, 2025, respectively. Each lease can be
renewed for an additional 30-year term. Mount Snow also has the option to
purchase the leased property and a right of first refusal in the event the
lessor receives a bona fide offer for the leased properties.
Attitash Bear Peak uses approximately 281 acres of its skiable terrain
pursuant to a special use permit issued by the United States Forest Service
dated. The permit has a 40-year term expiring July 18, 2034, which is renewable
subject to certain conditions. In addition, Attitash Bear Peak leases a portion
of its parking facilities under a lease expiring December 31, 2003. Attitash
Bear Peak has the option to purchase this leased property at any time during the
lease term.
Killington leases approximately 2,500 acres from the State of Vermont.
A substantial portion of that property constitutes skiable terrain. The initial
lease was for a 10-year term which commenced in 1960. The lease contains nine
10-year renewal options. Killington exercised the renewal option in 1970, 1980
and 1990. Assuming continued exercise of Killington's option, the lease
ultimately expires in the year 2060. The lease is subject to a buy-out option
retained by the State of Vermont, as landlord. At the conclusion of each 10-year
term (or extended term) the State has the option to buy out the lease for an
amount equal to Killington's adjusted capital outlay plus 10% of the gross
receipts from the operation for the preceding three years. Adjusted capital
outlay means total capital expenditures extending back to the date of origin of
the lease depreciated at 1% per annum, except that non-operable assets
depreciate at 2% per annum. This buy-out option will next become exercisable in
the year 2000. Although the Company has not had confirmation from Vermont State
officials, it has no reason to believe that the State intends to exercise the
option at that time.
The Sugarloaf resort leases the Sugarloaf Golf Course from the Town of
Carrabassett Valley, Maine pursuant to a lease dated June 3, 1987. The lease
term expires December 2003. Sugarloaf has an option to renew the lease for an
additional 20-year term.
The Canyons leases approximately 2,100 acres, including most of the
base area and a substantial portion of the skiable terrain, under a lease from
Wolf Mountain Resorts, LC. The initial term of this lease is 50 years expiring
July 2047, with an option to extend for three additional terms of 50 years each
(the "Wolf Lease"). The lease provides an option to purchase (subject to certain
reconveyance rights) those portions of the leased property that are intended for
residential or commercial development at a cost of 5.5% of the full capitalized
cost of such development in the case of property retained by the Company, or 11%
of such cost in the case of property intended for resale. The Canyons also
leases approximately 807 acres, which constitute the area for the planned
mid-mountain village and a substantial portion of skiable terrain, from the
State of Utah School and Institutional Trust Land Administration. The lease term
ends in 2078 and provides an option to purchase those portions of the
mid-mountain village area that are intended for real estate development at a
cost of 25% of their fair market value on an undeveloped basis. The Wolf Lease
also includes a sublease of certain skiable terrain owned by the Osguthorpe
family. The Company has established certain additional ski development rights
under a direct agreement with the Osguthorpe family. The ski development rights
for approximately 3,000 acres of skiable terrain targeted for development by the
Company are contained in a development agreement with Iron Mountain Associates,
LLC, which agreement includes a lease of all skiable terrain for a term ending
September 13, 2094.
Heavenly uses approximately 1,543 acres of its skiable terrain located
in California and Nevada pursuant to a special use permit issued by the United
States Forest Service. The permit expires on August 5, 2029. Heavenly uses
12
approximately 2,000 acres of additional skiable terrain in Nevada pursuant to a
special use permit which expires on August 5, 2029.
Steamboat uses approximately 2,644 acres, a substantial portion of
which is skiable terrain, pursuant to a special use permit issued by the United
States Forest Service which expires on August 31, 2029. Under Steamboat's
existing master plan, an additional 958 acres of contiguous National Forest
lands is expected to be added to the permitted area.
The Forest Service can terminate most of the foregoing special use
permits if it determines that termination is required in the public interest.
However, to the knowledge of the Company, no recreational Special Use Permit or
Term Special Use Permit for any major ski resort then in operation has ever been
terminated by the Forest Service over the opposition of the permit holder.
Systems and Technology
Information Systems. The Company's information systems are designed to
improve the ski experience through the development of more efficient guest
service products and programs. The Company has substantially implemented a
comprehensive system and technology plan including: (i) an integrated customer
database that tracks information regarding guest preferences and product
purchasing patterns, (ii) an extensive data communications network linking most
point-of-sale locations through a central database, (iii) a central reservations
system for use in the resort's rental management business and (iv) a skier
development reservation and instructor scheduling system that simplifies the
booking process and allows for optimal utilization of instructors.
Snowmaking Systems and Technology. The Company believes it operates the
largest consolidated snowmaking operation in existence, with approximately 3,000
acres of snowmaking coverage. The Company's proprietary snowmaking software
program enables it to produce what management believes is the highest quality
man-made snow in the industry. The Company refers to this ideal quality product
as "Retail Snow," a high quality, durable skiing surface with top to bottom
consistency. All of the Company's snowmaking systems are operated via
computer-based control using industrial automation software and a variety of
state of the art hardware and instrumentation. The Company utilizes an efficient
ground based, tower based and fully automated snowgun nozzle technology and has
developed software for determining the optimal snowmaking nozzle setting at
multiple locations on the mountain. This system monitors the weather conditions
and system capacities and determines the proper operating water pressure for
each nozzle, eliminating guesswork and ensuring the ideal snow quality. All of
the snowmaking systems are networked to provide the ability to view information
from multiple locations within its resort network. Another unique feature of the
Company's system is the current display of trail status, lift status, weather
conditions and other various on-mountain information at locations throughout
each resort. Much of this information is available on the World Wide Web at the
Company's and its individual resorts' web sites.
Competition
The ski industry is highly competitive. The Company competes with
mountain resort areas in the United States, Canada and Europe. The Company also
competes with other recreation resorts, including warm weather resorts, for the
vacation guest. In order to cover the high fixed costs of operations associated
with the ski industry, the Company must maintain each of its regional, national
and international skier bases. The Company's prices are directly impacted by the
variety of alternatives presented to skiers in these markets. The most
significant competitors are resorts that are well capitalized, well managed and
have significant capital improvement and resort real estate development
programs.
The Company's resorts also face strong competition on a regional basis.
With approximately three million skier visits generated by its northeastern
resorts, competition in that region is an important consideration. The Company's
northeastern markets are the major population centers in the northeast,
particularly eastern Massachusetts, northern Connecticut, New York and northern
New Jersey. For example, skier origin data collected at Sunday River indicates
that approximately 43% of its weekend skiers reside in Massachusetts. Similar
data collected at Killington and Mount Snow indicate that approximately 23% and
35%, respectively, of their weekend skiers reside in New York, with high
concentrations from Massachusetts, Connecticut, New Jersey and Vermont. The
Colorado, Utah and California ski markets are also highly competitive.
13
Employees and Labor Relations
The Company employs approximately 12,140 employees at peak season and
approximately 1,700 persons full time. None of the Company's employees are
covered by any collective bargaining agreements. The Company believes it has
good relations with its employees.
Government Regulation
The Company's resorts are subject to a wide variety of federal, state,
regional and local laws and regulations relating to land use,
environmental/health and safety, water resources, air and water emissions,
sewage disposal, and the use, storage, discharge, emission and disposal of
hazardous materials and hazardous and nonhazardous wastes, and other
environmental matters. While management believes that the Company's resorts are
currently in material compliance with all land use and environmental laws,
failure to comply with such laws could result in costs to satisfy environmental
compliance and/or remediation requirements or the imposition of severe penalties
or restrictions on operations by government agencies or courts that could
adversely affect the Company's future operations. Phase I environmental
assessments have been completed on substantially all of the real estate owned or
controlled by the Company. The reports identified areas of potential
environmental concern including the need to upgrade existing underground storage
tanks at several facilities and to potentially remediate petroleum releases. The
reports did not, however, identify any environmental conditions or
non-compliance at any of the Company's properties, the remediation or correction
of which management believes would have a material adverse impact on the
business or financial condition of the Company or results of operations or cash
flows.
The Company believes it has all permits, licenses and approvals from
governmental authorities material to its operations as currently configured. The
Company has not received any notice of material non-compliance with permits,
licenses or approvals necessary for the operation of any of its properties.
The Company's resort and real estate capital programs require permits
and approvals from certain federal, state, regional and local authorities. The
Company's operations are heavily dependent upon its continued ability, under
applicable laws, regulations, policies, permits, licenses or contractual
arrangements, to have access to adequate supplies of water with which to make
snow and service the other needs of its facilities, and otherwise to conduct its
operations. There can be no assurance that new applications of existing laws,
regulations and policies, or changes in such laws, regulations and policies will
not occur in a manner that would have a material adverse effect on the Company,
or that important permits, licenses or agreements will not be canceled, not
renewed, or renewed on terms no less favorable to the Company. Major expansions
of any one or more resorts could require the filing of an environmental impact
statement under environmental laws and applicable regulations if it is
determined that the expansion has a significant impact upon the environment and
could require numerous other federal, state and/or local approvals. Although the
Company has consistently been successful in implementing its capital expansion
plans, no assurance can be given that necessary permits and approvals will be
obtained.
Item 2
Properties
The Company's resorts include several of the top resorts in the United
States, including: (i) Steamboat, the fourth largest ski resort in the United
States with over 1.0 million skier visits in the 1998-99 ski season; (ii)
Killington, the fifth largest resort in the United States with over
approximately 978,000 skier visits in the 1998-99 ski season; (iii) three of the
four largest resorts in the Northeast (Killington, Sunday River and Mount
Snow/Haystack) in the 1998-99 ski season; and (iv) Heavenly, which ranked as the
second largest resort in the Pacific West region for the 1998-99 season with a
resort record 932,000 skier visits. The following table summarizes certain key
statistics of the Company's resorts:
14
----------------------------- ------------- --------- -------- ------------ -------------- --------- ------------
Skiable Vertical Snowmaking 1998-99
Terrain Drop Total Coverage Ski Skier
Resort (acres) (feet) Trails Lifts (% of acres) Lodges Visits
(high-speed) (000s)
----------------------------- ------------- --------- -------- ------------ -------------- --------- ------------
Killington 1,200 3,150 200 33(6) 70.0% 8 978
Sunday River 654 2,340 126 18(4) 93.3 4 526
Mount Snow/Haystack 631 1,700 133 25(3) 79.0 5 513
Sugarloaf 1,400 2,820 126 14(2) 35.0 1 329
Sugarbush 439 2,650 115 18(4) 66.1 5 368
Attitash Bear Peak 280 1,750 68 12(2) 89.7 2 210
The Canyons 3,300 3,190 63 13(9) 4.5 2 220
Steamboat 2,939 3,668 141 20(4) 14.9 4 1,013
Heavenly 4,800 3,500 82 27(6) 5.7 7 932
----------------------------- ------------- --------- -------- ------------ -------------- --------- ------------
Total 15,643 1,054 180(40) 38 5,089
----------------------------- ------------- --------- -------- ------------ -------------- --------- ------------
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 has pending
claims and is 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, until early fiscal 1999, provided
liability and workers' compensation coverage for its resorts located in Vermont.
The Company currently does not use the captive insurance subsidiary to provide
liability and workers' compensation insurance coverage, but it is still
responsible for any future claims arising from insurable events which may have
occurred while this coverage was being provided by the captive insurance
subsidiary. The captive insurance subsidiary maintains cash reserves in amounts
recommended by an independent actuarial firm, which management believes to be
adequate to cover any such claims.
The Killington resort has been identified by the U.S. Environmental
Protection Agency (the "EPA") as a potentially responsible party ("PRP") at two
sites pursuant to the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA" or "Superfund"). Killington has entered into a
settlement agreement with the EPA at one of the sites, the Solvents Recovery
Service of New England Superfund site in Southington, Connecticut. Killington
rejected an offer to enter into a de minimis settlement with the EPA for the
other site, the PSC Resources Superfund site in Palmer, Massachusetts, on the
basis that Killington disputes its designation as a PRP. In addition, the
Company recently received notification that its Heavenly resort is expected to
be designated as a PRP at a Superfund site in Patterson, CA. The Company has yet
to be officially designated with respect to this site. The Company believes that
its liability for these Superfund sites, individually and in the aggregate, will
not have a material adverse effect on the business or financial condition of the
Company or results of operations or cash flows.
Item 4
Submission of Matters to a Vote of Security Holders
Not applicable.
15
PART II
Item 5
Market for the Registrant's Common Equity and
Related Security Holder Matters.
The Company's Common Stock is traded on the New York Stock Exchange
under the symbol "SKI". The Company's Class A Common Stock is not listed on any
exchange and is not publicly traded, but is convertable into Common Stock of the
Company. As of October 20, 1999, 30,286,773 shares of common stock were issued
and outstanding, of which 14,760,530 shares were Class A Common Stock held by
one holder and 15,526,243 shares of Common Stock held by approximately 5,000
holders.
The following table sets forth, for the fiscal quarters indicated, the
range of high and low sale prices of the Company's Common Stock as reported on
the NYSE Composite Tape.
American Skiing Company Common Stock
Fiscal 1999 Fiscal 1998
High Low High Low
1st Quarter $12.50 $ 5.19 ----- -----
2nd Quarter $10.25 $ 4.75 $17.00 $13.00
3rd Quarter $ 5.75 $ 3.06 $16.88 $12.94
4th Quarter $ 5.50 $ 2.38 $14.13 $12.13
Market Information
The Company has not declared or paid any cash dividends on its capital
stock. The Company currently intends to retain earnings, if any, to support its
capital improvement and growth strategies and does not anticipate paying cash
dividends on its Common Stock in the foreseeable future. Payment of future
dividends, if any, will be at the discretion of the Company's Board of Directors
after taking into account various factors, including the Company's financial
condition, operating results, current and anticipated cash needs and plans for
capital improvements and expansion. Each of (i) the Indenture governing the
Company's 12% Senior Subordinated Notes due 2006, (ii) the Company's $165
million Senior Credit Facility with BankBoston, N.A. (as described below), and
(iii) the terms of the Company's 10.5% Mandatorily Redeemable Preferred Stock
contains certain restrictive covenants that, among other things, limit the
payment of dividends or the making of distributions on equity interests of the
Company. See Part II, Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
16
Item 6
Selected Financial Data
The following selected historical financial data of the Company have
been derived from the financial statements of the Company audited by Arthur
Andersen LLP, independent accountants as of and for the fiscal year ended July
25, 1999; and for the years ended July 30, 1995, July 28, 1996, July 27, 1997
and July 26, 1998 have been derived from the financial statements of the Company
audited by PricewaterhouseCoopers LLP, independent accountants.
Historical Year Ended (1)
July 30, 1995 July 28, 1996 July 27, 1997 July 26, 1998 July 25, 1999
(in thousands, except per share, real estate units,
and per skier visit amounts)
Consolidated Statement of Operations Data:
Net revenues:
Resort (2) $46,794 $63,489 $163,310 $277,574 $292,558
Real estate 7,953 9,933 10,721 60,992 24,492
------------ ------------ ------------ ------------ ------------
Total net revenues
54,747 73,422 174,031 338,566 317,050
Operating expenses:
Resort 29,725 41,799 107,230 171,246 198,231
Real estate 3,994 5,844 8,950 43,554 26,808
Marketing, general and administrative 9,394 11,289 25,173 40,058 51,434
Stock compensation charge (3) - - - 14,254 -
Depreciation and amortization 3,910 6,783 18,293 37,965 44,202
------------ ------------ ------------ ------------ ------------
Total operating expenses 47,023 65,715 159,646 307,077 320,675
------------ ------------ ------------ ------------ ------------
Income (loss) from operations 7,724 7,707 14,385 31,489 (3,625)
Other expenses:
Commitment fee - 1,447 - - -
Interest expense 2,205 4,699 23,730 34,575 39,382
------------ ------------ ------------ ------------ ------------
Income (loss) before provision (benefit)
for income taxes and minority interest in
loss of subsidiary 5,519 1,561 (9,345) (3,086) (43,007)
Provision (benefit) for income taxes 400 3,906 (3,613) (774) (15,057)
Minority interest in loss of subsidiary - (108) (250) (445) -
------------ ------------ ------------ ------------ ------------
Income (loss) before extraordinary items 5,119 (2,237) (5,482) (1,867) (27,950)
Extraordinary loss, net of income tax
benefit - - - 5,081 -
------------ ------------ ------------ ------------ ------------
Income (loss) before preferred stock
dividends 5,119 (2,237) (5,482) (6,948) (27,950)
Accretion of discount and issuance costs
and dividends accrued on mandatorily
redeemable preferred stock - - 444 5,346 4,372
------------ ------------ ------------ ------------ ------------
Net income (loss) available to common
shareholders $5,119 ($2,237) ($5,926) ($12,294) ($32,322)
============ ============ ============ ============ ============
Basic and fully diluted loss per share:
Loss before extraordinary items - ($2.37) ($6.06) ($0.28) ($1.07)
Extraordinary loss - - - (0.20) -
------------ ------------ ------------ ------------ ------------
Net loss available to common shareholders - ($2.37) ($6.06) ($0.48) ($1.07)
============ ============ ============ ============ ============
Weighted average shares outstanding - 942 978 25,809 30,286
============ ============ ============ ============ ============
17
Other Data:
Resort:
Skier visits (000's)(4) 1,060 1,290 3,025 5,319 5,089
Season pass holders (000's) 11.2 13.2 30.9 44.1 44.2
Resort revenues per skier visit $44.15 $49.22 $53.99 $52.19 $57.48
Resort EBITDA(5)(6) $7,675 $10,401 $30,907 $66,270 $42,893
Real estate:
Number of units sold 163 177 123 1,009 1,290
Number of units pre-sold(7) - 109 605 861 1,151
Real estate EBIT(6)(8) $3,959 $4,089 $1,771 $17,438 ($2,316)
Statement of Cash Flows Data:
Cash flows from (used in) operations $12,593 $7,465 $6,788 $8,708 ($77,235)
Cash flows used in investing activities (13,843) (122,583) (14,070) (384,303) (37,486)
Cash flows from financing activities 2,399 116,941 19,655 375,407 108,354
Balance Sheet Data:
Total assets $72,434 $298,732 $337,340 $780,899 $907,502
Mandatorily redeemable preferred stock - - 16,821 39,464 43,836
Long term debt, including current
maturities - 210,720 236,330 383,220 502,461
Common shareholders' equity 30,502 21,903 15,101 268,204 236,655
<FN>
(1) The historical results of the Company reflect the results of operations of
the Attitash Bear Peak ski resort since its acquisition in July 1994, the
results of operations of the Sugarbush ski resort since October 1994, the
results of operations of the Mount Cranmore ski resort from its acquisition in
June 1995 through its divestiture in November 1996, the results of operation of
S-K-I Ltd. since its acquisition in June 1996, the results of operation of Pico
Mountain since its acquisition in November 1996, the results of operations of
The Canyons resort since its acquisition in July 1999 and the results of
operations of the Steamboat and Heavenly resorts since their acquisition in
November 1997.
(2) Resort revenues represents all revenues excluding revenues generated by the
sale of real estate interests.
(3)In the first quarter of fiscal 1998, the Company granted to certain executive
officers and other employees fully vested options to purchase 511,530 shares of
Common Stock at an exercise price of $2.00 per share. The Company also agreed to
pay certain tax liabilities which the recipients of the options expect to incur
upon exercise of the options. Because the $2.00 per share exercise price was
below the fair market value of a share of Common Stock on the date of grant, the
Company recognized a one-time compensation charge of $14.3 million in fiscal
1998.
(4)For the purposes of estimating skier visits, the Company assumes that a
season pass holder visits the Company's resorts a number of times that
approximates the average cost of a season pass divided by the average daily lift
ticket price.
(5)Resort EBITDA represents resort revenues less cost of resort operations and
marketing, general and administrative expense.
(6)Resort EBITDA and Real Estate EBIT are not measurements calculated in
accordance with GAAP and should not be considered as alternatives to operating
or net income as an indicator of operating performance, cash flows as a measure
of liquidity or any other GAAP determined measurement. Certain items excluded
from Resort EBITDA and/or Real Estate EBIT, such as depreciation, amortization
and non-cash charges for stock compensation awards and asset impairments are
significant components in understanding and assessing the Company's financial
performance. Other companies may define Resort EBITDA and Real Estate EBIT
differently, and as a result, such measures may not be comparable to the
Company's Resort EBITDA and Real Estate EBIT. The Company has included
information concerning Resort EBITDA and Real Estate EBIT because management
believes they are indicative measures of the Company's liquidity and financial
position, and are generally used by investors to evaluate companies in the
resort industry.
(7)Pre-sold units represent quartershare and other residential units for which
the Company has a binding sales contract, subject to certain closing conditions,
and has received a 5% down payment on the unit from the purchaser. Recognition
of the revenue from such pre-sales is deferred until the period in which such
sales are closed.
(8)Real Estate EBIT represents revenues from real estate sales less cost of real
estate sold, including selling costs, holding costs, the allocated capitalized
cost of land, construction costs and other costs relating to property sold.
</FN>
18
Item 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
The following is management's discussion and analysis of financial
condition and results of operations for the twelve months ended July 25, 1999.
As you read the material below, we urge you to carefully consider our
Consolidated Financial Statements and related notes contained elsewhere in this
report.
The Oak Hill Transaction. On August 9, 1999, the Company consummated
the sale of 150,000 shares of its Series B Convertible Exchangeable Preferred
Stock (the "Series B Preferred Stock") to Oak Hill Capital Partners, L.P. and
certain related entities ("Oak Hill"). The Company realized gross proceeds of
$150 million on the Series B Preferred Stock sale. The Company used $128.6
million of the proceeds to reduce indebtedness under its Senior Credit Facility
(as described below), approximately $30 million of which will be reborrowed and
invested in the Company's principal real estate development subsidiary, American
Skiing Company Resort Properties, Inc., ("Resort Properties"). The remainder of
the proceeds were used to (1) pay approximately $16 million in fees and expenses
in connection with the Series B Preferred Stock sale and related transactions,
and (2) acquire from the Company's principal shareholder certain strategic
assets and to repay a demand note issued by a subsidiary of the Company to the
Company's principal shareholder, in the aggregate amount of $5.4 million. As a
result of these transactions, management believes that its current capital
resources are sufficient both to fund operations at its resorts and to complete
those real estate projects which are currently under construction. As more fully
discussed below, the Company's ability to commence and complete new real estate
development projects will be dependent upon the Company's ability to raise
additional capital and Resort Properties' ability to obtain additional
non-recourse financing.
In connection with the Series B Preferred Stock sale, the Company
obtained consents (1) from lenders and creditors of the Company stating that the
Series B Preferred Stock sale would not constitute a "change of control" under
the relevant loan agreements, (2) from the holders of the 10.5% Senior Preferred
Stock of the Company approving the issuance of the Series B Preferred Stock and
the terms of such stock and (3) from noteholders under the Indenture relating to
the 12% Senior Subordinated Notes due 2006 of the Company's subsidiary, ASC East
(the "Indenture"), approving the merger of ASC East into the Company and certain
other amendments to the Indenture.
In connection with the Series B Preferred Stock sale, the Company
simplified its capital structure by merging its two principal subsidiaries, ASC
East and ASC West, with and into the Parent. In connection with the merger, the
Parent assumed all liabilities of ASC East and ASC West and became the primary
obligor under certain credit facilities and under the Indenture. In addition,
the then current subsidiaries of the Parent and ASC West, as well as ASC Utah,
also became additional guarantors under the Indenture. As a result of the
merger: (a) ASC East is no longer required to file annual reports and make other
filings under the regulations of the Securities Exchange Act of 1934; (b) the
Company's capital structure has been simplified, which is expected to make it
easier to raise capital in the future and administer the operations of the
Company; (c) the capital and assets of ASC East and its subsidiaries are
available to satisfy the obligations of ASC West and its subsidiaries under the
Company's Senior Credit Facility (described below); and (d) the Parent and its
subsidiaries are now subject to the covenants and other restrictions contained
in the Indenture.
As a result of the additional guarantee given by certain subsidiaries
of the Company, the noteholders under the Indenture will have priority over the
equity holders of the Company with respect to any claims made on the assets of
those subsidiaries until the obligations under the Indenture have been
satisfied.
Liquidity and Capital Resources
Short-Term. The Company's primary short-term liquidity needs are
funding seasonal working capital requirements, continuing and completing real
estate development projects presently under construction, funding its fiscal
2000 capital improvement program and servicing indebtedness. Cash requirements
for ski-related and real estate development activities are provided by separate
sources. The Company's primary sources of liquidity for ski-related working
capital and ski-related capital improvements are cash flow from operations of
its non-real estate subsidiaries and borrowings under the Senior Credit Facility
(as hereinafter defined). Real estate development and real estate working
capital is funded primarily through (i) construction financing facilities
established for major real estate development projects, (ii) the expected $30
million equity contribution made available from the proceeds of the Series B
Preferred Stock sale and (iii) through a $58 million term loan facility
established through Resort Properties (the "Resort Properties Term Facility").
These construction financing facilities and Resort Properties Term Facility
(collectively, the "Real Estate Facilities") are without recourse to the Company
and its resort operating subsidiaries. The Real Estate Facilities are
collateralized by significant real estate assets of Resort Properties and its
subsidiaries, including, without limitation, the assets and stock of Grand
Summit Resort Properties, Inc. ("GSRP"), the Company's primary hotel development
subsidiary. As of July 25, 1999, the book value of the total assets that
collateralized the Real Estate Facilities, and are included in the accompanying
consolidated balance sheet, were approximately $247.3 million.
Resort Liquidity. The Company established a senior credit facility on
November 12, 1997. On October 7, 1999, this senior credit facility was amended,
restated and consolidated from two sub-facilities totaling $215 million to a
single facility totaling $165 million ($74.1 million of which was available for
borrowings at October 7, 1999, which includes $25 million the Company intends to
19
transfer to Resort Properties in fiscal 2000) (the "Senior Credit Facility").
The Senior Credit Facility consists of a revolving credit facility in the amount
of $100 million and a term facility in the amount of $65 million. The revolving
portion of the Senior Credit Facility matures on May 30, 2004, and the term
portion matures on May 31, 2006.
The Senior Credit Facility contains restrictions on the payment of
dividends by the Company on its common stock. Those restrictions prohibit the
payment of dividends in excess of 50% of the Company's consolidated net income
after July 31, 1997, and further prohibit the payment of dividends under any
circumstances when the effect of such payment would be to cause the Company's
debt to EBITDA ratio (as defined within the credit agreement) to exceed 4.0 to
1. Based upon these restrictions (as well as additional restrictions discussed
below), the Company does not expect that it will be able to pay cash dividends
on its common stock, 10.5% Senior Preferred Stock or Series B Senior Preferred
Stock in the foreseeable future.
The maximum availability under the revolving facility will reduce over
the term of the Senior Credit Facility by certain prescribed amounts. The term
facility amortizes at an annual rate of approximately 1.0% of the principal
amount for the first four years with the remaining portion of the principal due
in two substantially equal installments in years five and six. The Senior Credit
Facility requires mandatory prepayment of 50% of the Company's excess cash flows
during any period in which the ratio of the Company's total senior debt to
EBITDA exceeds 3.50 to 1. In no event, however, will such mandatory prepayments
reduce the revolving facility commitment below $74.8 million. Management does
not presently expect to generate excess cash flows, as defined in the Senior
Credit Facility, during fiscal 2000 or fiscal 2001.
The Senior Credit Facility contains affirmative, negative and financial
covenants customary for this type of credit facility, including maintenance of
certain financial ratios. The Senior Credit Facility is collateralized by
substantially all the assets of the Company, except its real estate development
subsidiaries (consisting of Resort Properties and its subsidiaries), which are
not borrowers under the Senior Credit Facility. The revolving facility is
subject to an annual 30-day clean down requirement to an outstanding balance of
not more than $35 million, which clean down period must include April 30 of each
fiscal year.
Based upon historical operations, management presently anticipates that
the Company will be able to meet the financial covenants of the Senior Credit
Facility. Failure to meet one or more of these covenants could result in an
event of default under the Senior Credit Facility. In the event that such
default were not waived by the lenders holding a majority of the debt under the
Senior Credit Facility, such default would also constitute defaults under one or
more of the Textron Facility, the Key Facility (each as hereinafter defined),
the Resort Properties Term Facility and the Indenture, the consequences of which
would likely be material and adverse to the Company.
The Senior Credit Facility also places a maximum level of non-real
estate capital expenditures for fiscal 2000 of $23.1 million (exclusive of
certain capital expenditures in connection with the sale of the Series B
Preferred Stock). Following fiscal 2000, annual resort capital expenditures
(exclusive of real estate capital expenditures) are capped at the lesser of (i)
$35 million or (ii) the total of consolidated EBITDA (as defined therein) for
the four fiscal quarters ended in April of the previous fiscal year less
consolidated debt service for the same period. In addition to the foregoing
amounts, the Company is permitted to and expects to make capital expenditures of
up to $30 million for the purchase and construction of a new gondola at its
Heavenly resort in Lake Tahoe, Nevada, which the Company currently plans to
construct during the 2000 and 2001 fiscal years.
20
The Company intends to use borrowings under the Senior Credit Facility
for seasonal working capital needs, certain capital improvements and to build
retail and other inventories prior to the start of the 1999-2000 ski season. The
Company expects to maximize borrowings under the Senior Credit Facility sometime
between October and November of 1999. During this period, the Company
historically has had little, if any, borrowing availability under the Senior
Credit Facility. However, as a result of the sale of the Series B Preferred
Stock and the resulting paydown in the balance of the revolving portion of the
Senior Credit Facility, in Fiscal 2000 management expects that the Company will
have significant additional borrowing availability under the Senior Credit
Facility during this period.
The Company's liquidity is significantly affected by its high leverage.
As a result of its leveraged position, the Company will have significant cash
requirements to service interest and principal payments on its debt.
Consequently, cash availability for working capital needs, capital expenditures
and acquisitions is very limited, outside of the availability under the Senior
Credit Facility. Furthermore, the Senior Credit Facility and the Indenture each
contain significant restrictions on the ability of the Company and its
subsidiaries to obtain additional sources of capital and may affect the
Company's liquidity. These restrictions include restrictions on the sale of
assets, restrictions on the incurrence of additional indebtedness and
restrictions on the issuance of preferred stock.
On October 6, 1999, the Parent merged with two of its subsidiaries, ASC
East, Inc. and ASC West, Inc. In connection with this merger, the Parent assumed
the obligations of ASC East, Inc. under the Indenture, and each of the material
subsidiaries of ASC West, Inc. granted guarantees to secure the obligations of
the Parent under the Indenture. Each of the material subsidiaries of ASC East,
Inc. had previously granted guarantees to secure the obligations under the
Indenture. By assuming the obligations of ASC East under the Indenture, the
Company removed a significant impediment to the free flow of cash among its
subsidiaries and allowed for the consolidation of the Senior Credit Facility.
The assumption also subjects the Parent and its subsidiaries, ASC Utah and the
subsidiaries of ASC West, Inc. to the restrictions on dividends, indebtedness,
and other covenants contained in the Indenture. Management believes that the
simplified capital structure which resulted from the merger and the assumption
of the Indenture obligations will benefit the Company as it pursues additional
financing or other capital sources.
Under the Indenture, the Company is prohibited from paying cash
dividends or making other distributions to its shareholders, except under
certain circumstances (which are not currently applicable and are not
anticipated to be applicable in the foreseeable future).
The Company issued $17.5 million of convertible preferred stock and
$17.5 million of convertible notes in July, 1997 to fund development at The
Canyons. These securities were converted on November 12, 1997 into Mandatorily
Redeemable 10 1/2% Preferred Stock of the Company. The Mandatorily Redeemable 10
1/2% Preferred Stock is exchangeable at the option of the holder into shares of
the Company's common stock at a conversion price of $17.10 for each common
share. In the event that the Mandatorily Redeemable 10 1/2% Preferred Stock is
held to its maturity date of November 15, 2002, the Company will be required to
pay the holders the face value of $36.6 million plus dividends in arrears. So
long as the Mandatorily Redeemable 10 1/2% Preferred Stock remains outstanding,
the Company may not pay any cash dividends on its common stock or Series B
Preferred Stock unless accrued and unpaid dividends on the Mandatorily
Redeemable 10 1/2% Preferred Stock have been paid in cash on the most recent due
date. Because the Company has been accruing unpaid dividends on the Mandatorily
Redeemable 10 1/2% Preferred Stock, the Company is not presently able to pay
cash dividends on its common stock or Series B Preferred Stock and management
does not expect that the Company will have this ability in the near future.
Real Estate Liquidity: Interim funding of working capital for Resort
Properties and its fiscal 1999 real estate development program was obtained
through a loan from BankBoston, N.A. in the maximum amount of $30 million, which
closed on September 4, 1998 (the "Bridge Loan"). On January 8, 1999, the Bridge
Loan was repaid with proceeds from a term loan facility between BankBoston and
Resort Properties in the maximum principal amount of $58 million (the "Resort
Properties Term Facility"). The Resort Properties Term Facility bears interest
at a variable rate equal to BankBoston's base rate plus 8.25%, or a current rate
of 16.5% per annum (payable monthly in arrears), and matures on June 30, 2001.
As of October 1, 1999, $52.8 million was outstanding under the Resort Properties
Term Facility. The Resort Properties Term Facility is collateralized by security
interests in, and mortgages on, substantially all of Resort Properties' assets,
which primarily consist of undeveloped real property and the stock of its real
estate development subsidiaries (including GSRP). As of July 25, 1999, the book
value of the total assets that collateralized the Resort Properties Term
Facility, and are included in the accompanying consolidated balance sheet, was
approximately $247.3 million. The Resort Properties Term Facility is
non-recourse to the Company and its resort operating subsidiaries.
In conjunction with the Resort Properties Term Facility, Resort
Properties entered into a syndication letter with BankBoston (the "Syndication
Letter") pursuant to which BankBoston agreed to syndicate up to $43 million of
the Resort Properties Term Facility. Under the terms of the Syndication Letter,
one or more of the terms of the Resort Properties Term Facility (excepting
certain terms such as the maturity date and commitment fee) may be altered
depending on the requirements for syndication of the facility. However, no
alteration of the terms of the facility may occur without the consent of Resort
Properties. Although Resort Properties expects the terms of the Resort
Properties Term Facility to remain substantially similar to those discussed
21
above, one or more of such terms could be altered in order to syndicate the
facility, and such alterations could be material and adverse to the Company. As
of October 1, 1999, BankBoston was actively engaged in syndicating the Resort
Properties Term Facility, however, no syndication participants were committed as
of that date. The Syndication Letter also provides that, in the event that
BankBoston is unable to syndicate at least $33 million of the Resort Properties
Term Facility, then BankBoston may at its option, require repayment of the
outstanding balance of the facility within 120 days of its request for repayment
by Resort Properties If the syndication is unsuccessful and BankBoston were to
require repayment, there can be no assurance that the Company could secure
replacement financing for the Resort Properties Term Facility. The failure to
secure replacement financing on terms similar to those existing under the Resort
Properties Term Facility could result in a material adverse effect on the
liquidity of Resort Properties and its subsidiaries, including GSRP, and could
also result in a default under the Indenture and the Senior Credit Facility.
The Company runs substantially all of its real estate development
through single purpose subsidiaries, each of which is a wholly-owned subsidiary
of Resort Properties. In its fourth fiscal quarter of 1998, the Company
commenced construction on three new hotel projects (two at The Canyons in Utah
and one at Steamboat in Colorado). Two of these new hotel projects are Grand
Summit Hotels which are being constructed by GSRP. The Grand Summit Hotels at
The Canyons and Steamboat are being financed through a construction loan
facility among GSRP and various lenders, including TFC Textron Financial, the
syndication agent and administrative agent, which closed on September 25, 1998
(the "Textron Facility").
As of October 1, 1999, the amount outstanding under the Textron
Facility was $75.2 million. The Textron Facility matures on September 24, 2002
and bears interest at the rate of prime plus 2.5% per annum. The principal of
the Textron Facility is payable incrementally as quartershare sales are closed
based on a predetermined per unit amount, which approximates 80% of the net
proceeds of each closing. The Textron Facility is collateralized by mortgages
against the project sites (including the completed Grand Summit Hotels at
Killington, Mt. Snow, Sunday River and Attitash Bear Peak), and is subject to
covenants, representations and warranties customary for this type of
construction facility. The Textron Facility is non-recourse to the Company and
its resort operating subsidiaries (although it is collateralized by substantial
assets of GSRP, $165.7 million as of July 25, 1999) which comprise substantial
assets of the Company.
The remaining hotel project commenced by the Company in 1998, the
Sundial Lodge project at The Canyons, is being financed through a construction
loan facility between Canyons Resort Properties, Inc., (a wholly-owned
subsidiary of Resort Properties) and KeyBank, N.A. (the "Key Facility"). The Key
Facility has a maximum principal amount of $29 million, bears interest at a rate
of prime plus 1/4% per annum (payable monthly in arrears), and matures on June
30, 2000. Additional costs (approximately $8 million) for the Sundial Lodge
project have been financed through proceeds of the Resort Properties Term
Facility, which have been loaned on an intercompany basis by Resort Properties
to Canyons Resort Properties, Inc. The Key Facility closed on December 19, 1998.
The Company began drawing under the Key Facility in late April of 1999,
following completion of the required equity contribution (approximately $8
million) of the Company in the Sundial Lodge project. The Company had $12.3
million in advances outstanding under the Key Facility as of October 1, 1999.
The Key Facility is collateralized by a mortgage and security interest in the
Sundial Lodge project, a $5.8 million payment guaranty of Resort Properties, and
a full completion guaranty of Resort Properties. The Key Facility is
non-recourse to the Company and its resort operating subsidiaries (although it
is collateralized by substantial assets of Resort Properties and its
subsidiaries). As of July 25, 1999, the book value of the total assets that
collateralized the Real Estate Facilities, and are included in the accompanying
consolidated balance sheet, were approximately $247.3 million.
Long-Term. The Company's primary long-term liquidity needs are to fund
skiing related capital improvements at certain of its resorts and development of
its slope side real estate. The Company has invested over $145.5 million in
skiing related facilities in fiscal years 1998 and 1999 combined. As a result,
the Company expects its resort capital programs for the next several fiscal
years will be more limited in size. The Company's fiscal 2000 resort capital
program is estimated at approximately $23 million, plus such additional amounts
as are expended on the Heavenly Gondola project.
The Company's largest long-term capital needs relate to certain resort
capital expenditure projects and the Company's real estate development program.
For the next two fiscal years, the Company anticipates its annual maintenance
capital needs to be approximately $12 million. There is a considerable degree of
flexibility in the timing and, to a lesser degree, scope of the Company's growth
capital program. Although specific capital expenditures can be deferred for
extended periods, continued growth of skier visits, revenues and profitability
will require continued capital investment in on-mountain improvements. The
22
Company's practice is to finance on-mountain capital improvements through resort
cash flow and its Senior Credit Facility. The size and scope of the capital
improvement program will generally be determined annually depending upon future
availability of cash flow from each season's resort operations and future
borrowing availability and covenant restrictions under the Senior Credit
Facility. The Senior Credit Facility places a maximum level of non-real estate
capital expenditures for fiscal 2001 and beyond at the lesser of (i) $35 million
or (ii) the total of (a) consolidated EBITDA (as defined therein) for the four
fiscal quarters ended in April of the previous fiscal year less (b) consolidated
debt service for the same period. Management believes that these capital
expenditure amounts will be sufficient to meet the Company's needs for non-real
estate capital expenditures for the near future.
The Company's business plan anticipates the development of both Grand
Summit hotels and condominium hotels at several resorts, as well as resort
villages at Sunday River, Killington, The Canyons, Steamboat and Heavenly. The
timing and extent of these projects are subject to local and state permitting
requirements which may be beyond the Company's control, as well as to the
Company's cash flow requirements and availability of external capital.
Substantially all of the Company's real estate development is undertaken through
the Company's real estate development subsidiary, Resort Properties. Recourse on
indebtedness incurred to finance this real estate development is limited to
Resort Properties and/or its subsidiaries (including GSRP). Such indebtedness is
generally collateralized by the projects financed under the particular
indebtedness which, in some cases, constitutes a significant portion of the
assets of the Company. As of July 25, 1999, the total assets that collateralized
the Real Estate Facilities, and are included in the accompanying consolidated
balance sheet, totaled approximately $247.3 million. Resort Properties' seven
existing development projects are currently being funded by the Resort
Properties Term Facility, the Textron Facility and the Key Facility.
The Company expects to undertake future real estate development
projects through special purpose subsidiaries with financing provided
principally on a non-recourse basis to the Company and its resort operating
subsidiaries. Although this financing is expected to be non-recourse to the
Company and its resort subsidiaries, it will likely be collateralized by
existing and future real estate projects of the Company which may constitute
significant assets of the Company. Required equity contributions for these
projects must be generated before those projects can be undertaken, and the
projects are subject to mandatory pre-sale requirements under the Resort
Properties Term Facility. Potential sources of equity contributions include
sales proceeds from existing real estate projects and assets, (to the extent not
applied to the repayment of indebtedness) and potential sales of equity
interests in Resort Properties and/or its real estate development subsidiaries.
Financing commitments for future real estate development do not currently exist,
and no assurance can be given that they will be available on satisfactory terms.
The Company will be required to establish both equity sources and construction
facilities or other financing arrangements for these projects before undertaking
each development.
The Company from time to time considers potential acquisitions which,
based upon the historical performance of the target entities, are expected to be
accretive to earnings. There are not currently any funding sources immediately
available to the Company for such acquisitions. The Company would need to
establish such sources prior to consummating any such acquisition.
23
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 27,1997 July 26,1998 July 25,1999
Net revenues:
Resort 93.8% 82.0% 92.3%
Real estate 6.2% 18.0% 7.7%
--------------- -------------- --------------
Total net revenues 100.0% 100.0% 100.0%
--------------- -------------- --------------
Operating expenses:
Resort 61.6% 50.6% 62.5%
Real estate 5.1% 12.9% 8.5%
Marketing, general and administrative 14.5% 11.8% 16.2%
Stock compensation charge 0.0% 4.2% 0.0%
Depreciation and amortization 10.5% 11.2% 13.9%
--------------- -------------- --------------
Total operating expenses 91.7% 90.7% 101.1%
--------------- -------------- --------------
Income (loss) from operations 8.3% 9.3% (1.1%)
Interest expense 13.6% 10.2% 12.4%
--------------- -------------- --------------
Loss before benefit from income taxes
And minority interest in loss of subsidiary (5.4%) (0.9%) (13.5%)
Benefit from income taxes (2.1%) (0.2%) (4.7%)
Minority interest in loss of subsidiary (0.1%) (0.1%) 0.0%
--------------- -------------- --------------
Loss before extraordinary items (3.2%) (0.6%) (8.8%)
Extraordinary loss 0.0% 1.5% 0.0%
--------------- -------------- --------------
Net loss (3.2%) (2.1%) (8.8%)
Accretion of discount and dividends accrued
on mandatorily redeemable preferred stock 0.3% 1.6% 1.4%
--------------- -------------- --------------
Net loss available to common shareholders (3.4%) (3.6%) (10.2%)
=============== ============== ==============
24
Fiscal Year Ended July 25, 1999 ("Fiscal 1999")
Versus Fiscal Year Ended July 26, 1998 ("Fiscal 1998")
The actual results of Fiscal 1999 versus the actual results of Fiscal
1998 discussed below are not comparable due to the acquisition of the Steamboat
and Heavenly resorts on November 12, 1997. Accordingly, the usefulness of the
comparisons presented below is limited, as the Fiscal 1998 results include the
results of Steamboat and Heavenly since November 12, 1997, while the Fiscal 1999
results include all twelve months of results of Steamboat and Heavenly. The
following table illustrates the pro forma effect of the results of Steamboat and
Heavenly as if the purchase had occurred at the beginning of Fiscal 1998:
- -----------------------------------------------------------------------------------------------------------------
Actual Year Pro Forma Pro Forma Actual Pro Forma Increase/
Ended Effect on Year Ended Year Ended (Decrease)
Year Ended
July 26,1998 July 26,1998 July 26,1998 July 25,1999 Dollar Percent
- -----------------------------------------------------------------------------------------------------------------
Revenue category:
Lift Tickets $ 135.9 $ 0.0 $ 135.9 $ 134.5 $ (1.4) (1.0%)
Food and beverage 34.0 0.5 34.5 38.3 3.8 10.9%
Retail sales 37.4 1.6 39.0 41.5 2.5 6.4%
Lodging and property 27.5 0.1 27.6 31.6 4.0 14.4%
Skier development 22.4 0.0 22.4 24.2 1.8 8.0%
Golf, summer activities and
other 20.4 1.4 21.8 22.5 0.7 3.3%
------------- ----------- ------------- ------------ ---------- ---------
Total resort revenues $ 277.6 $ 3.6 $ 281.2 $ 292.6 $ 11.4 4.0%
------------- ----------- ------------- ------------ ---------- ---------
Cost of resort operations $ 171.2 $ 8.6 $ 179.8 $ 198.2 $ 18.4 10.2%
Marketing, general and
administrative 40.1 5.0 45.1 51.4 6.3 14.0%
Depreciation and amortizaiton 38.0 1.6 39.6 44.2 4.6 11.6%
- -----------------------------------------------------------------------------------------------------------------
25
Resort revenues increased $15.0 million or 5.4% from $277.6 million for
Fiscal 1998 to $292.6 million for Fiscal 1999. The pro forma effect of the
inclusion of the results from Steamboat and Heavenly resorts for the first
fiscal quarter of 1999 accounts for $3.6 million of the increase. The remaining
$11.4 million increase in resort revenues is broken out by revenue category in
the above table. The decrease in lift ticket revenues is derived from two
factors: 1) a 4.3% decrease in skier visits, due to unfavorable weather
conditions in New England and Colorado, resulted in an approximately $6.1
million decrease in lift ticket revenues; and 2) a 3.5% increase in lift ticket
yield, due mainly to price increases at Steamboat and Heavenly, offset this
decrease by approximately $4.7 million. Increases in food and beverage and
retail sales revenues are primarily attributable to additional food and beverage
and retail outlets. The increase in skier development revenues is mainly
associated with a new skier development program instituted in Fiscal 1999, which
corresponded with the opening of new Sprint Discovery Centers at four of the
Company's eastern resorts. The increase in lodging revenue is primarily due to
the full year of operations in Fiscal 1999 of three new Grand Summit Hotels
which opened during Fiscal 1998 (one each at Killington, Mount Snow and Sunday
River).
Real estate revenues decreased $36.5 million for Fiscal 1999 as
compared to Fiscal 1998. The decrease is attributable to the substantial
revenues recognized in Fiscal 1998 from closings on pre-sold quartershare units
at the Company's Grand Summit Hotels at Killington and Mt. Snow, and the Jordan
Grand Hotel at Sunday River. These projects were completed during the second and
third fiscal quarters of Fiscal 1998, and the Company realized $55.4 million in
sales revenue from these projects in Fiscal 1998. For Fiscal 1999 the Company
realized $18.4 million in on-going sales of quartershare units.
Cost of resort operations increased $27.0 million or 15.8% from $171.2
million to $198.2 million. The pro forma effect of the inclusion of the results
of Steamboat and Heavenly resorts for the first fiscal quarter of 1999 accounts
for $8.6 million of the increase. The majority of the remaining increase is
attributable to the following: a) $4.8 million in lodging costs associated with
a full year of operation of three new hotels; b) $1.2 million increase
associated with a new skier development program which included the operation of
four new Sprint Discovery Centers; c) $3.6 million in food and beverage and
retail costs associated with additional outlets and higher sales volume and the
liquidation of excess inventory during the fourth quarter of fiscal 1999; d)
$1.1 million increase in snowmaking due to the lack of natural snow at the
Company's eastern resorts; e) $1.5 million increase in property taxes due to
increased tax rates in Vermont and an increased asset base at The Canyons; and
f) $1.0 million increase in event costs associated with marketing sponsorship.
Cost of real estate sold decreased $16.7 million in Fiscal 1999
compared to Fiscal 1998. The decrease is attributable to the substantial cost
recognized in the third quarter of Fiscal 1998 from closings of pre-sold
quartershare units at the Company's Grand Summit Hotels at Killington and Mt.
Snow and the Jordan Grand Hotel at Sunday River. The cost associated with the
revenue realized for Fiscal Year 1998 totaled $32.0 million. The cost associated
with the on-going sales of these units in Fiscal 1999 totaled $10.9 million. The
$21.0 million decrease related to sales of quartershare units was offset by
other increases, due mainly to the following: a) $3.5 million of cost recognized
relating to the sale of land which was not of strategic importance to the
Company's real estate development plan or resort operations; b) the write-off of
$0.7 million in prepaid advertising and commission charges incurred in
generating pre-sale contracts, some of which have subsequently expired, for a
Grand Summit Hotel at the Company's Sugarbush resort (the timing of development
for the Sugarbush project is expected to be re-evaluated by the Company during
next year's skiing season); and c) $0.8 million of expenses were incurred during
the second quarter of Fiscal 1999 relating to the Company's unsuccessful $300
million bond offering which was undertaken to provide additional financing for
the Company's real estate projects.
Marketing, general and administrative expenses increased $11.3 million
or 28.2% from $40.1 million to $51.4 million. The inclusion of the results of
Steamboat and Heavenly resorts for the first fiscal quarter of 1999 accounts for
$5.0 million of the increase. The majority of the remaining increase is
attributable to the following: a) a planned increase in marketing expense at all
the resorts of $2.9 million; b) a stock compensation charge of $0.8 million
relating to the vesting of additional management stock options; c) $0.6 million
of additional expenses resulting from the expansion of management information
services; d) $2.0 million of severance payments and restructuring of management
compensation; and e) additional costs associated with being a public company.
Depreciation and amortization increased $6.2 million for Fiscal 1999
compared to Fiscal 1998. The inclusion of the Steamboat and Heavenly resorts for
26
the first fiscal quarter of 1999 accounts for $1.6 million of the increase. The
remaining increase is primarily due to additional depreciation on capital
improvements of approximately $53 million made this year. These increases are
slightly offset by the change in the estimated useful lives of certain of the
Company's ski-related assets, which decreased depreciation expense by $0.7
million.
Interest expense increased from $34.6 million for Fiscal 1998 to $39.4
million for Fiscal 1999. The increase is principally attributable to increased
debt levels associated with financing the Company's recent capital improvements
and real estate projects.
The benefit for income taxes increased from $0.8 million for Fiscal
1998 to $15.1 million for Fiscal 1999 due to the increase in the loss before
income taxes. The effective income tax rate increased from 25.1% in Fiscal 1998
to 35.0% in Fiscal 1999 due to the non-recurring stock option compensation
charge of $14.3 million in Fiscal 1998, not all of which was deductible for
income tax purposes.
Accretion of discount and dividends accrued on mandatorily redeemable
preferred stock decreased $0.9 million, or 17.0%, from $5.3 million for Fiscal
1998 to $4.4 million for Fiscal 1999. The decrease is primarily attributable to
$0.9 million in additional accretion recognized during Fiscal 1998 relating to a
conversion feature on the Company's Series A 14% Exchangeable Preferred Stock
that allowed holders of these securities to convert to shares of the Company's
Common Stock at a 5% discount to the Company's initial public offering price. An
additional $0.9 million of the decrease is due to amortization of issuance costs
recognized in Fiscal 1998 related to the Company's Series A 14% Exchangeable
Preferred Stock upon its conversion into 10 1/2 % Mandatorily Redeemable
Preferred Stock. These decreases were offset by an increase resulting from the
full twelve months accretion for Fiscal 1999 related to the 10 1/2 % Mandatorily
Redeemable Preferred Stock (as compared to only nine months in Fiscal 1998), and
the compounding effect of the dividend accrual.
Fiscal Year Ended July 26, 1998 ("Fiscal 1998")
Versus Fiscal Year Ended July 27, 1997 ("Fiscal 1997")
The actual results of Fiscal 1998 versus the actual results of Fiscal
1997 discussed below are not comparable due to the acquisition of the Steamboat
and Heavenly resorts on November 12, 1997, and the acquisition of The Canyons
resort in July 1997. Accordingly, the usefulness of the comparisons presented
below is limited, as the Fiscal 1998 results include the results of Steamboat
and Heavenly since November 12, 1997, while the Fiscal 1997 results do not
include any results for Steamboat and Heavenly. Likewise, the Fiscal 1998
results include the results of The Canyons for the entire year while the Fiscal
1997 results do not include any results for The Canyons.
Resort revenues increased $114.3 million or 70.0% from $163.3 million
for Fiscal 1997 to $277.6 million for Fiscal 1998. The Steamboat and Heavenly
resorts acquired on November 12, 1997, and The Canyons resort acquired in July
1997, accounted for $88.6 million of the increase. The remaining $25.7 million
represents an increase of 15.7% and is principally attributable to increases in
skier visits, the acquisition of new retail and food and beverage outlets, the
opening of three new hotels, and increased yields per skier visit at the
Company's pre-acquisition group of resorts.
Real estate revenues increased $50.3 million for Fiscal 1998 as
compared to Fiscal 1997. The increase is attributable to completion of the
Company's new quartershare condominium hotels at Killington, Mount Snow and
Sunday River and closings of quartershare sales at those projects.
Cost of resort operations increased $64.0 million or 59.7% from $107.2
million to $171.2 million. The acquisition of Steamboat, Heavenly, and The
Canyons resorts accounted for $53.9 million of the increase. The remaining $10.1
million represents an increase of 9.4% and is principally attributable to the
increases in skier visits, business volume, and new operations at the Company's
pre-acquisition resorts.
Cost of real estate sold increased $34.6 million in Fiscal 1998
compared to Fiscal 1997. The increase is attributable principally to increased
sales, as outlined above, and to non-capitalizeable costs associated with new
projects under development at Killington, The Canyons and Steamboat.
Marketing, general and administrative expenses increased 59.1% from
$25.2 million to $40.1 million. The inclusion of Steamboat, Heavenly and The
Canyons accounted for approximately $11.9 million of this increase. The
remaining $3.0 million represents a 11.9% increase attributable to increased
27
costs associated with the establishment of public holding company corporate
functions, including legal, accounting, shareholder relations, financial
analysis, management information system support functions, corporate marketing
initiatives involving the Edge card direct to lift and corporate wide
sponsorship programs.
The Company incurred a stock compensation charge of $14.3 million in
Fiscal 1998 associated with the grant of non-qualified stock options to certain
key members of senior management.
Depreciation and amortization increased $19.7 million for Fiscal 1998
compared to Fiscal 1997. The increase is principally attributable to the
acquisitions of Steamboat, Heavenly and The Canyons and the additional plant and
equipment related to the summer 1997 capital improvement program.
Interest expense increased from $23.7 million for Fiscal 1997 to $34.6
million for Fiscal 1998. The increase is principally attributable to the
Company's Senior Credit Facility, which was established contemporaneously with
the closing of its initial public offering and the acquisition of Steamboat and
Heavenly on November 12, 1997.
The benefit for income taxes decreased from $3.6 million for Fiscal
1997 to $0.8 million for Fiscal 1998 due to a decrease in the loss before income
taxes. The effective income tax rate decreased from 38.7% in Fiscal 1997 to
25.1% in Fiscal 1998 due to the non-recurring stock option compensation charge
of $14.3 million, not all of which is deductible for income tax purposes.
The extraordinary loss recorded by the Company results from the early
retirement of certain indebtedness in conjunction with the Company's initial
public offering in November, 1997, including the Company's then-existing
revolving line of credit, junior subordinated discount notes, and certain
indebtedness established upon acquisition of Sugarbush.
Accretion of discounts and dividends accrued on the mandatorily
redeemable preferred stock of $5.3 million in Fiscal 1998 represents the
accretion of the exchange feature, the amortization of the issuance costs and
the accrual of dividends relating to the Series A Exchangeable Preferred Stock
prior to its exchange. The activity in this component for Fiscal 1998 also
includes $2.8 million of dividends accrued on the 10 1/2% Mandatorily Redeemable
Preferred Stock subsequent to its exchange for the Series A Exchangeable
Preferred Stock on November 12, 1997.
Year 2000 Disclosure
Background. The "Year 2000 Problem" is the result of many existing
computer programs and embedded chip technologies containing programming code in
which calendar year data is abbreviated by using only two digits rather than
four to refer to a year. As a result of this, some of these programs fail to
operate or may not properly recognize a year that begins with "20" instead of
"19". This may cause such software to recognize a date using "00" as the year
1900 rather than the year 2000. Even systems and equipment that are not
typically thought of as computer-related often contain embedded hardware or
software that may improperly understand dates beginning with the year 2000.
Inability of systems to properly recognize the year 2000 could result in system
failure or miscalculations causing disruptions to operations, including
temporary inability to process transactions or engage in normal business
activities.
The Company has developed a Year 2000 task force with representation
throughout the organization. The task force has developed a comprehensive
strategy to systematically evaluate and update systems as appropriate. In some
cases, no system changes are necessary or the changes have already been made. In
all other cases, modifications are planned to prepare the Company's systems to
be Year 2000 compliant by November 1, 1999. The disclosure below addresses the
Company's Year 2000 Project.
28
Company's state of readiness. The Year 2000 Project is divided into
three initiatives: (i) Information Technology ("IT") Systems, (ii) Non-IT
Systems and (iii) related third party providers. The Company has identified the
following phases with actual or estimated dates of completion: 1) identify an
inventory of systems, (completed April 30, 1999), 2) gather certificates and
warranties from providers, (completed April 30, 1999), 3) determine required
actions and budgets, (completed April 30, 1999), 4) perform remediation and
tests (expected to be completed by November 1, 1999) and 5) designing
contingency and business continuation plans for each Company location (plans are
complete and are expected to be implemented by December 1, 1999).
The following is a summary of the different phases and progress to date
for each initiative identified above:
IT Systems: The Company has continuously updated or replaced older
technology with more current technology. As the Company has acquired ski
resorts, it updated certain technology at these resorts. The Company's main IT
systems include an enterprise-wide client server financial system, an
enterprise-wide client server ticketing and direct to lift system, a mid-range
enterprise-wide payroll system, various point of sale and property management
systems, upgraded personal computers, wide area networking and local area
networking. Phases 1 through 3 are complete. During phase 1 and 2, the Company
determined that its Sugarloaf and Sugarbush resorts had not yet converted to
Year 2000 compliant lodging systems. The Company has subsequently converted
these two resorts to Year 2000 compliant systems. The Company has developed
contingency and business contingency plans for its crucial IT systems and
expects to have these ready for implementation at each Company location by
December 1, 1999.
Non-IT Systems: Internal non-IT systems are comprised of faxes,
copiers, printers, postal systems, security systems, ski lifts, elevators and
telecommunication systems. Phases 1 through 5 are complete for all systems
except telecommunication. These systems are expected to be completed by December
1, 1999.
Related third party providers: The Company has identified its major
related third party providers as certain utility providers, employee benefit
administrators and supply vendors. Phases 1 through 4 are complete. Phase 5 is
expected to be completed by December 1, 1999.
Actual and anticipated costs. The total cost associated with required
modifications to become Year 2000 compliant is not expected to be material to
the Company's financial position. The estimated total cost of the Year 2000
Project is approximately $295,000. This estimate includes Information System
conversions for Year 2000 compliant lodging systems at Sugarloaf and Sugarbush.
The Company had planned to update these systems regardless of Year 2000 issues
to standardize systems within the Company's resorts. The total amount expended
on the Year 2000 Project through July 25th, 1999 was $220,000. As of July 25,
1999, the estimated future costs of the Year 2000 Project are $75,000 all of
which relate to replacement costs of non-compliant IT systems. The anticipated
costs related to non-IT systems is deemed by management to be immaterial.
Risks. The failure to correct a material Year 2000 problem could result
in an interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. The Year 2000 Project is expected
to significantly reduce the Company's level of uncertainty about the Year 2000
problem. The Company believes that, with the implementation of new business
systems and completion of the Year 2000 Project as scheduled, the possibility of
significant interruptions of normal operations should be reduced. Readers are
cautioned that forward-looking statements contained in the "Year 2000
Disclosures" should be read in conjunction with the Company's disclosures under
the heading "Forward-Looking Statements".
Contingency plans. The Company has completed the development of a
contingency plan related to Year 2000. The Company is actively engaged in
implementing the contingency plan to be prepared for any issues that may arise
on January 1, 2000.
29
Forward-Looking Statements -
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of
the Private Securities Litigation Reform Act Of 1995
Certain information contained herein includes forward-looking
statements, the realization of which may be impacted by the factors discussed
below. The forward-looking statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 (the "Act").
This report contains forward looking statements that are subject to risks and
uncertainties, including, but not limited to, uncertainty as to future financial
results; substantial leverage of the Company; the capital intensive nature of
development of the Company's ski resorts; rapid and substantial growth that
could place a significant strain on the Company's management, employees and
operations; uncertainties associated with fully syndicating the Resort
Properties Term Facility; uncertainties associated with obtaining additional
financing for future real estate projects and to undertake future capital
improvements; demand for and costs associated with real estate development;
changes in market conditions affecting the interval ownership industry;
regulation of marketing and sales of the Company's quartershare interests;
seasonality of resort revenues; fluctuations in operating results; dependence on
favorable weather conditions; the discretionary nature of consumers' spending
for skiing, destination vacations and resort real estate; regional and national
economic conditions; laws and regulations relating to the Company's land use,
development, environmental compliance and permitting obligations; termination,
renewal or extension terms of the Company's leases and United States Forest
Service permits; industry competition; the adequacy of water supply at the
Company's properties; the ability of the Company to make its information
technology assets and systems year 2000 compliant and the costs of any
modifications necessary in that regard; and other risks detailed from time to
time in the Company's filings with the Securities and Exchange Commission. These
risks could cause the Company's actual results for fiscal year 2000 and beyond
to differ materially from those expressed in any forward looking statements made
by, or on behalf of, the Company. The foregoing list of factors should not be
construed as exhaustive or as any admission regarding the adequacy of
disclosures made by the Company prior to the date hereof or the effectiveness of
said Act.
Item 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 25, 1999, the Company has long term debt
and subordinated notes outstanding with a carrying value of $502 million and an
estimated fair value of $495 million.
The Company has entered into two interest rate protection 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
$102.5 million. The rate for this portion of the Senior Credit Facility is fixed
at 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 $200.5
million, leaving $98.0 million at a variable rate for which, depending on the
Company's leverage, the interest rate will be LIBOR plus 1.5% to 3.5%.
The Company has three other variable-rate facilities associated with
its real estate activities: 1) the Textron Facility, which has an interest of
rate of prime plus 2.5% per annum, with an outstanding balance of $55.8 million
as of July 25, 1999; 2) the Resort Properties Term Facility, which has an
interest rate equal to BankBoston's base rate plus 8.25%, with an outstanding
balance of $52.7 million as of July 25, 1999; and 3) the Key Facility, which
bears an interest rate of prime plus 1/4% per annum and had a balance of $6.9
million as of July 25, 1999.
Fixed interest rate debt outstanding as of July 25, 1999, excluding the
Senior Credit Facility debt, was $186.7 million, carries a weighed average
interest rate of 10.98%, and matures as follows: $16.8 million in fiscal 2000,
$10.2 million in fiscal 2001, $15.7 million in fiscal 2002, $9.2 million in
fiscal 2003, and $12.7 million in fiscal 2004 and $129.5 million in fiscal 2005
and after.
30
The Company has also entered into two non-cancellable interest rate
swap agreements. The notional amount of both agreements is $120 million. The
first swap agreement matures on July 15, 2001. With respect to this swap
agreement, the Company receives interest at a rate of 12% per annum and pays
interest out at a variable rate based on the notional amount of the swap
agreement. The second swap agreement expires July 15, 2006 and requires the
Company pay interest at a rate of 9.01% per annum 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 9.01% per
annum and receiving interest at a variable rate. The variable rate of interest
the Company would receive is based on the six month LIBOR, and as of October 12,
1999 that rate was 6.095% per annum.
Item 8
Financial Statements and Supplementary Data
Selected Quarterly Operating Results
The following table presents certain unaudited quarterly financial
information of the Company for the eight quarters ended July 25, 1999. 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.26,1997 Jan.25,1998 Apr.26,1998 Jul.26,1998 Oct.25,1998 Jan.24,1999 Apr.25,1999 Jul.25,1999
(in thousands)
Net revenues:
Resort $ 13,716 $106,181 $144,244 $ 13,433 $ 20,311 $103,205 $154,317 14,725
Real estate 710 7,990 40,914 11,378 4,485 6,300 10,324 3,383
----------- ----------- ----------- ------------ ----------- ---------- ---------- ----------
Total net revenues 14,426 114,171 185,158 24,811 24,796 109,505 164,641 18,108
----------- ----------- ----------- ------------ ----------- ---------- ---------- ----------
Operating expenses:
Resort 17,890 63,328 66,096 23,932 28,073 69,251 74,573 26,334
Real estate 832 5,423 28,451 8,848 4,040 7,865 8,554 6,349
Marketing, general
and administrative 6,661 13,193 11,427 8,777 10,826 17,922 14,519 8,167
Stock compensation
charge 14,254 - - - - - - -
Depreciation and
amortization 1,506 15,009 17,959 3,491 2,709 19,010 19,731 2,752
----------- ----------- ----------- ------------ ----------- ---------- ---------- ----------
Total operating
expenses 41,143 96,953 123,933 45,048 45,648 114,048 117,377 43,602
----------- ----------- ----------- ------------ ----------- ---------- ---------- ----------
Income(loss) from
operations $(26,717) $ 17,218 $ 61,225 $(20,237) $(20,852) $(4,543) $ 47,264 $(25,494)
=========== =========== =========== ============ =========== ========== ========== ==========
31
Item 9
Changes in and Disagreements with Accountants over
Accounting and Financial Disclosures
The consolidated financial statements of the Company for the year ended
July 25, 1999 have been audited and reported upon by Arthur Andersen LLP ("AA").
Similarly, AA is expected to serve as the independent auditors of the Company
for fiscal 2000.
For fiscal years prior to 1999, the consolidated financial statements
of the Company were audited and reported on by PricewaterhouseCoopers LLP
("PwC"). On March 13, 1999, the Company was informed by PwC that they were
resigning as independent accountants of the Company effective March 13, 1999. On
March 31, 1999 the Audit Committee of the Board of Directors of the Company
approved the hiring of AA as the independent auditors of the Company.
In connection with the audits of the Company's consolidated financial
statements for the two fiscal years ended July 27, 1997 and July 26, 1998, and
the subsequent interim period through March 13, 1999, there were no
disagreements between the Company and PwC on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedures,
which disagreements, if not resolved to PwC's satisfaction would have caused PwC
to make reference to the subject matter of the disagreement in connection with
PwCs audit report on the consolidated financial statements of the Company. In
addition, the audit reports of PwC on the consolidated financial statements of
the Company as of and for the two fiscal years ended July 26, 1998 did not
contain any adverse opinion or disclaimer of opinion, nor were such reports
qualified or modified as to uncertainty, audit scope, or accounting principles.
32
PART III
Pursuant to General Instruction G of Form 10-K, the information
contained in Part III (Items 10, 11, 12 and 13) is incorporated by reference
from the Company's Definitive Proxy Statement, which is expected to be filed
with the Commission on or before November 22, 1999.
PART IV
Item 14
Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this report: Page
1. Index to financial statements, financial statement schedules, and
supplementary data, filed as part of this report:
Report of Independent Accountants..................................F-1
Consolidated 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 Certificate of Incorporation of the Company
3.2 By-laws of the Company
3.3 Articles of Merger ASC East, Inc. and ASC West, Inc. into American
Skiing Company dated October 5, 1999 with Plan of Merger (incorporated
by reference to Exhibit 4.3 to the Company's Form 8K for the Report
date of October 6, 1999).
3.4 Articles of Merger American Skiing Company into ASC Delaware, Inc.
dated October 12, 1999 with Agreement and Plan of Merger (incorporated
by reference to Exhibit 4.3 to the Company's Form 8K for the Report
date of October 6, 1999).
4.1. Specimen Certificate for shares of Common Stock, $.01 par value, of the
Company
33
4.2 Form of Indenture relating to 10 1/2% Repriced Convertible Subordinated
Debentures (incorporated by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-1, Registration No. 333-33483).
10.1 Preferred Stock Subscription Agreement dated July 9, 1999 between the
Registrant and the Purchasers listed on Annex A thereto, including a
form of Stockholders' Agreement, Voting Agreement and Certificate of
Designation relating to the preferred stock to be issued (incorporated
by reference to Exhibit 2.1 to the Company's Form 8K for the Report
Date of July 9, 1999).
10.2 Stockholders' Agreement dated as of August 6, 1999 among Oak Hill
Capital Partners, L.P., and the other entities identified in Annex A
attached thereto, Leslie B. Otten and the Registrant
10.3 Stock Purchase Agreement dated as of August 1, 1997, among Kamori
International Corporation, ASC West and the Company (incorporated by
reference to Exhibit 2.1 of the Company's Registration Statement on
Form S-1, Registration No. 333-33483).
10.4 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 ASC East's Registration
Statement on Form S-4, Registration No. 333-9763).
10.5 Stock Purchase Agreement dated August 17, 1994, between Sugarloaf
Mountain Corporation and S-K-I Ltd. (incorporated by reference to
Exhibit 10.36 to ASC East's Registration Statement on Form S-4,
Registration No. 333-9763).
10.6 Acquisition Agreement dated May 16, 1995, among Sugarbush Resort
Holdings, Inc., Sugarbush Resort Corporation, Snowridge, Inc., Sugar
Ridge, Inc., Sugarbush Inn Corporation and Bev Ridge, Inc.,
(incorporated by reference to Exhibit 10.38 to ASC East's Registration
Statement on Form S-4, Registration No. 333-9763).
10.7 Purchase and Sale Agreement dated as of August 30, 1996, among
Waterville Valley Ski Area, Ltd., Cranmore, Inc., ASC East and Booth
Creek Ski Acquisition Corp. (incorporated by reference to Exhibit 10.61
to ASC East's Registration Statement on Form S-4, Registration No.
333-9763).
10.8 Purchase and Sale Agreement dated as of October 16, 1996, among
Sherburne Pass Mountain Properties, LLC, Pico Mountain Sports Center,
LLC, Pico Mountain Operating Company, LLC, Harold L. and Edith Herbert,
and Pico Ski Area Management Company (incorporated by reference to
Exhibit 10.62 to ASC East's Registration Statement on Form S-4,
Registration No. 333-9763).
10.9 Purchase and Sale Agreement dated July 3, 1997, between Wolf Mountain
Resorts, L.C., and ASC Utah (incorporated by reference to Exhibit 10.74
to the Company's Registration Statement on Form S-1, Registration No.
333-33483).
10.10 Letter of Agreement dated August 27, 1996, among SKI Ltd and certain
shareholders of Sugarloaf Mountain Corporation (incorporated by
reference to Exhibit 10.63 to ASC East's Registration Statement on Form
S-4, Registration No. 333-9763).
10.11 Amended, Restated and Consolidated Credit Agreement dated as October
12, 1999, among the Company, certain Subsidiaries as Borrowers, the
Lenders party thereto, BankBoston, N.A. as Agent for the Lenders.
10.12 Indenture dated as of June 28, 1996 among ASC East, certain of its
subsidiaries and United States Trust Company of New York, relating to
Series A and Series B 12% Senior Subordinated Notes Due 2006
(incorporated by reference to Exhibit 4.1 to ASC East's Registration
Statement on Form S-4, Registration No. 333-9763).
34
10.13 First Supplemental Indenture dated as of November 12, 1997 among ASC
East, Inc., its subsidiaries party thereto, and United States Trust
Company of New York as Trustee (incorporated by reference to Exhibit
10.3 to the Company's quarterly report on Form 10-Q for the quarter
ended October 25, 1998).
10.14 Second Supplemental Indenture dated as of September 4, 1998 among ASC
East, Inc., its subsidiaries party thereto, and United States Trust
Company of New York as Trustee (incorporated by reference to Exhibit
4.3 to the Company's Form 8K for the Report date of October 6, 1999).
10.15 Third Supplemental Indenture dated as of August 6, 1999 among ASC East,
Inc., its subsidiaries party thereto, and United States Trust Company
of New York as Trustee (incorporated by reference to Exhibit 4.3 to the
Company's Form 8K for the Report date of October 6, 1999).
10.16 Fourth Supplemental Indenture dated as of October 6, 1999 among
Supplemental Indenture dated as of November 12, 1997 among ASC East,
Inc., its subsidiaries party thereto, and United States Trust Company
of New York as Trustee (incorporated by reference to Exhibit 4.3 to the
Company's Form 8K for the Report date of October 6, 1999).
10.17 Credit Agreement among American Skiing Company Resort Properties, Inc.,
certain lenders and BankBoston, N.A. as agent dated as of January 8,
1999 (incorporated by reference to Exhibit 10.1 to the Company's
quarterly report on Form 10-Q for the quarter ended January 24, 1999).
10.18 Forbearance Agreement date as of March 8, 1999, between American Skiing
Company Resort Properties, Inc. and BankBoston, N.A., as Agent
(incorporated by reference to Exhibit 10.2 to the Company's quarterly
report on Form 10-Q for the quarter ended April 25, 1999)
10.19 Amended and Restated Forbearance Agreement dated as of April 20, 1999
between American Skiing Company Resort Properties, Inc. and BankBoston,
N.A., as Agent (incorporated by reference to Exhibit 10.3 to the
Company's quarterly report on Form 10-Q for the quarter ended April 25,
1999).
10.20 Loan and Security Agreement among Grand Summit Resort Properties, Inc.,
Textron Financial Corporation and certain lenders dated as of September
1, 1998 (incorporated by reference to Exhibit 10.1 to the Company's
quarterly report on Form 10-Q for the quarter ended October 25, 1998).
10.21 First Amendment Agreement Re: Loan and Security Agreement Among Grand
Summit Resort Properties, Inc., as Borrower and Textron Financial
Corporation, as Administrative Agent dated as of April 5, 1999
(incorporated by reference to Exhibit 10.1 to the Company's quarterly
report on Form 10-Q for the quarter ended April 25, 1999) . 10.22
Accession, Loan Sale and Second Amendment Agreement Re: Loan and
Security Agreement among Grand Summit Resort Properties, Inc. and
Textron Financial Corp. and The Lenders Listed therein dated June 24,
1999.
10.23 ISDA Master Agreement between BankBoston, N.A. and the Company dated as
of May 12, 1998 (incorporated by reference to Exhibit 10.38 to the
Company's annual report on Form 10-K for the year ended July 26, 1998).
.
10.24 Credit Support Annex to ISDA Master Agreement between BankBoston, N.A.
and the Company dated as of May 12, 1998 (incorporated by reference to
Exhibit 10.39 to the Company's annual report on Form 10-K for the year
ended July 26, 1998).
10.25 Unlimited Guaranty by the Company in favor of BancBoston Leasing, Inc.,
dated as of July 20, 1998 (incorporated by reference to Exhibit 10.40
to the Company's annual report on Form 10-K for the year ended July 26,
1998).
.
10.26 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 (incorporated by reference to Exhibit 10.41 to the Company's
annual report on Form 10-K for the year ended July 26, 1998).
35
10.27 $2,750,000 Subordinated Promissory Note dated November, 1996 by Booth
Creek Ski Acquisition Corp., Waterville Valley Ski Resort, Inc. and
Mount Cranmore Ski Resort, Inc., to ASC East (incorporated by reference
to Exhibit 10.72 to the Company's Registration Statement on Form S-1,
Registration No. 333-33483).
10.28 Assignment dated May 30, 1997, between Wolf Mountain Resorts, L.C. and
ASC Utah (incorporated by reference to Exhibit 10.7 to the Company's
Registration Statement on Form S-1 Registration No.
333-33483).
10.29 Indenture dated October 24, 1990, between Killington Ltd. and The
Howard Bank, as trustee (representative of indentures with respect to
similar indebtedness aggregating approximately $2,995,000 in original
principal amount and maturing at various times from 2015 to 2016)
(incorporated by reference to Exhibit 10.19 to ASC East's Registration
Statement on Form S-4, Registration No. 333-9763).
10.30 Form of Subordinated Debenture Due 2002 from L.B.O. Holding, Inc. to
former shareholders of Mt. Attitash Lift Corporation (incorporated by
reference to Exhibit 10.34 to ASC East's Registration Statement on Form
S-4, Registration No. 333-9763).
10.31 Lease dated October 15, 1980, among H. Donald Penley, Joseph Penley,
Albert Penley and Sunday River Skiway Corporation (incorporated by
reference to Exhibit 10.40 to ASC East's Registration Statement on Form
S-4, Registration No. 333-9763).
10.32 Lease/Option dated July 19, 1984, between John Blake and L.B.O.
Holding, Inc. (incorporated by reference to Exhibit 10.41 to ASC East's
Registration Statement on Form S-4, Registration No. 333-9763).
10.33 Lease Agreement dated as of July 1, 1993, between Snowridge, Inc. and
Mountain Water Company (incorporated by reference to Exhibit 10.42 to
ASC East's Registration Statement on Form S-4, Registration No.
333-9763).
10.34 Lease Agreement dated as of March 1, 1988, between Snowridge, Inc. and
Mountain Wastewater Treatment, Inc., (incorporated by reference to
Exhibit 10.43 to ASC East's Registration Statement on Form S-4,
Registration No. 333-9763).
10.35 Lease dated November 10, 1960, between the State of Vermont and
Sherburne Corporation (predecessor to Killington, Ltd.) (incorporated
by reference to Exhibit 10.44 to ASC East's Registration Statement on
Form S-4, Registration No. 333-9763).
10.36 Lease Agreement dated as of June 21, 1994, between the Town of
Wilmington, Vermont and Mount Snow, Ltd. (incorporated by reference to
Exhibit 10.46 to ASC East's Registration Statement on Form S-4,
Registration No. 333-9763).
10.37 Lease Agreement dated April 24, 1995, between Sargent, Inc. and Mount
Snow, Ltd. (incorporated by reference to Exhibit 10.47 to ASC East's
Registration Statement on Form S-4, Registration No. 333-9763).
10.38 Agreement between Sugarloaf Mountain Corporation and the Inhabitants of
the Town of Carrabassett Valley, Maine, concerning the Sugarloaf Golf
Course dated June 3, 1987 (incorporated by reference to Exhibit 10.52
to ASC East's Registration Statement on Form S-4, Registration No.
333-9763).
36
10.39 Ground Lease Agreement dated July 3, 1997, between ASC Utah and Wolf
Mountain Resorts, L.C. (incorporated by reference to Exhibit 10.64 to
the Company's Registration Statement on Form S-1, Registration No.
333-33483).
10.40 Ground Lease Guaranty dated July 3, 1997, from the Company to Wolf
Mountain Resorts, L.C. (incorporated by reference to Exhibit 10.65 to
the Company's Registration Statement on Form S-1, Registration No.
333-33483).
10.41 Stock Option Plan (incorporated by reference to Exhibit 10.89 to the
Company's Registration Statement on Form S-1, Registration No.
333-33483).
10.42 Form of Non-Qualified Stock Option Agreement (Five-Year Vesting
Schedule) (incorporated by reference to Exhibit 10.90 to the Company's
Registration Statement on Form S-1, Registration No. 333-33483).
10.43 Form of Non-Qualified Stock Option Agreement (Fully-Vested)
(incorporated by reference to Exhibit 10.91 to the Company's
Registration Statement on Form S-1, Registration No. 333-33483).
10.44 Form of Incentive Stock Option Agreement (incorporated by reference to
Exhibit 10.92 to the Company's Registration Statement on Form S-1,
Registration No. 333-33483).
10.45 Registration Rights Agreement dated November 10, 1997 by and between
American Skiing Company and ING (U.S.) Capital Corporation
(incorporated by reference to Exhibit 3 to the Company's quarterly
report on Form 10-Q for the quarter ended October 26, 1997).
10.46 Purchase and Development Agreement by and among the Company, American
Skiing Company Resort Properties, Inc., and Marriott Ownership Resorts,
Inc., dated as of July 22, 1998 (incorporated by reference to Exhibit 1
to the Company's Form 8-K dated July 27, 1998).
10.47 Construction Loan Agreement between The Canyons Resort Properties, Inc.
and KeyBank National Association dated as of December 18, 1998
10.48 First Amendment to Construction Loan Agreement between The Canyons
Resort Properties, Inc.and KeyBank National Association dated as of
April, 1999
22.1 Subsidiaries of the Company.
23.1 Consent of PricewaterhouseCoopers, LLP
23.2 Consent of Arthur Anderson LLP
23.3 Report of Independent Accountants for fiscal 1998
24.1 Power of Attorney
27.1 Financial Data Schedule.
(b) Reports filed on Form 8-K.
The Company filed a Form 8-K on July 9, 1999, reporting a Preferred
Stock Subscription Agreement between the Company and the Purchasers listed on
Annex A thereto.
37
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 22nd day of October, 1999.
American Skiing Company
By: /s/ Leslie B. Otten
--------------------------------
Leslie B. Otten
Director, President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Christopher E. Howard
--------------------------------
Christopher E. Howard
Director, Executive Vice President,
By: /s/ Mark J. Millerr
--------------------------------
Mark J. Miller
Senior Vice President, Chief Financial Officer
(Principal Financial Officer)
By: /s/ Christopher D. Livak
--------------------------------
Christopher D. Livak
Vice President-Accounting
(Principal Accounting Officer)
By: /s/ Martel D. Wilson, Jr.
--------------------------------
Martel D. Wilson, Jr., Director
By: /s/
--------------------------------
Gordon M. Gillies, Director
By: /s/ Daniel Duquette
--------------------------------
Daniel Duquette, Director
By: /s/ David Hawkes
--------------------------------
David Hawkes, Director
By: /s/
--------------------------------
Bradford E. Bernstein, Director
By: /s/ Steven B. Gruber
--------------------------------
Steven B.Gruber, Director
By: /s/
--------------------------------
J. Taylor Crandall, Director
By: /s/ William Janes
--------------------------------
William Janes, Director
38
Report of Independent Public Accountants
To American Skiing Company
We have audited the accompanying consolidated balance sheet of American
Skiing Company and its subsidiaries as of July 25, 1999, and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for the year then ended. 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 audit. The financial statements of the
Company as of July 27, 1997 and July 26, 1998, were audited by other auditors
whose report dated October 14, 1998, expressed an unqualified opinion on those
statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Skiing Company as of
July 25, 1999 and the results of its operations and its cash flows for the year
then ended in conformity with generally accepted accounting principles.
//Arthur Andersen LLP//
Boston, MA
October 1, 1999
(Except with respect to the matters discussed in Note 17, as to which the date
is October 12, 1999.)
F-1
American Skiing Company
Consolidated Balance Sheet
(in thousands, except share and per share amounts)
July 26, 1998 July 25, 1999
------------- -------------
Assets
Current assets
Cash and cash equivalents $ 15,370 $ 9,003
Restricted cash 4,946 5,480
Accounts receivable 7,538 6,474
Inventory 13,353 10,837
Prepaid expenses 3,709 5,309
Deferred financing costs 1,246 1,530
Deferred income taxes 1,413 4,273
--------------- -----------------
Total current assets 47,575 42,906
Property and equipment, net 521,139 529,154
Real estate developed for sale 78,636 207,745
Goodwill 78,687 76,672
Intangible assets 23,706 22,987
Deferred financing costs 7,966 7,749
Long-term investments 7,397 669
Other assets 14,479 18,472
Restricted cash 1 ,314 1,148
--------------- -----------------
Total assets $ 780,899 $ 907,502
=============== =================
Liabilities, Mandatorily Redeemable Preferred Stock and
Shareholders' Equity
Current liabilities
Current portion of long-term debt $ 43,698 $ 60,882
Current portion of subordinated notes and debentures 455 673
Accounts payable and other current liabilities 44,372 77,951
Deposits and deferred revenue 8,895 19,710
Demand note, Principal Shareholder 1,846 1,830
--------------- -----------------
Total current liabilities 99,266 161,046
Long-term debt, excluding current portion 211,570 313,844
Subordinated notes and debentures, excluding current portion 127,497 127,062
Other long-term liabilities 10,484 13,461
Deposits and deferred revenue 1,320 1,140
Deferred income taxes 22,719 10,062
Minority interest in subsidiary 375 396
--------------- -----------------
Total liabilities 473,231 627,011
Mandatorily Redeemable 10 1/2% Preferred Stock
par value $1,000 per share; 40,000 shares authorized;
36,626 issued and outstanding; including cumulative
dividends in arrears (redemption value of $39,464 at July
26, 1998 and $43,836 at July 25, 1999) 39,464 43,836
Shareholders' Equity
Common stock, Class A, par value $.01 per share;
15,000,000 shares authorized; 14,760,530 issued and
outstanding at July 26, 1998 and July 25, 1999 148 148
Common stock, par value of $.01 per share; 100,000,000
shares authorized; 15,525,022 and 15,526,243 issued and
outstanding at July 26, 1998 and July 25, 1999,
respectively 155 155
Additional paid-in capital 267,890 268,663
Retained earnings (deficit) 11 (32,311)
--------------- -----------------
Total shareholders' equity 268,204 236,655
--------------- -----------------
Total liabilities, mandatorily redeemable
preferred stock and shareholders' equity $ 780,899 $ 907,502
=============== =================
See accompanying notes to consolidated financial statements
F-2
American Skiing Company
Consolidated Statement of Operations
(in thousands, except share and per share amounts)
Year Ended
----------------------------------------------
July 27, July 26, July 25,
1997 1998 1999
------------ ------------- -------------
Net revenues:
Resort $ 163,310 $ 277,574 $ 292,558
Real estate 10,721 60,992 24,492
------------ ------------- -------------
Total net revenues 174,031 338,566 317,050
------------ ------------- -------------
Operating expenses:
Resort 107,230 171,246 198,231
Real estate 8,950 43,554 26,808
Marketing, general and administrative 25,173 40,058 51,434
Stock compensation charge - 14,254 -
Depreciation and amortization 18,293 37,965 44,202
------------ ------------- -------------
Total operating expenses 159,646 307,077 320,675
------------ ------------- -------------
Income (loss) from operations 14,385 31,489 (3,625)
Interest expense 23,730 34,575 39,382
------------ ------------- -------------
Loss before benefit from income taxes
and minority interest in loss of subsidiary (9,345) (3,086) (43,007)
Benefit from income taxes (3,613) (774) (15,057)
Minority interest in loss of subsidiary (250) (445) -
------------ ------------- -------------
Loss before extraordinary items (5,482) (1,867) (27,950)
Extraordinary loss, net of income tax benefit
of $3,248 - 5,081 -
------------ ------------- -------------
Loss before preferred stock dividends (5,482) (6,948) (27,950)
Accretion of discount and dividends accrued on
mandatorily redeemable preferred stock 444 5,346 4,372
------------ ------------- -------------
Net loss available to common shareholders $ (5,926) $ (12,294) $ (32,322)
============ ============= =============
Basic and fully diluted loss per share:
Loss before extraordinary items ($6.06) ($0.28) ($1.07)
Extraordinary loss - (0.20) -
------------ ------------- -------------
Net loss available to common shareholders ($6.06) ($0.48) ($1.07)
============ ============= =============
Weighted average shares outstanding 978 25,809 30,286
============ ============= =============
See accompanying notes to consolidated financial statements
F-3
American Skiing Company
Consolidated Statement of Changes in Shareholders' Equity
(in thousands, except share amounts)
Class A Additional
Common stock Common stock paid-in Retained
------------------------- ------------------------
Shares Amount Shares Amount capital earnings Total
------------ ----------- ------------- ---------- ------------- ------------ ------------
Balance at July 28, 1996 978,300 $ 10 - $ - $ 3,762 $ 18,131 $ 21,903
Exchange of the Principal
Shareholder's 96% interest
in ASC East for 100% of the
Common Stock of the Company (939,168) (10) - - - - (10)
Restatement of beginning of
the year retained earnings
for the establishment of
the 4% minority interest in
ASC East and share of
earnings since inception (39,132) - - - (976) 100 (876)
Issuance of Common Stock of
the Company to the
Principal Shareholder 1,000,000 10 - - - - 10
Conversion of Common Stock to
Class A Common Stock (1,000,000) (10) 1,000,000 10 - - -
Stock split in October 1997,
accounted for retroactively - - 13,760,530 - - - -
Accretion of discount and
issuance costs and
dividends accrued on
mandatorily redeemable
preferred stock - - - - - (444) (444)
Netloss - - - - - (5,482) (5,482)
------------ ----------- ------------- ---------- ------------- ------------ ------------
Balance at July 27, 1997 - - 14,760,530 10 2,786 12,305 15,101
============ =========== ============= ========== ============= ============ ============
Shares issued pursuant to
initial public offering 14,750,000 148 - - 244,181 - 244,329
Issuance of Common Stock
options - - - - 8,538 - 8,538
Conversion of Class A Common
Stock - - - 138 (138) - -
Purchase of minority interest
in subsidiary 615,022 6 - - 8,648 - 8,654
Original issue discount on
Series A 14% Exchangeable
Preferred Stock and 14%
Senior Exchangeable
Notes - - - - 1,841 - 1,841
Shares issued to purchase
subsidiary 140,000 1 - - 1,994 - 1,995
Exercise of Common Stock
options 20,000 - - - 40 - 40
Accretion of discount and
issuance costs and
dividends accrued on
mandatorily redeemable
preferred stock - - - - - (5,346) (5,346)
Net loss - - - - - (6,948) (6,948)
------------ ----------- ------------- ---------- ------------- ------------ ------------
Balance at July 26, 1998 15,525,022 155 14,760,530 148 267,890 11 268,204
============ =========== ============= ========== ============= ============ ============
Exercise of Common Stock
options 1,221 - - - - - -
Issuance of Common Stock
options - - - - 773 - 773
Accretion of discount and
issuance costs and
dividends accrued on
mandatorily redeemable
preferred stock - - - - - (4,372) (4,372)
Net loss - - - - - (27,950) (27,950)
------------ ----------- ------------- ---------- ------------- ------------ ------------
Balance at July 25, 1999 15,526,243 $ 155 14,760,530 $ 148 $268,663 $ (32,311) $236,655
============ =========== ============= ========== ============= ============ ============
See accompanying notes to consolidated financial statements
F-4
American Skiing Company
Consolidated Statement of Cash Flows
(in thousands)
Year Ended
---------------------------------------------------
July 27, July 26, July 25,
1997 1998 1999
------------- ------------- ----------------
Cash flows from operating activities
Net loss $ (5,482) $ (6,948) $ (27,950)
Adjustments to reconcile net loss to net cash used in
operating activities:
Minority interest in loss of subsidiary (250) (445) -
Depreciation and amortization 18,293 37,966 44,202
Discount on convertible debt 3,300 3,159 333
Deferred income taxes (3,332) (3,910) (15,517)
Stock compensation charge - 14,254 773
Extraordinary loss - 8,329 -
(Gain)loss from sale of assets - (773) 2,426
Decrease (increase) in assets:
Restricted cash 12,587 (3,448) (368)
Accounts receivable (1,343) (3,608) 1,090
Inventory (2,257) (2,088) 2,516
Prepaid expenses 1,792 (1,644) (1,600)
Real estate developed for sale (21,976) (25,950) (125,331)
Other assets (872) (10,319) (5,000)
Increase (decrease) in liabilities:
Accounts payable and other current liabilities 6,794 2,413 33,579
Deposits and deferred revenue 838 (866) 10,635
Other long-term liabilities (1,304) 2,586 2,977
------------- ------------- ----------------
Net cash provided from (used in) operating activities 6,788 8,708 (77,235)
------------- ------------- ----------------
Cash flows from investing activities
Payments for purchases of businesses, net of cash
acquired (6,959) (291,773) -
Capital expenditures (23,267) (106,917) (46,007)
Long-term investments 836 1,110 1,222
Proceeds from sale of assets 2,626 7,227 7,198
Proceeds from sale of business 14,408 5,702 -
Other, net (1,714) 348 101
------------- ------------- ----------------
Net cash used in investing activities (14,070) (384,303) (37,486)
------------- ------------- ----------------
Cash flows from financing activities
Net borrowings under Senior Credit Facility - 194,227 7,308
Net proceeds (repayment of) Old Credit Facility 14,766 (59,623) -
Proceeds from long-term debt 1,079 1,568 20,145
Proceeds from non-recourse real estate debt 3,504 71,462 115,909
Repayment of long-term debt (11,237) (15,793) (10,466)
Repayment of non-recourse real estate debt - (45,551) (23,088)
Deferred financing costs (1,567) (4,355) (1,438)
Net proceeds from initial public offering - 244,329 -
Repayment of subordinated notes - (23,223) -
Proceeds from issuance of mandatorily redeemable
securities 16,377 17,500 -
Payments on demand note, Principal Shareholder (3,267) (87) (16)
Proceeds from exercise of stock options - 40 -
Cash payment in connection with early retirement of
debt - (5,087) -
------------- ------------- ----------------
Net cash provided by financing activities 19,655 375,407 108,354
------------- ------------- ----------------
Net decrease in cash and cash equivalents 12,373 (188) (6,367)
Cash and cash equivalents, beginning of period 3,185 15,558 15,370
------------- ------------- ----------------
Cash and cash equivalents, end of period $ 15,558 $ 15,370 $ 9,003
============= ============= ================
See accompanying notes to consolidated financial statements
F-5
American Skiing Company
Consolidated Statement of Cash Flows (continued)
(in thousands)
Year Ended
---------------------------------------------------
July 27, July 26, July 25,
1997 1998 1999
------------- ------------- ----------------
Supplemental disclosures of cash flow information
Cash paid for interest $ 20,998 $ 36,583 $41,295
Cash paid (refunded) for income taxes (1,492) 43 (10)
Supplemental schedule of noncash investing
and financing activities
Property acquired under capital leases $ 7,824 $ 9,832 $ 7,425
Notes payable issued for purchase of assets - 14,232 1,395
Liabilities assumed associated with purchased companies 1,826 17,205 -
Deferred tax asset (liability) associated with purchased
companies - 1,650 -
Purchase price adjustments 1,541 - -
Purchase price adjustments related to deferred taxes 1,317 1,226 -
Note payable issued for purchase of a business 6,500 - -
Note receivable received for sale of a business 2,750 - -
Purchase of minority interest 626 375 -
Accretion of discount and issuance costs and dividends
accrued on mandatorily redeemable preferred stock 444 5,346 4,372
Exchange of mandatorily redeemable securities for 10 1/2%
Repriced Convertible Preferred Stock - 36,626 -
Intangible asset assumed to purchase subsidiary - 1,883 -
See accompanying notes to consolidated financial statements
F-6
American Skiing Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Basis of Presentation
American Skiing Company ("ASC") is organized as a holding company and
operates through various subsidiaries. ASC and its subsidiaries (collectively,
the "Company") operate in two business segments, ski resorts and real estate
development. ASC East and ASC West are holding companies which are wholly-owned
subsidiaries of ASC. ASC East and its wholly-owned subsidiaries (collectively
"ASC East") operate the following resorts: Sugarloaf/USA and Sunday River in
Maine, Attitash Bear Peak in New Hampshire, and Killington, Mount Snow/Haystack
and Sugarbush in Vermont. ASC West and its subsidiaries (collectively "ASC
West") operate the following resorts: The Canyons in Utah, Steamboat Ski &
Resort Corporation ("Steamboat") in Colorado, and Heavenly Valley Ski & Resort
Corporation ("Heavenly") in California/Nevada. The Company performs its real
estate development through its wholly-owned subsidiary, American Skiing Company
Resort Properties, Inc. ("Resort Properties"), and Resort Properties'
subsidiaries, including Grand Summit Resort Properties, Inc. ("GSRP")and Canyons
Resort Properties, Inc. The Company owns and operates resort facilities, real
estate development companies, golf courses, ski and golf schools, retail shops
and other related companies. For periods prior to June 17, 1997, the term "the
Company" refers to ASC East and its subsidiaries, and after such date, to
American Skiing Company and its subsidiaries (including ASC East). In 1997, the
Company formed ASC Utah, a wholly-owned subsidiary, for the purpose of acquiring
the Wolf Mountain ski area in Utah, which was subsequently renamed The Canyons.
In August 1997, the Company formed ASC West for the purpose of acquiring
Steamboat and Heavenly.
ASC was formed on June 17, 1997, when Leslie B. Otten (the "Principal
Shareholder") exchanged his 96% ownership interest in ASC East for 100% of the
Common Stock of ASC. In conjunction with the formation of ASC, the Company
recorded the 4% minority interest in ASC East. On January 23, 1998, the Company
and the holders of the minority interest in ASC East entered into an agreement
whereby the Company issued 615,022 shares of Common Stock in exchange for all
shares of ASC East common stock held by the minority shareholders.
On October 10, 1997, the Company approved an increase in authorized
shares of Common Stock, a new issue of Class A Common Stock, the conversion of
100% of the outstanding Common Stock to Class A Common Stock and a 14.76 for 1
stock split of Class A Common Stock. The stock split was given retroactive
effect in the accompanying consolidated financial statements as of July 27,
1997.
The Company consummated an initial public offering (the "Offering") on
November 6, 1997. The Company sold 14.75 million shares of common stock in the
Offering at a price of $18.00 per share. Net proceeds to the Company after
expenses of the Offering totaled $244.3 million. Of the 14.75 million shares
sold in the Offering, 833,333 shares were purchased by the Principal
Shareholder.
The Company acquired Heavenly and Steamboat on November 12, 1997 for
approximately $300.5 million, including closing costs and adjustments. The
acquisition was accounted for using the purchase method of accounting. The
accompanying consolidated financial statements reflect the results of operations
of Steamboat and Heavenly subsequent to November 12, 1997.
2. Summary of Significant Accounting Principles
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of American Skiing Company and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Fiscal Year
The Company's fiscal year is a fifty-two week or fifty-three week
period ending on the last Sunday of July. The periods for 1997, 1998 and 1999
consisted of fifty-two weeks.
F-7
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with a
remaining maturity of three months or less to be cash equivalents.
Restricted Cash
Restricted cash represents deposits that relate to pre-sales of real
estate developed for sale held in escrow and guest advance deposits for lodging
reservations. The cash will be available to the Company when the real estate
units are sold or the lodging services are provided. Restricted cash classified
as long-term represents deposits held in escrow relating to pre-sales with
anticipated closing dates subsequent to fiscal 2000.
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 1997, 1998, and 1999 totaled $473,000,
$2.4 million and $6.4 million, respectively.
Intangible Assets
Intangible assets consist of goodwill and various other intangibles.
The Company has classified as goodwill the excess of fair value of the net
assets (including tax attributes) of companies acquired in purchase transactions
and also the purchase of a minority interest. Intangible assets are recorded net
of accumulated amortization in the accompanying consolidated balance sheet and
are amortized using the straight-line method over their estimated useful lives
as follows:
Goodwill up to 40 years
Tradenames 40 years
Other intangibles 16 - 20 years
Deferred Financing Costs
Costs incurred in connection with the issuance of debt are included in
deferred financing costs, net of accumulated amortization. Amortization is
calculated using the straight-line method over the respective original lives of
the applicable issues. Amortization calculated using the straight-line method is
not materially different from amortization that would have resulted from using
the interest method.
F-8
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
26, 1998 and July 25, 1999. Contractual maturities relating to these investments
range from less than one year to five years at July 25, 1999.
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 25, 1999, management believes that there has not been
any impairment of the Company's long-lived assets, real estate developed for
sale, goodwill or other identifiable intangibles.
Revenue Recognition
Resort revenues include sales of lift tickets, tuition from ski
schools, golf course fees and other recreational activities, sales from
restaurants, bars and retail shops, and real estate rentals. Daily lift ticket
revenue is recognized on the day of purchase. Lift ticket season pass revenue is
recognized in equal amounts over the ski season, which is the Company's second
and third quarters of its fiscal year. The Company's remaining revenue is
generally recognized as the services are performed. Real estate revenues are
recognized under the full accrual method when title has been transferred.
Amounts received from pre-sales of real estate are recorded as deposits and
deferred revenue in the accompanying consolidated balance sheet until the
revenue is recognized. Deposits and deferred revenue classified as long-term
represent deposits held in escrow relating to pre-sales with anticipated closing
dates subsequent to fiscal 2000.
Interest
Interest is expensed as incurred except when it is capitalized in
connection with major capital additions and real estate developed for sale. The
amounts of interest capitalized are determined by applying current interest
rates to the funds required to finance the construction. During 1997, 1998 and
1999, the Company incurred total interest cost of $24.3 million, $37.5 million,
and $46.4 million respectively, of which $575,000, $2.9 million and $7.1
million, respectively, have been capitalized to property and equipment and real
estate developed for sale.
Employee Benefits
As of July 27, 1997, the Company maintained a number of profit sharing
and savings plans pursuant to Section 401(k) of the Internal Revenue Code. In
August 1997, the Company established the ASC 401(k) Retirement Plan pursuant to
Section 401(k) of the Internal Revenue Code (the "Plan") and subsequently merged
the previously existing plans into the Plan. The Plan allows employees to defer
up to 15% of their income and provides for the matching of participant
contributions at the Company's discretion. The Company made no contributions to
the profit sharing plans for 1997, 1998 and 1999. Contributions to the savings
plans for 1997, 1998 and 1999 totaled $301,000, $225,000 and $395,000, excluding
contributions to the Steamboat and Heavenly plans. On January 1, 1998, the
Heavenly profit sharing plan was merged into the Plan and the Steamboat 401(k)
plan was merged into the Plan on October 1, 1998. Contributions to the Steamboat
and Heavenly plans for Fiscal 1998 were $220,000 and $43,000, respectively.
Contributions to the Steamboat plan for Fiscal 1999 were $7,000.
F-9
Advertising Costs
Advertising costs are expensed the first time the advertising takes
place. At July 26, 1998 and July 25, 1999, advertising costs of $407,000 and
$244,000, respectively, were recorded in prepaid expenses in the accompanying
consolidated balance sheet. Advertising expense for the years ended July 27,
1997, July 26, 1998 and July 25, 1999 was $5.2 million, $7.6 million and $9.5
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" earnings per share (which excludes dilution
as a result of unexercised stock options and the Mandatorily Redeemable 10 1/2%
Preferred Stock) and "diluted" earnings per share. The Company adopted SFAS 128
in fiscal 1998 and all prior periods presented were retroactively restated. For
the years ended July 27, 1997, July 26, 1998 and July 25, 1999, basic and
diluted loss per share are as follows:
Year Ended
-----------------------------------------------
July 27, 1997 July 26, 1998 July 25, 1999
-------------- -------------- ---------------
Income (loss) (in thousands, except per share amounts)
Income (loss) before preferred stock dividends and
accretion and extraordinary items $ (5,482) $ (1,867) $ (27,950)
Accretion of discount and dividends accrued on
mandatorily redeemable preferred stock 444 5,346 4,372
-------------- -------------- ---------------
Income (loss) before extraordinary items (5,926) (7,213) (32,322)
Extraordinary loss - 5,081 -
-------------- -------------- ---------------
Net income (loss) available to common shareholders $ (5,926) $ (12,294) $ (32,322)
============== ============== ===============
Shares
Total weighted average shares outstanding (basic
and diluted) 978 25,809 30,286
============== ============== ===============
Basic and diluted loss per common share
Loss before extraordinary items $ (6.06) $ (0.28) $ (1.07)
Extraordinary loss - 0.20 -
-------------- -------------- ---------------
Net loss available to common shareholders $ (6.06) $ (0.48) $ (1.07)
============== ============== ===============
The Company currently has outstanding 36,626 shares of Mandatorily
Redeemable Convertible Preferred Stock which are convertible into shares of the
Company's common stock. The common stock shares into which these securities are
convertible have not been included in the dilutive share calculation as the
impact of their inclusion would be anti-dilutive. The Company also has 2,746,048
exercisable options outstanding to purchase shares of its common stock under the
Company's stock option plan as of July 25, 1999. These shares are also excluded
from the dilutive share calculation as the impact of their inclusion would also
be anti-dilutive.
F-10
Stock Compensation
The Company's stock option plan is accounted for in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." The Company has adopted the disclosure requirements of Statement of
Financial Accounting Standards No. 123, ("SFAS 123"), "Accounting for
Stock-Based Compensation" (Note 13).
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 25, 1999. 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.
The estimated fair values of the Senior Subordinated Notes and other
subordinated debentures at July 26, 1998 and July 25, 1999 are
presented below (in thousands):
July 26, 1998 July 25, 1999
Carrying Fair Carrying Fair
amount value amount value
12% Senior Subordinated Notes $ 117,002 $ 134,400 $ 117,240 $ 110,400
Other subordinated debentures $ 10,950 $ 8,667 $ 10,495 $ 9,417
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.
Reclassifications
Certain amounts in the prior year financial statements and related notes
have been reclassified to conform with the fiscal 1999 presentation.
Recently Issued Accounting Standards
In fiscal 1999, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income". As of July 25, 1999, the
Company has no such items that would necessitate disclosure of comprehensive
income. As such, the Company's adoption of SFAS 130 had no effect on the
accompanying consolidated financial statements.
In fiscal 1999, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). This statement established standards for reporting
information on operating segments in interim and annual financial statements.
The Company had previously disclosed segment information under SFAS 14,
"Financial Reporting for Segments of a Business Enterprise". The adoption of
SFAS 131 did not result in a change in the composition of the Company's
operating segments, or in the previously reported net income for each segment.
F-11
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities". At adoption, SOP 98-5 requires the Company to write-off
any unamortized start-up costs as a cumulative effect of change in accounting
principle and, going forward, expense all start-up activity costs as they are
incurred. The Company is required to and will adopt SOP 98-5 in the first
quarter of fiscal 2000 and estimates that it will recognize a corresponding
charge of approximately $1 million as a change in accounting principle.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). In June 1999, the FASB issued
SFAS No. 137, "Accounting for Derivatives and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133" ("SFAS 137"). SFAS 137 extends the
effective date of SFAS 133 to all fiscal years beginning after June 15, 2000
(fiscal year 2001 for the Company). SFAS 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction. Management of
the Company is currently reviewing the impact of SFAS 133 on its consolidated
financial statements. 3. Business Acquisitions and Divestments
Kamori Combined Enterprises Acquisition
On November 12, 1997, the Company acquired all of the outstanding
shares of common stock of Kamori Combined Entities (the "Kamori Acquisition")
which included the Steamboat Ski & Resort Corporation in Steamboat Springs,
Colorado ("Steamboat"), the Heavenly Valley Ski & Resort Corporation in Lake
Tahoe, California/Nevada ("Heavenly") and the Sabal Point Golf Course in
Orlando, Florida ("Sabal Point") for approximately $300.5 million, including
closing costs and adjustments. Steamboat and Heavenly are major destination ski
resorts while Sabal Point is a golf, tennis and swimming club. The acquisition
was accounted for using the purchase method of accounting and, accordingly, the
results of operations subsequent to November 12, 1997 are included in the
accompanying consolidated financial statements. The purchase price was allocated
to the assets acquired and the liabilities assumed based on their fair market
values at the date of acquisition as follows (in thousands):
Fair value
of
net assets
acquired
-------------
Cash $ 8,771
Accounts receivable 129
Inventory 3,983
Prepaid expenses 486
Property and equipment, net 183,922
Asset held for sale 5,780
Real estate developed for sale 25,624
Goodwill 60,177
Intangible assets 22,200
Long-term investments 5,000
Other assets 177
Deferred income taxes 2,443
-------------
Total assets 318,692
-------------
Accounts payable and other current liabilities (10,289)
Deposits and deferred revenue (6,702)
Deferred income taxes (793)
Minority interest (364)
-------------
Total liabilities (18,148)
-------------
Net assets acquired $ 300,544
=============
Amortization of goodwill and intangible assets charged to depreciation
and amortization was $1.3 million and $544,000, respectively, for fiscal 1998,
and $1.3 million and $545,000, respectively, for fiscal 1999.
F-12
The asset held for sale per above of $5.8 million represents the
carrying value of Sabal Point. Sabal Point was subsequently sold on February 2,
1998 for total proceeds of $5.7 million. As Sabal Point was identified as held
for sale as of the Kamori Acquisition date, the operating results of Sabal Point
from that date through February 2, 1998 were excluded from the Company's
consolidated operating results and were included in the determination of the
carrying value of $5.8 million. No gain or loss was recognized from the sale of
Sabal Point as the difference between the carrying value and the proceeds was
treated as an adjustment to the original purchase price allocation.
The minority interest of $396,000 at July 25, 1999 is comprised of the
balance of $364,000 as of the Kamori Acquisition date and the minority interest
in the income of the subsidiary of $11,000 for fiscal 1998 and $21,000 for
Fiscal 1999.
The following unaudited pro forma financial information for the
Company gives effect to the Kamori Acquisition as if the transaction had
occurred on July 29, 1996 (in thousands, except per share amounts):
Year ended Year ended
July 27, 1997 July 26, 1998
(unaudited) (unaudited)
-------------- --------------
Revenues $ 262,566 $ 342,172
Loss from continuing operations (3,874) (9,416)
Net loss (4,318) (19,843)
Basic and diluted loss per common share:
Loss before extraordinary items ($0.15) ($0.49)
Extraordinary loss - (0.17)
-------------- --------------
Net loss available to common shareholders ($0.15) ($0.66)
============== ==============
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/USA for $2.0 million cash. The Company had originally
purchased 51% of Sugarloaf/USA in connection with its acquisition of all the
outstanding common stock of S-K-I on June 28, 1996 (the "S-K-I Acquisition"). In
connection with the purchase of the minority interest, 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 fiscal 1998 and fiscal
1999, the Company paid contingent consideration of approximately $492,000, thus
exhausting the liability established for such payments. The Company anticipates
that it will be required to make additional future contingent payments pursuant
to the purchase agreement over the next three fiscal years. Such future payments
will be treated in accordance with APB 16, which requires that contingent
consideration be recorded as an additional cost of the acquired enterprise and
amortized over the remaining life of the acquired asset. 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.
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.
In July 1997, the Company purchased The Canyons for a total purchase
price of $8.3 million. The purchase price includes a cash payment of $1.6
million, assumed liabilities of $200,000 and the issuance of a note payable in
the amount of $6.5 million.
F-13
4. Property and Equipment
Property and equipment consists of the following (in thousands):
July 26, July 25,
1998 1999
---- ----
Buildings and grounds $ 159,841 $ 176,952
Machinery and equipment 117,704 166,475
Lifts and lift lines 158,074 161,102
Trails 36,072 37,130
Land improvments 14,954 19,006
------------ ------------
486,645 560,665
Less: accumulated depreciation 69,817 111,288
------------ ------------
416,828 449,377
Land 73,755 72,249
Construction-in-process 30,556 7,528
------------ ------------
Property and equipment, net $ 521,139 $ 529,154
============ ============
Property and equipment includes approximately $19.3 million and $52.3
million of machinery and equipment and lifts held under capital leases at July
26, 1998 and July 25, 1999, respectively. At July 26, 1998 and July 25, 1999,
related accumulated amortization on property and equipment under capital leases
was approximately $3.8 million and $9.0 million, respectively. Amortization
expense for property and equipment under capital leases was approximately $1.6
million, $2.2 million and $4.4 million for 1997, 1998 and 1999, respectively.
Total depreciation and amortization expense relating to all property and
equipment was $34.0 million and $40.4 million for 1998 and 1999, respectively.
5. Demand Note, Principal Shareholder
In June 1996, prior to the S-K-I Acquisition, the Company delivered to
the Principal Shareholder a demand note in the principal amount of $5.2 million
for the amount expected to become payable by the Principal Shareholder in 1996
and 1997 for income taxes with respect to the Company's income as an S
Corporation through the date of the S-K-I Acquisition. The demand note is
unsecured and bears interest at 5.4% per annum, the applicable federal rate in
effect at the time of issuance. The amount in the accompanying consolidated
balance sheet at July 25, 1999 of $1.8 million was repaid by the Company
subsequent to the end of fiscal 1999 (see Note 17 - Subsequent Events).
6. Long-Term Debt
Long-term debt consists of (dollar amounts in thousands):
July 26, July 25,
1998 1999
----------- ------------
Senior Credit Facility (Note 8) $194,227 $200,485
Real estate development note payable with a face value of $105,000. The note bears
interest at a variable rate of prime plus 2.5% 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 March 2002. The note is collateralized
by the real estate developed for sale of GSRP. 31,411 55,796
Real estate development term loan facility with a face value of $58,000 to finance the
working capital of the Company's real estate subsidiaries. The facility bears interest at
a variable rate equal to the lender's base rate plus 8.25% or a current rate of 16%.
Interest is payable monthly in arrears. Any remaining principal is due June 30, 2001. This
facility is underwritten by substantially all the Resort Properties subsidiaries. - 52,654
Note payable in an aggregate principal amount of $3,530 for forbearance fees for the
amended and restated real estate development term loan facility described above. The note
bears interest at 12% per annum and is payable at maturity. The Balance is due in full at
February 2002. - 3,530
F-14
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 2,250
Note payable with a face value of $2,000. The note bears interest at 10% per annum which
is payable upon the maturity of the note. A principal payment of $1,000 was made in June
1999. The remaining principal and accrued interest are due in June 2000. 2,000 1,000
Subordinated debentures issued with an original face value of $2,101. 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. 1,844 1,912
Note payable with a face value of $1,720. The note bears interest at 12% per annum which
is payable quarterly, in arrears, beginning October 1998. The principal is due in full in
July 2000. 1,720 1,720
Note payable with a face value of $1,600. Interest is payable monthly beginning January
1998 for a 30-year term. The interest rate is 7% per annum for the first 10 years, 8.44%
per annum for the second 10 years and 10.55% per annum for the final 10 years. The
principal is due in full in December 2027. 1,600 1,600
Note payable with a face value of $1,000. The note bears interest at 14% per annum which
is payable monthly beginning in August 1997. The principal is due in full in July 2000. 1,000 1,000
Note payable with a face value of $2,097 and bearing interest at the rate of 8.25% per
annum. The principal and interest are payable upon completion of the Sundial Lodge at the
Canyons resort, which is expected in the Company's fiscal year 2000. - 2,097
Note payable with a face value of $6,600. The note bears interest at a rate of 8.5% per
annum which is paid quarterly, in arrears. Principal payments of $4,720 were made in
fiscal 1999. The remaining balance is payable upon completion of the Grand Summit Hotel at
the Canyons resort, which is expected in the Company's fiscal year 2000. - 1,880
Real estate development note payable with a face value of $29,000. The note bears interest
at a variable rate of prime plus1/4% and is payable monthly. The principal is due upon
completion of the Sundial Lodge project at the Company's Canyons resort. This project is
expected to be completed in Fiscal 2000. - 6,858
Real estate development note payable with a face value of $2,500 for the construction of
employee housing at the Company's Steamboat resort. The note bears interest at a variable
rate of prime plus1/4%. Principal and interest of $17 are payable monthly. The loan will be
converted to a 15 year amortization when the project is completed. 467 1,831
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: $200 in August 1999; $200 in
August 2000 and $300 in August 2001. 1,000 700
Note payable with face value of $2,294. The note bears interest at 7.83% per annum.
Interest and principal payments of $22 are payable monthly beginning March 1998. The
remaining principal and accrued interest are due in February 2003. 2,255 2,154
Obligations under capital leases 12,664 33,642
Other notes payable 2,830 3,617
----------- ------------
255,268 374,726
----------- ------------
Less: current portion 43,698 60,882
----------- ------------
Long-term debt, excluding current portion $211,570 $313,844
=========== ============
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 25, 1999.
At July 25, 1999, the Company had letters of credit outstanding totaling $2.5
million.
F-15
The non-current portion of long-term debt matures as follows (in
thousands):
Long-term Subordinated Total
debt notes debt
------------- ------------ ------------
2001 $ 62,561 $ 525 $ 63,086
2002 70,624 549 71,173
2003 15,752 1,074 16,826
2004 12,238 1,466 13,704
2005 and
thereafter 160,038 123,448 283,486
Interest related to capitalized
leases (7,124) - (7,124)
Debt discount (245) - (245)
------------- ------------ ------------
$ 313,844 $ 127,062 $ 440,906
============= ============ ============
7. Subordinated Notes and Debentures
On June 25, 1996, in connection with the S-K-I Acquisition, ASC East
issued $120.0 million of 12% Senior Subordinated Notes (the "Notes"). Pursuant
to a registration rights agreement, ASC East filed a registration statement with
respect to an offer to exchange the Notes for a new issue of notes of ASC East
registered under the Securities Act of 1933, with identical terms. The
registration statement became effective in November 1996. The Notes are general
unsecured obligations of ASC East, subordinated in right of payment to all
existing and future senior debt of ASC East, including all borrowings of the
Company under the Senior Credit Facility. The Notes mature July 15, 2006, and
will be redeemable at the option of ASC East, in whole or in part, at any time
after July 15, 2001. ASC East incurred deferred financing costs totaling $6.7
million in connection with the issuance of the 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 27, 1997, July 26,
1998 and July 25, 1999 amounted to $781,000, $713,000 and $668,600,
respectively. (See Note 17 - Subsequent Events)
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
$14.6 million in 1997, 1998, and 1999.
Concurrently with the Offering, the Company solicited and received the
required consents from the holders of the Notes to amend the Notes indenture to
permit the consummation of the Offering without requiring the Company to make a
Change of Control Offer (as defined). In connection with the consent
solicitation, the Company paid a customary fee to the consenting holders of the
Notes.
The Company entered into two non-cancelable interest rate swap
agreements (the "Swap Agreements") with BankBoston, N.A. ("BankBoston") with an
effective date of February 9, 1998 (the "Effective Date") to manage the interest
rate risk associated with the Notes. The notional amount of both Swap Agreements
of $120.0 million is equal to the face value of the Notes. The first Swap
Agreement matures on July 15, 2001, the date on which the related Notes first
become redeemable at the option of the Company. The second Swap Agreement
matures on July 15, 2006, the date on which the related Notes mature. From the
Effective Date through July 15, 2001, the Swap Agreements effectively reduce the
Company's cash outflow relating to the payment of interest on the Notes from 12%
to 9.01%, with the Company's payment of interest to BankBoston at 9.01% of the
notional amount and BankBoston's payment of interest to the Company at 12% of
the notional amount. The reduction in the net cash outflow for interest had no
impact on the accompanying consolidated statement of operations as the net swap
receipt from BankBoston of $5.1 million for the period from the Effective Date
through July 25, 1999 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.
F-16
On January 26, 1998, the Company and the holders of the 4% of the
outstanding shares of ASC East entered into an agreement whereby the Company
issued 615,022 shares of its Common Stock in exchange for all ASC East common
stock shares not owned by the Company. In connection with the exchange, the
Company recorded $8.5 million of goodwill which represented the excess of the
fair market value of the common stock exchanged relative to the carrying value
of the minority interest. Amortization expense relating to the goodwill was
$127,000 and $228,000 for the years ended July 26, 1998 and July 25, 1999,
respectively.
A portion of the proceeds from the Senior Credit Facility (Note 8) were
used to redeem all of the Company's outstanding 13.75% Subordinated Discount
Notes ("Subordinated Notes"). The indenture relating to the Subordinated Notes
provided for a redemption price equal to 113.75% of the carrying value of the
Subordinated Notes on the redemption date. The Company recorded extraordinary
losses before any benefit for income taxes in Fiscal 1998 of approximately $4.3
million related to the prepayment of the Subordinated Notes and $1.0 million
related to the write-off of deferred financing costs. These losses are included
in the total extraordinary loss in the accompanying consolidated statement of
operations for the year ended July 26, 1998.
Other subordinated debentures owed by the Company at July 25, 1999 are
due as follows (in thousands):
Interest Principal
Year Rate Amount
------------------------------------
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
-----------
$ 10,495
===========
8. Senior Credit Facility
In connection with the Offering, the Company entered into a new credit
facility (the "Senior Credit Facility") with BankBoston on November 12, 1997 and
repaid the indebtedness under the Company's then existing credit facility (the
"Old Credit Facility"). In connection with the repayment of the Old Credit
Facility, the Company wrote-off deferred financing costs of $1.2 million and
incurred prepayment penalties of $433,000. These amounts are included in the
total extraordinary loss in the accompanying consolidated statement of
operations for the year ended July 26, 1998. On November 13, 1997, BankBoston,
as agent, syndicated the Senior Credit Facility to a group of participating
lenders (the "Banks").
The Senior Credit Facility is divided into two sub-facilities, $64.6
million of which is available for borrowings by ASC East and its subsidiaries
(the "East Facility") and $149.0 million of which is available for borrowings by
the Company excluding ASC East and its subsidiaries (the "West Facility"). The
East Facility consists of a six-year revolving credit facility in the amount of
$34.9 million and an eight-year term facility in the amount of $29.7 million.
The West Facility consists of a six-year revolving facility in the amount of
$74.7 million and an eight-year term facility in the amount of $74.3 million
The revolving facilities are subject to an annual requirement to reduce
the outstanding debt to a balance of not more than $9.9 million for the East
Facility and not more that $44.7 million for the West Facility for a period of
30 days. The maximum availability under the revolving facilities will reduce
over the term of the Senior Credit Facility by certain prescribed amounts. The
term facilities amortize at a rate of approximately 1.0% of the principal amount
for the first six years with the remaining portion of the principal due in two
F-17
substantially equal installments in years seven and eight. Beginning July 1999,
the Senior Credit Facility requires mandatory prepayment of 50% of excess cash
flows during any period in which the ratio of the Company's total senior debt to
earnings before interest expense, income taxes, depreciation and amortization
("EBITDA") exceeds 3.50 to 1. In no event, however, will such mandatory
prepayments reduce either revolving facility commitment below $35.0 million. The
Senior Credit Facility contains affirmative, negative and financial covenants
including maintenance of debt to EBITDA, minimum net worth, EBITDA to interest
expense, and cash flow to debt service financial ratios. Except for the debt to
EBITDA and minimum net worth ratios, which are calculated at both the ASC
consolidated level and at the ASC East and ASC West levels, compliance with
financial covenants is determined on a consolidated basis notwithstanding the
bifurcation of the Senior Credit Facility into sub-facilities.
At July 25, 1999, the revolving portion of the East and West Facilities
had outstanding borrowings of $30.0 million and $64.0 million, respectively
under LIBOR contracts which bear interest at rates ranging from 8.64% to 8.69%
per annum. At July 25, 1999, the East and West Facilities had outstanding
borrowings of $1.9 million and $700,000, respectively, in Money Market accounts
which bear interest at 8.50%. The balance of the borrowings outstanding at year
end under the West Facility of $48,000 bears interest at the greater of
BankBoston's base rate or the Federal Funds Rate plus 2% per annum. There were
no borrowings outstanding under the East Facility at July 25, 1999 other than
those described above under LIBOR contracts and Money Market accounts. At July
25, 1999, the LIBOR, Money Market and Base rates were 8.68%, 8.50% and 10.00%,
respectively. At July 25, 1999, the term portion of the East and West Facilities
had outstanding borrowings of $29.7 million and $74.3 million, respectively, and
bear interest at rates ranging from 9.18% to 10.5%. Both the revolving and term
portions of the Senior Credit Facility accrue interest daily and pay interest
quarterly, in arrears. At July 25, 1999, accrued interest for the East and West
Facilities was $1.2 million and $2.8 million, respectively. The East Facility is
secured by substantially all the assets of ASC East and its subsidiaries, except
the real estate development subsidiaries, which are not borrowers under the
Senior Credit Facility. The West Facility is secured by substantially all the
assets of ASC West and its subsidiaries.
The Company negotiated an amendment to the Senior Credit Facility on
March 3, 1999 (the "Credit Facility Amendment") which significantly modified the
covenant requirements on a prospective basis. The Credit Facility Amendment
requires minimum quarterly EBITDA levels and places a maximum range of non-real
estate capital expenditures for fiscal 2000 of between $15 and $20 million, with
maximum levels depending on the Company's ability to consummate sales of certain
non-strategic assets, as defined in the Credit Facility Amendment. Following
fiscal 2000, annual resort capital expenditures (exclusive of real estate) are
capped at the lesser of (i) $35 million or (ii) the total of consolidated EBITDA
for the four fiscal quarters ended April of the previous fiscal year less
consolidated debt service for the same period.
In November 1997, the Company paid financing fees with respect to the
Senior Credit Facility of 1.75% of the total commitment, or $3.8 million to the
Banks. In March 1999, the Company also paid additional financing fees of
$806,000 with respect to the Credit Facility Amendment. The Company has
capitalized these fees and certain other debt related costs and is amortizing
them over the term of the Senior Credit Facility. Total unamortized financing
fees relating to the Senior Credit Facility recorded in deferred financing costs
in the accompanying consolidated balance sheet were $4.3 million at July 25,
1999.
The Senior Credit Facility was restructured subsequent to the end of fiscal
1999 pursuant to a fourth amendment entered into by the Company (see Note 17 -
Subsequent Events).
F-18
9. Income Taxes
The provision (benefit) for income taxes charged to continuing
operations was as follows (in thousands):
Year ended
------------- --- ------------ --- --------------
July 27, 1997 July 26, 1998 July 25, 1999
------------- ------------ --------------
Current tax provision
Federal $ - $ - $ -
State - - -
Deferred tax provision (benefit)
Federal (2,815) 580 (11,939)
State (798) (1,354) (3,118)
------------- ------------ --------------
Total provision (benefit) $ (3,613) $ (774) $ (15,057)
============= ============ ==============
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.
Deferred tax liabilities (assets) are comprised of the following at July
26, 1998 and July 25, 1999 (in thousands):
July 26, 1998 July 25, 1999
------------- -------------
Property and equipment basis differential $ 43,992 $ 53,814
Other 880 640
------------- -------------
Gross deferred tax liabilities 44,872 54,454
Tax loss and credit carryforwards (15,017) (30,887)
Capitalized cost (1,042) (1,856)
Deferred revenue and contracts (259) (10,536)
Stock compensation charge (4,939) (3,112)
Reserves and accruals (3,527) (4,239)
Other (1,229) (661)
------------- -------------
Gross deferred tax assets (26,013) (51,291)
Valuation allowance 2,447 2,626
------------- -------------
Net deferred tax liability (asset) $ 21,306 $ 5,789
============= =============
The provision (benefit) for income taxes differs from the amount of
income tax determined by applying the applicable U.S. statutory income tax rate
of 35% to income (loss) before provision (benefit) for income taxes, minority
interest in loss of subsidiary and extraordinary loss as a result of the
following differences (in thousands):
Year ended
------------- -- -------------- -- --------------
July 27, 1997 July 26, 1998 July 25, 1999
------------- -------------- --------------
Income tax provision (benefit) at the statutory U.S. tax
rates $ (3,271) $ (1,080) $ (15,052)
Increase (decrease) in rates resulting from:
State taxes, net (798) (1,354) (3,118)
Change in valuation allowance 71 250 -
Stock option compensation - 1,019 1,623
Nondeductible items 243 634 848
Other 142 (243) 642
------------- ------------- --------------
Income tax provision (benefit) at the effective tax rates $ (3,613) $ (774) $ (15,057)
============= ============== ==============
At July 25, 1999, the Company has federal net operating loss ("NOL")
carryforwards of approximately $67.3 million which expire in varying amounts
though the year 2019 and a federal capital loss carryover of approximately
$700,000 that expires in the year 2003. Internal Revenue Code Section 382 limits
the amount of NOL carryforwards incurred before a change in ownership, as
defined, that can be used annually against income generated after the change in
F-19
ownership. In November of 1997 as a result of the Offering, the Company
experienced a change in ownership. Approximately $27.5 million of the federal
NOL carryforwards were incurred prior to the Offering and are subject to an
overall annual limitation under Section 382 of approximately $14 million.
Because of recent acquisitions, the limitation is required to be allocated to
the various subsidiaries based on their relative fair market values. In
addition, certain subsidiaries have separate pre-change in ownership losses
which are subject to lower annual limitations as a result of previous changes in
ownership. Subsequent changes in ownership could further affect the limitation
in future years.(See Note 17 - Subsequent Events).
In addition to the limitations under Section 382, approximately $7
million of the federal NOL carryovers are from separate return years, as defined
in the regulations to the Internal Revenue Code, of certain subsidiaries (or
sub-groups), and may only be used to offset each subsidiary's (or sub-group's)
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 $2.6 million is appropriate because,
due to the change of ownership and the resulting annual limitations, the Company
will not be able to use all of the potential tax benefits from existing NOL
carryforwards and tax credits as of July 25, 1999.
10. Mandatorily Redeemable Securities
Pursuant to a Securities Purchase Agreement (the "Agreement") dated
July 2, 1997 (as amended July 16, 1997), the Company issued 17,500 shares of its
Series A 14% Exchangeable Preferred Stock (the "Preferred Stock") in a private
offering to an institutional investor. The Company incurred $1.1 million in
expenses in connection with the issuance of the Preferred Stock.
Pursuant to the Agreement, the Company issued $17.5 million aggregate
principal amount of its 14% Senior Exchangeable Notes Due 2002 (the
"Exchangeable Notes") on July 28, 1997 in a private offering to an institutional
investor. The Company incurred deferred financing costs totaling $1.1 million in
connection with the issuance of the Exchangeable Notes. The Exchangeable Notes
bore interest at a rate of 14% per annum and mature on July 28, 2002. Interest
on the Exchangeable Notes was payable in cash or additional Exchangeable Notes,
at the option of the Company.
On November 15, 1997, subsequent to the completion of the Offering,
each share of Preferred Stock and the Exchangeable Notes were converted into
shares of Mandatorily Redeemable 10 1/2% Preferred Stock. The total number of
Mandatorily Redeemable 10 1/2% Preferred Stock shares issued in association with
the exchange were 36,626 and have a face value of $1,000 per share. The carrying
value of the Preferred Stock and Exchangeable Notes just prior to the conversion
were $18.4 million and $18.2 million, respectively. The Company incurred an
extraordinary loss before income tax benefit of $1.0 million upon the conversion
of the Preferred Stock and Exchangeable Notes as a result of the write-off of
unamortized deferred financing costs relating to the Exchangeable Notes.
Under the Agreement, the Mandatorily Redeemable 10 1/2% Preferred
Stock shares are exchangeable at the option of the holder into shares of the
Company's Common Stock at a conversion price of $17.10 for each common share. In
the event the Mandatorily Redeemable 10 1/2% Preferred Stock is held to the
maturity date of November 15, 2002, the Company will be required to pay the
holder in cash the face value of $36.6 million plus cumulative dividends in
arrears.
In the event of a default, as defined in the Agreement, there shall be
a mandatory redemption of the Mandatorily Redeemable 10 1/2% Preferred Stock by
the Company unless the holder of the stock elects instead to have visitation
rights to meetings of both the Board of Directors and Management Committees
until the event of default is cured.
The Mandatorily Redeemable 10 1/2% Preferred Stock ranks senior in
liquidation preference to all Common Stock and Class A Common Stock outstanding
at July 25, 1999 as well as any Common Stock and Class A Common Stock issued in
the future.
F-20
11. Related Party Transactions
The Principal Shareholder's wife is employed by the Company as
director of retail purchasing and is actively involved in the Company's retail
sales activities. During fiscal 1997, 1998 and 1999, the Principal Shareholder's
wife received total compensation of $52,000, $52,000 and $54,000, respectively.
During the first quarter of fiscal 1998, the Company granted the Principal
Shareholder's wife fully vested options to purchase up to 20,060 shares of
Common Stock at a price of $2.00 per share. During 1999 the Company granted the
Principal Shareholder's wife options to purchase up to 750 shares of Common
Stock at a price of $7.00 per share that will vest over the next four years.
Western Maine Leasing Co., a corporation wholly-owned by the Principal
Shareholder, leases heavy equipment to Sunday River under short-term leases. In
fiscal 1997, 1998 and 1999, payments under such leases totaled $24,000, $17,000
and $0 respectively.
Sunday River provided lodging management services for Ski Dorm, Inc.
("Ski Dorm"), a corporation owned by the Principal Shareholder and his mother,
which owns a ski dorm located near the Sunday River resort. During fiscal 1997,
1998 and 1999, payments by Ski Dorm to Sunday River totaled $258,000, $2,000 and
$ 65,000, respectively. In addition, Ski Dorm issued to Sunday River a
promissory note in 1995 with a principal amount of $265,000, of which $250,000
was outstanding at July 25, 1999. This note is secured by a mortgage on real
estate and related improvements owned by Ski Dorm. Interest on the note is
charged at the prime rate plus 1 1/2% and principal and any accrued interest are
due in December 1999. The Company purchased Ski Dorm from the Principal
Shareholder (among other assets) subsequent to the end of fiscal 1999 (see Note
17 - Subsequent Events).
The Company provided an interest free construction loan to Mr. Rich
McGarry, Senior Vice President and General Manager of Killington Ski Resort. The
Company relocated Mr. McGarry to Killington during fiscal 1999 and agreed to
provide financing on the construction of a home in the Killington area until his
previous residence was sold. As of July 25, 1999 the balance of the loan was
$316,027 which was the largest amount advanced during fiscal 1999.
The Principal Shareholder is the obligor under a margin loan (the
"Margin Loan") with ING (U.S.) Capital Corporation. The Margin Loan has two
different maintenance bases: (i) one which requires that the aggregate market
value of the collateral be at a certain level in order to take additional
advances under the arrangement to make interest payments (the "Advance Base")
and (ii) one which requires that the aggregate market value of the collateral be
at a certain level in order to avoid a default under the terms of the Margin
Loan (the "Minimum Base"). The Margin Loan is collateralized by the Principal
Shareholder's 833,333 shares of the Company's Common Stock and 14,760,530 shares
of the Company's Class A Common Stock. At any time that the aggregate market
value of the collateral is below the Minimum Base, the Principal Shareholder is
required to either pay down the balance of the Margin Loan or to pledge
additional collateral. The Company is not liable for nor do any of its assets
collateralize the Margin Loan.
12. 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 1997, 1998 and 1999
was $2.2 million, $2.5 million and $2.6 million, respectively.
Significant portions of the land underlying certain of the Company's
ski resorts are leased or subleased by the Company or used pursuant to renewable
permits or licenses. If any such lease, sublease, permit or license were to be
terminated or not renewed upon expiration, or renewed on terms materially less
favorable to the Company, the Company's ability to possess and use the land
subject thereto and any improvements thereon would be adversely affected,
perhaps making it impossible for the Company to operate the affected resort. A
F-21
substantial portion of the land constituting skiable terrain at Attitash Bear
Peak, Sugarbush, Mount Snow/Haystack and Steamboat is located on federal land
that is used under the terms of the permits with the United States Forest
Service (the "Forest Service"). Generally, under the terms of such permits, the
Forest Service has the right to review and comment on the location, design and
construction of improvements in the permit area and on many operational matters.
The permits can be terminated or modified by the Forest Service to serve the
public interest. A termination or modification of any of the Company's permits
could have a material adverse effect on the results of operations of the
Company. The Company does not anticipate any limitations, modifications, or
non-renewals which would adversely affect the Company's operations.
In connection with the purchase of The Canyons, the Company entered
into an operating lease arrangement with the seller for the lease of certain
land to be used in the operation of the resort and for future real estate
development. The arrangement provides for an initial lease term of 50 years,
with the option to extend for three additional 50 year periods for a fee of $1.0
million for each extension period. Lease payments are based on a percentage of
gross skiing and lodging revenues. The arrangement also provides for additional
one-time payments ranging from $250,000 to $3.0 million upon achievement of
annual skier visit level increases in 100,000 visit increments up to 1,000,000.
Total rent expense under this arrangement, as recorded in resort operating
expenses in the accompanying consolidated statement of operations for 1997, 1998
and 1999 was $0, $473,000, and $311,000, respectively. In addition, the Company
has the option to purchase parcels of land covered under the operating lease for
real estate development. Payments for these options total $19.0 million and are
payable at various times and in varying amounts, at the Company's discretion,
through July 2001. The Company is not required to make the option payments for
all parcels of land in order to develop and sell real estate on the land covered
under the lease. Option payments for the year ended July 26, 1998 and July 25,
1999 were $7.6 million and $3.6 million, respectively, and are included in other
assets in the accompanying consolidated balance sheet.
In addition to the leases described above, the Company is committed
under several operating and capital leases for various facilities, machinery and
equipment. Rent expense under all operating leases was $4.2 million $6.4 million
and $6.1 million for the years ended 1997, 1998 and 1999, respectively.
Future minimum lease payments for lease obligations at July 25, 1999
are as follows (in thousands):
Capital Operating
leases leases
------------ ------------
2000 $ 8,349 $ 5,410
2001 8,503 2,122
2002 8,791 1,646
2003 6,025 1,242
2004 and thereafter 11,639 25,418
------------ ------------
Total payments 43,307 $ 35,838
============
Less interest 9,665
------------
Present value of net minimum payments 33,642
Less current portion 5,761
------------
Long-term obligations $ 27,881
============
In the fourth quarter of fiscal 1998, the Company began construction
on two quartershare hotel projects, one at The Canyons, one at Steamboat and a
whole ownership hotel project at The Canyons. Total construction costs for these
three projects are estimated to be $244.8 million. These projects are primarily
being financed through a $110.0 million revolving construction loan facility
with TFC Textron for the quarter share projects and a $29 million construction
loan from Key Bank for the whole ownership hotel. The Company also has a $58
million term facility with BankBoston that can be used for these projects as
well as general and operating expenditures. As of July 25, 1999 the Company had
drawn outstanding $55.8 million on the Textron facility and $6.9 million on the
Key Bank facility. The Company estimates that total costs to complete these
projects will be approximately $129.3 million dollars, with available drawings
of $125.8 million. The additional funds will be generated from the net proceeds
of the sale of existing inventory.
On July 22, 1998, the Company entered into an agreement with Marriott
Ownership Resorts, Inc. ("Marriott") for the future sale of land parcels at the
F-22
Company's Killington, Sunday River, The Canyons, Steamboat and Heavenly resorts
(the "Marriott Agreement"). Under the Marriott Agreement, Marriott has the right
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, in the event that Marriott elects to develop
properties at the resorts, 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 Company has received a cash deposit of $1.6
million from Marriott relating to the future land sales, and because none of the
parcels have yet to be sold, the deposit is recorded as deposits and deferred
revenue in the accompanying consolidated balance sheet at July 25, 1999.
The Killington resort has been identified by the U.S. Environmental
Protection Agency (the "EPA") as a potentially responsible party ("PRP") at two
sites pursuant to the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA" or "Superfund"). Killington has entered into a
settlement agreement with the EPA at one of the sites, the Solvents Recovery
Service of New England Superfund site in Southington, Connecticut. Killington
rejected an offer to enter into a de minimis settlement with the EPA for the
other site, the PSC Resources Superfund site in Palmer, Massachusetts, on the
basis that Killington disputes its designation as a PRP. In addition, the
Company recently received notification that its Heavenly resort is expected to
be designated as a PRP at a Superfund site in Patterson, CA. The Company has yet
to be officially designated with respect to this site. The Company believes that
its liability for these Superfund sites, individually and in the aggregate, will
not have a material adverse effect on the business or financial condition of the
Company or results of operations or cash flows.
Certain claims, suits and complaints associated with the ordinary
course of business are pending or may arise against the Company, including all
of its direct and indirect subsidiaries. In the opinion of management, all
matters are adequately covered by insurance or, if not covered, are without
merit or are of such kind, or involve such amounts as would not have a material
effect on the financial position, results of operations or cash flows of the
Company if disposed of unfavorably.
13. Stock Option Plan
Effective August 1, 1997, the Company established a fixed stock option
plan, the American Skiing Company Stock Option Plan (the "Plan"), to provide for
the grant of incentive and non-qualified stock options for the purchase of up to
5,688,699 shares of the Company's common stock by officers, management employees
of the Company and its subsidiaries and other key persons (eligible for
nonqualified stock options only) as designated by the Options Committee. The
Options Committee, which is appointed by the Board of Directors, is responsible
for the Plan's administration. The Options Committee determines the term of each
option, option exercise price, number of shares for which each option is granted
and the rate at which each option is exercisable. Options granted under the Plan
generally expire ten years from the date of grant and vest either immediately or
over a five-year term. Incentive stock options shall not have an exercise price
less than the fair market value of the common stock at the date of grant.
Nonqualified stock options shall be granted at an exercise price as determined
by the Options Committee. The status of the Company's stock option plan is
summarized below:
Weighted
Average
Number Exercise
of Shares Price
------------------------------------------------------------
Outstanding at July 27, 1997 ---- ----
Granted 2,716,057 $14.01
Exercised (20,000) 2.00
------------------------------------------------------------
Outstanding at July 26, 1998 2,696,057 $14.10
Granted 1,196,000 7.17
Exercised (1,221) 2.00
------------------------------------------------------------
Outstanding at July 25, 1999 3,890,836 $11.97
------------------------------------------------------------
During fiscal 1998, the Company granted nonqualified options under the
Plan to certain key members of management to purchase 672,010 shares of common
F-23
stock with an exercise price of $2.00 per share when the fair market value of
the stock was estimated to be $18.00 per share. The majority of these options
(511,530 shares) were granted to members of senior management and were 100%
vested on the date of grant. Accordingly, the Company recognized stock
compensation expense of $8.1 million relating to the grants based on the
intrinsic value of $16.00 per share. Under these senior management grant
agreements, the Company also agreed to pay the optionees a fixed tax "bonus" in
the aggregate of $5.7 million to provide for certain fixed tax liabilities that
the optionees will incur upon exercise. The remainder of these options (160,480
shares) were granted under the Plan to certain members of management and were
vested 20% on the date of grant and will vest ratably to 100% over the following
four years. For fiscal 1998 and fiscal 1999, the Company recognized $500,000 and
$773,000, respectively, of stock compensation expense relating to these options.
The total stock compensation charge, including the tax bonus, of $14.3 million
recorded in fiscal 1998 is reflected as Stock compensation charge, while the
$773,000 recorded in fiscal 1999 is reflected as Marketing, general and
administrative costs in the accompanying consolidated statement of operations.
The liability for the fixed tax bonus to be paid to the optionees has been
reduced to reflect $200,000 in tax bonus payments made in fiscal 1999 in
connection with options exercised. The remaining $5.5 million tax bonus
liability is reflected in accounts payable and other current liabilities in the
accompanying consolidated balance sheet at July 25, 1999. All other stock
options granted in fiscal 1998 and fiscal 1999 had an exercise price equal to
the fair market value of the common stock on the date of the grant in accordance
with the Plan.
The following table summarizes information about the stock options
outstanding under the Stock Plan at July 25, 1999:
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Outstanding Life (in Exercise Exercisable Exercise
Prices @ 7/25/99 years) Price @ 7/25/99 Price
----------------------------------------------------------------------------
$2 - $5 653,289 8.0 $2.01 557,001 $2.01
6 - 10 1,193,500 9.0 7.18 145,000 7.16
11 - 15 22,500 8.0 14.19 22,500 14.19
16 - 18 2,021,547 8.0 18.00 2,021,547 18.00
----------------------------------------------------------------------------
$2 - $18 3,890,836 8.3 $11.97 2,746,048 $14.15
----------------------------------------------------------------------------
The Company continues to account for stock-based compensation using the
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", under which no compensation expense for stock
options is recognized for stock option awards granted at or above fair market
value. The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Had stock compensation expense been determined based
on the fair value at the grant dates for awards granted under the Company's
stock option plan, consistent with the provisions of SFAS 123, the Company's net
loss and loss per share would have been increased to the pro forma amounts
indicated below (dollar amounts in thousands):
Fiscal Years Ended July 26, 1998 July 25, 1999
---------------------------------------------------------------------------------
Net Loss
As reported $ (12,294) $ (32,322)
Pro forma (27,562) (32,691)
Basic and fully diluted net
loss per common share
As reported (0.48) (1.07)
Pro forma (1.07) (1.08)
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes model with the following weighted average assumptions:
Fiscal Years Ended July 26, 1998 July 25, 1999
---------------------------------------------------------------------------------
Expected life 10 yrs 10 yrs
Risk-free interest rate 5.6% 6.0%
Volatility 47.1% 68.4%
Dividend yield --- ---
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The weighted average grant date fair value for the options granted in
Fiscal 1999 with an exercise price of $4.00 to $8.75 per share was $5.71 per
share. The weighted average grant date fair value for the options granted in
fiscal 1998 with an exercise price of $2.00 per share was $16.92. The weighted
average grant date fair value for the options granted in fiscal 1998 with an
exercise price of $14.19 to $18.00 per share was $11.92.
14. Capital Stock
The Company has two classes of Common Stock outstanding, Class A
Common Stock and Common Stock. The rights and preferences of holders of Class A
Common Sock and Common Stock are substantially identical, except that, while any
Class A Common Stock is outstanding, holders of Class A Common Stock will elect
a class of directors that constitutes two-thirds of the Board of Directors and
holders of Common Stock will elect a class of directors that constitutes
one-third of the Board of Directors. Each share of Class A Common Stock will be
convertible into one share of Common Stock (i) at the option of the holder at
any time, (ii) automatically upon transfer to any person that is not an
affiliate of the Principal Shareholder and (iii) automatically if, at any time,
the number of shares of Class A Common Stock outstanding represents less than
20% of outstanding shares of Common Stock and Class A Common Stock. The
Principal Shareholder holds 100% of the Class A Common Stock, representing
approximately 51% of the combined voting power of all outstanding shares of
Common Stock and Class A Common Stock. (See Note 17 - Subsequent Events).
15. Business Segment Information
The Company currently operates in two business segments, Resorts and
Real Estate. Data by segment is as follows:
July 27, 1997 July 26, 1998 July 25, 1999
-------------- -------------- ---------------
Net revenues:
Resorts $ 163,310 $ 277,574 $ 292,558
Real estate 10,721 60,992 24,492
-------------- -------------- ---------------
$ 174,031 $ 338,566 $ 317,050
============== ============== ===============
Income from operations:
Resorts $ 19,666 $ 40,811 $ 15,169
Real estate 1,771 17,438 (1,532)
Corporate (7,052) (26,760) (17,262)
-------------- -------------- ---------------
$ 14,385 $ 31,489 $ (3,625)
============== ============== ===============
Depreciation and amortization:
Resorts $ 16,934 $ 35,579 $ 39,455
Real estate - 385 976
Corporate 1,359 2,001 3,771
-------------- -------------- ---------------
$ 18,293 $ 37,965 $ 44,202
============== ============== ===============
Capital expenditures:
Resorts $ 31,091 $ 92,998 $ 52,465
Real estate 30,926 93,255 153,106
-------------- -------------- ---------------
$ 62,017 $ 186,253 $ 205,571
============== ============== ===============
Identifiable assets:
Resorts $ 613,922 $ 599,173
Real estate 120,957 248,412
Corporate 44,607 55,644
-------------- ---------------
$ 779,486 $ 903,229
============== ===============
F-25
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 25, 1999:
Net sales $24,796 $109,505 $164,641 $18,108
Income (loss) from operations (20,852) (4,543) 47,264 (25,494)
Income (loss) before preferred stock dividends (19,209) (9,700) 22,333 (21,374)
Net income (loss) available to common shareholders (20,268) (10,779) 21,237 (22,512)
Basic income (loss) per share:
Net income (loss) available to common shareholders $ (0.67) $ (0.36) $ 0.70 $ (0.74)
Weighted average shares outstanding 30,286 30,287 30,287 30,287
Fully diluted income (loss) per share:
Net income (loss) available to common shareholders $ (0.67) $ (0.36) $ 0.69 $ (0.74)
Weighted average shares outstanding 30,286 30,287 30,630 30,287
Year ended July 26, 1998:
Net sales $14,426 $114,171 $185,158 $24,811
Income (loss) from operations (26,717) 17,218 61,225 (20,237)
Extraordinary loss, net of income tax benefit - 5,081 - -
Income (loss) before preferred stock dividends (20,995) (126) 32,781 (18,608)
Net income (loss) available to common shareholders (23,426) (866) 31,690 (19,692)
Basic income (loss) per share:
Income (loss) before extraordinary items $ (1.59) $ 0.15 $ 1.05 $ (0.65)
Extraordinary loss - (0.18) - -
Net income (loss) available to common shareholders $ (1.59) $ (0.03) $ 1.05 $ (0.65)
Weighted average shares outstanding 14,761 27,913 30,266 30,271
Fully diluted income (loss) per share:
Income (loss) before extraordinary items $ (1.59) $ 0.15 $ 1.03 $ (0.65)
Extraordinary loss - (0.18) - -
Net income (loss) available to common shareholders $ (1.59) $ (0.03) $ 1.03 $ (0.65)
Weighted average shares outstanding 14,761 28,424 30,840 30,271
17. Subsequent Events
Issuance of Preferred Stock
Pursuant to a Preferred Stock Subscription Agreement (the "Series B
Agreement") dated July 9, 1999, the Company sold 150,000 shares of its 8.5%
Series B Convertible Participating Preferred Stock ("Series B Preferred Stock")
on August 9, 1999 to Oak Hill Capital Partners, L.P. and certain related
entities ("Oak Hill") for $150 million. After using a portion of the proceeds
from the Series B Preferred Stock sale to (1) pay $5.4 million to the Principal
Shareholder for the purchase of certain strategic assets and the repayment of a
demand note issued by a subsidiary of the Company, (2) pay approximately $16
million in fees and expenses in connection with the Series B Preferred Stock
sale and related transactions, the Company used the remaining proceeds to reduce
indebtedness under its Senior Credit Facility, approximately $30 million of
which will be reborrowed and invested in its principal real estate development
subsidiary.
The Series B Preferred Stock is convertible into shares of the Company's
common stock at an initial conversion price of $5.25 per share of common stock.
The initial conversion price is subject to an antidilution adjustment. Assuming
all shares of the Series B Preferred Stock are converted into the Company's
common stock at the initial (and current) conversion price, Oak Hill would own
approximately 48.5% of the Company's outstanding common stock and Class A common
stock as of August 9, 1999. Oak Hill is entitled to vote its shares of Series B
Preferred Stock on matters (other than the election of Directors) as if its
F-26
shares were converted into the Company's common stock. In addition, Oak Hill as
the holder of Series B Preferred Stock has class voting rights to elect
Directors to the Company's Board of Directors. Furthermore, under the Series B
Agreement, Oak Hill and the Principal Shareholder have agreed to use best
efforts and to vote their shares in order to ensure that each of them is able to
appoint up to four Directors to the Board (depending on their shareholdings).
Therefore, under the Series B Agreement and the Company's certificate of
incorporation, Oak Hill and the Principal Shareholder may elect up to eight of
the 11 members of the Company's Board.
Dividends on the Series B Preferred Stock are payable at the rate of 8.5%
per year. For the first five years, the Company may accrete and compound
dividends payable to the liquidation price instead of paying cash dividends, in
which case the dividend rate will increase to 9.5% after January 31, 2001, and
to 10.5% after January 31, 2002. The Series B Agreement requires dividends to be
paid in cash after July 31, 2004, at which time the dividend rate will revert
back to 8.5%. If the Company elects to accrue dividends on the Series B
Preferred Stock to the liquidation price for the first five years, and
thereafter pay all dividends in cash when due, the Series B Preferred Stock
would be convertible into 60.4% of the Company's common stock after the fifth
anniversary of its issuance.
The following pro forma financial information of the Company gives
effect to the Series B Preferred Stock sale as if the transaction had occurred
on July 27, 1998, with dividends on the Series B Preferred Stock accrued at an
effective rate of 9.7%, assuming that the Company will elect to accrue dividends
for the first five years:
Year Ended
July 25, 1999 Transaction Pro Forma
The Company Adjustments As Adjusted
---------------- -------------- --------------
(in thousands of dollars except per share amounts)
Depreciation and amortization $ 44,202 $529 $ 44,731
---------------- -------------- --------------
Loss from operations (3,625) (529) (4,154)
Interest expense 39,382 (10,915) 28,467
Provision for (benefit from) income
taxes (15,057) 4,050 (11,007)
---------------- -------------- --------------
Income (loss) before accretion of
discount and dividends accrued on preferred
stock (27,950) 6,335 (21,615)
Accretion of discount and dividends
accrued on mandatorily redeemable preferred
stock 4,372 16,386 20,758
---------------- -------------- --------------
Net loss available to common
shareholders $ (32,322) $ (10,051) $ (42,373)
================ ============== ==============
Basic and diluted earnings per share:
Net loss available to common
shareholders $ (1.07) $ (1.40)
================ ==============
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 transaction occurred on the date indicated.
As part of the Series B Agreement, the Company also agreed to move its
state of incorporation from Maine to Delaware by merging the Company into a
wholly owned Delaware subsidiary and amending its articles of incorporation (the
"Delaware Reincorporation"). Under the Delaware Reincorporation, which took
place on October 12, 1999, the Company was merged into a newly formed Delaware
subsidiary (ASC Delaware) that survived the merger and that has a capital
structure identical to the Company's prior to the merger. In connection with the
merger, the certificate of incorporation of the new company provides that all
members of the new company's board of directors be elected annually in contrast
to the Company's previous election process in which approximately one-third of
the Board of Directors was elected for three year terms every three years.
On October 7, 1999, a special meeting of stockholders was held to vote on
(1) the approval of the issuance of 46,124,575 shares of the Company's common
stock, which would be issued upon conversion of the Series B Preferred Stock if
the Company elects to accrete dividends rather than pay them in cash for the
first five years, and (2) the approval of the Delaware Reincorporation. Both of
these proposals were approved by a majority of the shareholders at the special
meeting.
F-27
Internal Revenue Code Section 382 Change of Control; Loss of Tax Benefits
The Company anticipates that the issuance of the Series B Preferred Stock
to Oak Hill will result in an "ownership change" for federal and state tax
purposes. An ownership change will cause certain limitations to apply to the
Company's and its subsidiaries' use of their net operating loss carryforward and
other tax carryforward attributes (collectively, "tax attributes"). Determining
the amount of such limitation requires a number of factual determinations and
the application of recently issued, complex Internal Revenue Service
Regulations. The Company is currently evaluating the change in control and
effect this will have on the tax attributes. If all tax attributes are lost due
to the change in control the Company will be required to write off approximately
$50 million in the first quarter of fiscal 2000.
Related Transactions
In connection with Series B Preferred Stock sale, the Company obtained
consents (1) from lenders and creditors of the Company stating that the Series B
Preferred Stock sale would not constitute a "change of control" under the
relevant loan agreements, (2) from the holders of the 10.5% Senior Preferred
Stock of the Company approving the issuance of the Series B Preferred Stock and
the terms of such stock and (3) from noteholders under the Indenture relating to
the 12% Senior Subordinated Notes due 2006 of the Company's subsidiary, ASC East
(the "Indenture"), approving the "rollup and restructuring" transaction
(described below) and certain other amendments to the Indenture.
Rollup and Restructuring Transaction
In order to comply with the conditions to closing the Series B Preferred
Stock sale, certain amendments were made to the Indenture. One of the amendments
permitted the consummation of a merger of two of the Company's wholly owned
subsidiaries, ASC East and ASC West, with and into ASC. On July 20, 1999 ASC
East issued a consent solicitation to the holders of the Notes, the purpose of
which was to approve a merger of ASC with ASC East and ASC West. This merger was
approved on August 1, 1999 and a payment of approximately $1.5 million was paid
to the holders of the Notes. The Company, ASC East and ASC West were merged on
October 6, 1999. In connection with the merger, ASC assumed all liabilities of
ASC East and ASC West and became the primary obligor under certain credit
facilities and under the Indenture. In addition, the then current subsidiaries
of ASC and ASC West, as well as ASC Utah, also became additional guarantors
under the Indenture. As a result of the merger: (a) ASC East is no longer
required to file annual reports and make other filings under the regulations of
the Securities Exchange Act of 1934 ("Securities Act"); (b) the Company's
capital structure has been simplified, which is expected to make it easier to
raise capital in the future; and (c) the capital and assets of ASC East and its
subsidiaries are available to satisfy the obligations of ASC West and its
subsidiaries.
As a result of the additional guarantee given by certain subsidiaries of
the Company, the noteholders under the Indenture will have priority over the
equity holders of the Company with respect to any claims made on the assets of
those subsidiaries until the obligations under the Indenture have been
satisfied.
The Notes are fully and unconditionally guaranteed by the Company and all
its subsidiaries with the exception of Ski Insurance, Killington West, Ltd.,
Mountain Water Company, Uplands Water Company, Club Sugarbush, Inc., Walton Pond
Apartments, Inc. and Deerfield Operating Company. The guarantor subsidiaries are
wholly-owned subsidiaries of the Company and the guarantees are full,
unconditional, and joint and several. Previous ASC East Securities Act filings
included condensed consolidating financial information that listed separately
the issuer (ASC East), the guarantor subsidiaries under the Notes, and the
non-guarantor subsidiaries. Because the Notes are now guaranteed by subsidiaries
formerly owned by ASC West in addition to the original ASC East guarantor
subsidiaries, the non-guarantor subsidiaries subsequent to the merger are de
F-28
minimis as compared to the Company, and as such, the condensed consolidating
financial information relating to the guarantor subsidiaries of the Notes are
not included in the footnotes to the financial statements of the Company. The
total assets of the non-guarantor subsidiaries represented 0.5% of the total
assets of the Company as of July 25, 1999. Pre-tax income of the non-guarantor
subsidiaries represented 1.75% of total pre-tax income of the Company for the
year ended July 25, 1999, and net income available to common shareholders of the
non-guarantor subsidiaries represented 1.33% of total net income available to
common shareholders of the Company for the year ended July 25, 1999.
Restructuring of Senior Credit Facility
In connection with the Series B Preferred Stock sale, the Company entered
into a Fourth Amendment to the Senior Credit Facility, dated August 6, 1999
("the Amended Senior Credit Facility") to (1) change the definition of "change
in control" so that it would not be triggered by the issuance of the Series B
Preferred Stock; (2) allow the issuance of the Series B Preferred Stock; (3)
allow the consummation of the rollup transaction described above; (4) allow the
investment of approximately $30 million into the Company's principal real estate
development subsidiary; (5) allow the purchase of certain assets from entities
controlled by the Principal Shareholder; (6) allow the amendment of the
Indenture described above; and (7) allow for $23.1 million in resort capital
expenditures during fiscal year 2000 plus up to an additional $30 million for
construction of a gondola at the Heavenly resort, which the Company currently
plans to construct during fiscal years 2000 and 2001.
Pursuant to the Fourth Amendment, the Senior Credit Facility was restated
and consolidated from two sub-facilities totaling $215 million to a single
facility totaling $165 million. The Amended Senior Credit Facility consists of a
revolving credit facility in the amount of $100 million and a term facility in
the amount of $65 million. The revolving portion of the Amended Senior Credit
Facility matures on May 31 2004, and the term portion matures on May 31, 2006
F-29