ASC East, Inc. and Subsidiaries
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED APRIL 26, 1998
-----------------------------
Commission File Number 333-9763
-----------------------------
ASC East, Inc.
(Exact name of registrant as specified in its charter)
Maine 01-0503382
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation organization)
P.O. Box 450 04217
Bethel, Maine
(Address of principal executive office) (Zip Code)
(207) 824-5196
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report.)
Indicated by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of each of the issuer's classes of
common stock were 978,000 shares of common stock $.01 par value outstanding as
of June 11, 1998.
<PAGE>
Table of Contents
Part I - Financial Information............................................. 1
Item 1 Financial Statements ............................................... 2
Condensed Consolidated Statement of Operations (Unaudited) for the
Three Months Ended April 26, 1998 and April 27, 1997.............. 2
Condensed Consolidated Statement of Operations (Unaudited) for the
Nine Months Ended April 26, 1998 and April 27, 1997............... 3
Condensed Consolidated Balance Sheet as of April 26, 1998 (Unaudited)
and July 27, 1997................................................. 4
Condensed Consolidated Statement of Cash Flows (Unaudited) for
the Nine Months Ended April 26, 1998 and April 27, 1997........... 6
Notes to (Unaudited) Condensed Consolidated Financial Statements.. 8
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operation...................................................... 14
General.......................................................... 14
Liquidity and Capital Resources.................................. 14
Changes in Results of Operations................................. 15
Changes in Financial Condition................................... 18
Significant events............................................... 20
Subsequent events................................................ 20
Forward Looking Statements....................................... 21
Part II - Other Information............................................... 22
i
<PAGE>
Part I - Financial Information
Item 1
Financial Statements
This Form 10 Q is filed by ASC East, Inc. for itself and its following
wholly-owned subsidiaries:
Sunday River Skiway Corporation Sunday River, Ltd
Sunday River Transportation Perfect Turn, Inc
LBO Holding, Inc. Sugarbush Resort Holdings, Inc.
Mountain Wastewater Treatment, Inc. Sugarbush Leasing Company
Sugarbush Restaurants, Inc. AJT, Inc. (f/k/a Cranmore, Inc.)
S-K-I Limited Pico Ski Area Management
Killington, Ltd. Deerfield Operating Company
Mount Snow, Ltd. Sugartech
Sugarloaf Mountain Corporation Resort Technologies, Inc.
Killington Restaurants, Inc. Mountainside Corporation
Dover Restaurants, Inc. Resort Software Services, Inc.
WVSAL, Inc. (f/k/a Waterville
Valley Ski Area, Ltd.)
As used herein, the term "the Company" means and refers to ASC East,
Inc., the subsidiary registrants listed above and its non-guarantor wholly-owned
subsidiaries Ski Insurance Company, Mountain Water Company, Club Sugarbush,
Inc., Grand Summit Resort Properties, Inc., and Killington West, Ltd. on a
consolidated basis.
1
<PAGE>
<TABLE>
Condensed Consolidated Statement of Operations
(In thousands except share and per share amounts)
<CAPTION>
For the Three Months Ended
April 26, 1998 April 27, 1997
(Unaudited) (Unaudited)
<S> <C> <C>
Net revenues:
Resort $83,694 $81,673
Real estate 39,990 2,674
----------------------------------------------------------------------
Total net revenues 123,684 84,347
Operating expenses:
Resort 42,888 37,981
Real estate 27,311 2,167
Marketing, general and administrative 5,965 9,097
Depreciation and amortization 10,092 8,075
----------------------------------------------------------------------
Total operating expenses 86,256 57,320
----------------------------------------------------------------------
Income from operations 37,428 27,027
Interest expense 5,768 5,325
----------------------------------------------------------------------
Income before provision for income tax expense 31,660 21,702
Provision for income tax expense 12,347 8,623
----------------------------------------------------------------------
Net income $19,313 $13,079
======================================================================
Retained earnings, beginning of period $ 984 $ 8,221
Add: Net income 19,313 13,079
----------------------------------------------------------------------
Retained earnings, end of period $ 20,297 $ 21,300
======================================================================
Earnings per share - basic and diluted:
Net income $19.75 $13.37
See accompanying Notes to (Unaudited) Condensed Consolidated Financial Statements.
</TABLE>
2
<PAGE>
<TABLE>
Condensed Consolidated Statement of Operations
(in thousands except share and per share amounts)
<CAPTION>
For the Nine Months Ended
April 26, 1998 April 27, 1997
(Unaudited) (Unaudited)
<S> <C> <C>
Net revenues:
Resort $168,198 $157,747
Real estate 48,690 5,983
---------------------------------------------------------------------
Total net revenues 216,888 163,730
Operating expenses:
Resort 104,623 96,192
Real estate 33,459 4,880
Marketing, general and administrative. 19,761 21,598
Depreciation and amortization 19,693 16,946
---------------------------------------------------------------------
Total operating expenses 177,536 139,616
---------------------------------------------------------------------
Income from operations 39,352 24,114
---------------------------------------------------------------------
Interest expense 19,009 18,396
Income before provision for income taxes 20,343 5,718
Provision for income tax expense 7,934 2,549
---------------------------------------------------------------------
Income from continuing operations 12,409 3,169
Extraordinary loss, net of income tax benefit of $2,854 4,464 -
---------------------------------------------------------------------
Net income $7,945 $3,169
=====================================================================
Retained earnings, beginning of period $12,352 $18,131
Add: Net income 7,945 3,169
=====================================================================
Retained earnings, end of period $20,297 $21,300
=====================================================================
Earnings per share - basic and diluted:
Income from continuing operations $12.68 $3.24
Extraordinary loss ($4.56) -
Net income $8.12 $3.24
See accompanying Notes to (Unaudited) Condensed Consolidated Financial Statements
</TABLE>
3
<PAGE>
<TABLE>
Condensed Consolidated Balance Sheet
(in thousands)
<CAPTION>
April 26, 1998 July 27, 1997
(Unaudited)
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents $3,871 $2,634
Restricted cash 1,690 2,812
Accounts receivable 16,152 3,801
Inventory 10,695 7,282
Prepaid expenses 1,140 1,579
Deferred tax assets 770 422
---------------------------------------------------------
Total current assets 34,318 18,530
Property and equipment, net 264,483 242,617
Real estate developed for sale 61,967 23,540
Long-term investments 2,915 3,507
Goodwill 18,864 10,664
Deferred financing costs 6,863 8,334
Other assets 7,418 4,998
Due from affiliate - 1,260
---------------------------------------------------------
Total assets $396,828 $313,450
=========================================================
See accompanying Notes to (Unaudited) Condensed Consolidated Financial Statements.
</TABLE>
4
<PAGE>
<TABLE>
Condensed Consolidated Balance Sheet
(in thousands)
<CAPTION>
April 26, 1998 July 27, 1997
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities
Line of credit and current portion of long-term debt $28,557 $33,248
Accounts payable and other current liabilities 29,831 25,738
Due to shareholder 1,891 1,933
Deposits and deferred revenue 2,986 4,379
Due to affiliate 25,591 -
----------------------------------------------------------
Total current liabilities 88,856 65,298
Long-term debt, excluding current portion 70,613 46,833
Subordinated notes and debentures 127,899 149,749
Other long-term liabilities 6,207 6,932
Deferred income taxes 34,050 28,514
----------------------------------------------------------
Total liabilities 327,625 297,326
Shareholders' equity
Common stock 10 10
Additional paid-in capital 48,896 3,762
Retained earnings 20,297 12,352
----------------------------------------------------------
Total shareholders' equity 69,203 16,124
==========================================================
Total liabilities and shareholders' equity $396,828 $313,450
==========================================================
See accompanying Notes to (Unaudited) Condensed Consolidated Financial Statements.
</TABLE>
5
<PAGE>
<TABLE>
Condensed Consolidated Statement of Cash Flows
(in thousands)
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
For the Nine Months Ended
- -----------------------------------------------------------------------------------------------------------------------------------
April 26, 1998 April 27, 1997
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $7,945 $3,169
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization 19,693 19,099
Discount on convertible debt 342 -
Minority interest - 3,950
Deferred income taxes 5,330 -
Non-cash portion of extraordinary loss 2,231 -
Decreases (increases) in assets:
Restricted cash 252 -
Investments held in escrow - 5,200
Accounts receivable (11,205) (2,494)
Inventory (3,330) (1,355)
Prepaid expenses 75 1,332
Other current assets - 733
Real estate developed for sale (38,760) 13,721
Other assets (2,351) (1,311)
Increases (decreases) in liabilities:
Accounts payable and other current liabilities 2,781 (383)
Income taxes payable - (270)
Deposits and deferred revenue (358) (406)
Net change in due to affiliate 26,849
Accrued interest - 3,552
Other long-term liabilities (799) 2,883
-----------------------------------------------------------------
Net cash provided by operating activities 8,695 47,420
Cash flows from investing activities:
Assets held for resale - (9,070)
Additions to property and equipment (39,108) (22,661)
Purchase of ski resort minority interest - (2,492)
Sale of long-term investments 568 144
-----------------------------------------------------------------
Net cash used in investing activities (38,540) (34,079)
See accompanying Notes to (Unaudited )Condensed Consolidated Financial Statements
</TABLE>
6
<PAGE>
<TABLE>
Condensed Consolidated Statement of Cash Flows
(in thousands)
(continued)
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
For the Nine Months Ended
- -----------------------------------------------------------------------------------------------------------------------------------
April 26, 1998 April 27, 1997
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from financing activities:
Reductions in note payable to shareholder $(43) $(3,409)
Proceeds from construction loan 31,219 -
Proceeds from term loan 30,000 -
Proceeds from revolving line of credit 12,688 -
Repayment of revolving line of credit (59,623) (11,839)
Repayment of subordinated notes (21,882) -
Capital contribution from parent 36,630 -
Net additions to long-term debt 2,093 237
----------------------------------------------------------------
Net cash provided by (used in) financing activities 31,082 (15,011)
Net increase (decrease) in cash and cash equivalents 1,237 (1,670)
Cash and cash equivalents at beginning of period 2,634 4,087
----------------------------------------------------------------
Cash and cash equivalents at end of period $3,871 $2,417
================================================================
</TABLE>
See accompanying Notes to (Unaudited) Condensed Consolidated Financial
Statements.
7
<PAGE>
Notes to (Unaudited) Condensed Consolidated Financial Statements
1. General. In the opinion of the Company, the accompanying unaudited
condensed consolidated financial statements contain all adjustments necessary to
present fairly the financial position of the Company as of April 26, 1998, the
results of operations for the three and nine months ended April 26, 1998 and
April 27, 1997, and the statement of cash flows for the nine months ended April
26, 1998 and April 27, 1997. All adjustments are of a normal recurring nature.
The unaudited condensed consolidated financial statements should be read in
conjunction with the following notes and the Company's audited consolidated
financial statements as of and for the year ended July 27, 1997 which were filed
with the Company's Form 10K with the Securities Exchange Commission on October
30, 1997.
2. 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.
3. Income Taxes. The provision (benefit) for income taxes is based on a
projected annual effective tax rate of 39%. The net deferred income tax
liability includes the cumulative reduction in current income taxes payable
resulting principally from the excess of depreciation reported for income tax
purposes over that reported for financial reporting purposes.
4. Seasonal Business. Results for interim periods are not indicative of
the results expected for the year due to the seasonal nature of the Company's
business, which is the development and operation of ski resorts.
5. Earnings per Share. Effective January 25, 1998, the Company adopted
the provisions of Financial Accounting Standards Board's Statement of Financial
Accounting Standard No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128
specifies the computation, presentation, and disclosure requirements for
earnings per share for public entities. Earnings per share for the three and
nine months ended April 26, 1998 and April 27, 1997 were determined as follows:
8
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(in thousands) April 26, April 27, April 26, April 27,
Income 1998 1997 1998 1997
---------------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
Income from continuing operations $19,313 $13,079 $12,409 $3,169
Extraordinary loss - - (4,464) -
---------------- -------------- ------------- ------------
Net income (basic and diluted) $19,313 $13,079 $7,945 $3,169
================ ============== ============= ============
Shares
Weighted average common shares outstanding - basic and
diluted 978 978 978 978
================ ============== ============= ============
</TABLE>
6. Adjustments and Reclassifications. Certain amounts in the prior year's
unaudited condensed consolidated financial statements and the audited financial
statements which were filed with the Company's Form 10K with the Securities
Exchane Commission on October 30, 1997.
7. Guarantors of Debt. The 12% Senior Subordinated Notes due 2006 are
fully and unconditionally guaranteed by the Company and all of its subsidiaries
with the exception of Grand Summit Resort Properties, Inc., Ski Insurance,
Killington West, Ltd., Mountain Water Company, and Club Sugarbush, Inc., (the
non-guarantors). The guarantor subsidiaries are wholly-owned subsidiaries of the
company and the guarantees are full, unconditional, and joint and several. The
guarantor information for the period ended April 26, 1998, is as follows:
<TABLE>
Statement of operations for the nine months ended April 26, 1998
(in thousands)
<CAPTION>
Guarantor Non-Guarantor Consolidated
ASC East Subsidiaries Subsidiaries Eliminations ASC East
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
------------ ---------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Net revenues:
Resort $980 $166,723 $1,747 $(1,252) $168,198
Real estate - 3,722 44,968 - 48,690
------------ ---------------- ---------------- ------------- ----------------
Total net revenues 980 170,445 46,715 (1,252) 216,888
Operating expenses:
Resort 1,213 103,359 1,303 (1,252) 104,623
Real estate - 2,659 30,800 - 33,459
Marketing, general and administrative 2,111 17,627 23 - 19,761
Depreciation and amortization 1,194 18,448 51 - 19,693
------------ ---------------- ---------------- ------------- ----------------
Total operating expenses 4,518 142,093 32,177 (1,252) 177,536
------------ ---------------- ---------------- ------------- ----------------
Income (loss) from operations (3,538) 28,352 14,538 - 39,352
Interest expense 13,107 6,631 (729) - 19,009
------------ ---------------- ---------------- ------------- ----------------
Income (loss) before provision for (benefit from) (16,645) 21,721 15,267 - 20,343
income tax expense
Provision for (benefit from) income taxe expense (6,492) 8,472 5,954 - 7,934
------------ ---------------- ---------------- ------------- ----------------
Income (loss) from continuing operations (10,153) 13,249 9,313 - 12,409
Extraordinary loss 4,266 198 - - 4,464
------------ ---------------- ---------------- ------------- ----------------
Net income (loss) $(14,419) $13,051 $9,313 $- $7,945
============ ================ ================ ============= ================
</TABLE>
9
<PAGE>
<TABLE>
Balance Sheet at April 26, 1998
(in thousands)
<CAPTION>
Guarantor Non-Guarantor Consolidated
ASC East Subsidiaries Subsidiaries Eliminations ASC East
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $18 $2,535 $1,318 $- $3,871
Restricted cash - (33) 1,723 - 1,690
Accounts receivable - 9,411 11,710 (4,969) 16,152
Inventory 281 10,414 - - 10,695
Prepaid expenses 1 1,519 (380) - 1,140
Deferred tax assets - 422 348 - 770
---------------------------------------------------------------------------------------------
Total current assets 300 24,268 14,719 (4,969) 34,318
Property and equipment, net 93 262,959 1,431 - 264,483
Real estate developed for sale - 1,574 60,393 - 61,967
Long-term investments - - 2,915 - 2,915
Goodwill 18,864 - - - 18,864
Deferred financing costs 6,862 - 1 - 6,863
Other assets 150 7,162 106 - 7,418
Investment in subsidiaries 120,118 141,960 - (262,078) -
---------------------------------------------------------------------------------------------
Total assets $146,387 $437,923 $79,565 $(267,047) $396,828
=============================================================================================
</TABLE>
10
<PAGE>
<TABLE>
Balance Sheet at April 26, 1998
(in thousands)
<CAPTION>
Guarantor Non-Guarantor Consolidated
ASC East Subsidiaries Subsidiaries Eliminations ASC East
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities
Line of credit and current portion of long-term $25,255 $2,652 $650 $- $28,557
debt
Accounts payable and other current liabilities 5,181 22,059 2,618 (27) 29,831
Due to shareholder - 1,891 - - 1,891
Deposits and deferred revenue 300 1,008 1,678 - 2,986
Due to affiliate (40,522) 76,004 (9,891) - 25,591
---------------------------------------------------------------------------
Total current liabilities (9,786) 103,614 (4,945) (27) 88,856
Long-term debt, excluding current portion 18,400 22,309 34,873 (4,969) 70,613
Subordinated notes and debentures 116,949 10,950 - - 127,899
Other long-term liabilities 161 2,614 3,432 - 6,207
Deferred income taxes (9,428) 38,098 (421) 5,801 34,050
---------------------------------------------------------------------------
Total liabilities 116,296 177,585 32,939 805 327,625
Shareholders' equity
Common stock 10 181 2 (183) 10
Additional paid-in capital 48,876 212,780 30,640 (243,400) 48,896
Retained earnings (accumulated deficit) (18,795) 47,377 15,984 (24,269) 20,297
---------------------------------------------------------------------------
Total shareholders' equity 30,091 260,338 46,626 (267,852) 69,203
---------------------------------------------------------------------------
Total liabilities and shareholders' equity $146,387 $437,923 $79,565 $(267,047) $396,828
===========================================================================
</TABLE>
11
<PAGE>
<TABLE>
Statement of cash flows for the nine month period ended April 26,1998
(in thousands)
<CAPTION>
Guarantor Non-Guarantor Consolidated
ASC East Subsidiaries Subsidiaries Eliminations ASC East
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
-------------- ----------------- ----------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(14,419) $13,051 $9,313 $- $7,945
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization 1,019 18,663 11 - 19,693
Discount on convertible debt 270 72 - - 342
Deferred income taxes (9,218) 9,037 5,511 - 5,330
Non-cash portion of extraordinary loss 2,231 - - - 2,231
Decreases (increases) in assets:
Restricted cash 141 (104) 215 - 252
Accounts receivable 284 (5,797) (10,661) 4.969 (11,205)
Inventory 85 (3,346) (69) - (3,330)
Prepaid expenses (1) (204) 280 - 75
Real estate developed for sale - (644) (38,116) - (38,760)
Other assets 199 (2,444) (106) (2,351)
Increases (decreases) in liabilities:
Accounts payable and other current liabilities 2,983 2,245 (2,447) - 2,781
Deposits and deferred revenue (237) (347) 226 - (358)
Due to affiliate 14,156 7,290 5,403 - 26,849
Other long-term liabilities (331) 371 (839) - (799)
-------------- ----------------- ----------------- --------------- -------------
Net cash provided by (used in) operating (2,838) 37,843 (31,279) 4,969 8,695
activities
Cash flows from investing activities:
Additions to property and equipment 1,235 (40,844) 501 - (39,108)
Sale of long-term investments - - 568 - 568
-------------- ----------------- ----------------- --------------- -------------
Net cash used in investing activities 1,235 (40,844) 1,069 (38,540) (38,540)
Net cash flows from financing activities:
Proceeds from construction loan - - 31,219 - 31,219
Proceeds from term loan 30,000 - - - 30,000
Deferred financing costs (1,495) - (1,495)
Proceeds from revolving line of credit 13,655 (967) - - 12,688
Repayment of revolving line of credit (59,623) - - - (59,623)
Capital contribution from ASC 36,630 - - - 36,630
Repayments of subordinated debt (21,882) - - - (21,882)
Additions (reductions) to long-term debt 4,318 4,239 - (4,969) 3,588
Reductions in note payable to shareholder - (43) - - (43)
-------------- ----------------- ----------------- --------------- -------------
Net cash provided by financing activities 1,603 3,229 31,219 (4,969) 31,082
</TABLE>
12
<PAGE>
<TABLE>
Statement of cash flows for the nine month period ended April 26,1998
(in thousands)
(continued)
<CAPTION>
Guarantor Non-Guarantor Consolidated
ASC East Subsidiaries Subsidiaries Eliminations ASC East
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
-------------- --------------- -------------- -------------- -----------------
<S> <C> <C> <C> <C>
Net increase in cash and cash equivalents - 228 1,009 - 1,237
Cash and cash equivalents at beginning of period 18 1,422 1,194 - 2,634
-------------- --------------- -------------- -------------- -----------------
Cash and cash equivalents at end of period $ 18 $ 1,650 $ 2,203 $ - $ 3,871
============== =============== ============== ============== =================
</TABLE>
13
<PAGE>
Item 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
We are pleased to present to you management's discussion and analysis
of financial condition and results of operations for the third quarter of fiscal
1998 and the nine months ended April 26, 1998. As you read the material below,
we urge you to carefully consider our (Unaudited) Condensed Consolidated
Financial Statements and related notes contained elsewhere in this report and
the audited financial statements and related notes contained in our Form 10K
filed with the Securities Exchange Commission on October 30, 1997.
Liquidity and Capital Resources
Short-Term. The Company's primary short-term liquidity needs are
funding seasonal working capital requirements, its summer 1998 capital
improvement program, and servicing indebtedness. The 1998 summer capital
improvements will include expenditures on lifts, trails, snow-making equipment
and base facilities. Cash requirements for ski-related and real estate
development activities are provided by separate sources. The Company's primary
sources of liquidity for working capital and ski-related capital improvements
are investments in the Company by its parent, American Skiing Company ("ASC"),
cash flow from operations of its subsidiaries and borrowings under ASC's senior
credit facility. No future real estate development is anticipated to occur
through the Company. ASC has structured its real estate operations as a separate
direct subsidiary of ASC.
The Company established a new credit facility on November 12, 1997 (the
"New Credit Facility"). The New Credit Facility is a sub-facility under the
senior credit facility of ASC and $75 million (up to $30 million of which is
currently available) is available for borrowings by the Company. The New Credit
Facility consists of an eight-year revolving credit facility in the amount of
$45 million and an eight-year term facility in the amount of $30 million.
The revolving portion of the New Credit Facility is subject to annual
30-day clean down requirements to an outstanding balance of not more than $10
million. The maximum availability under the revolving facility will be reduced
over the term of the New Credit Facility by certain prescribed amounts. The term
portion of the New Credit Facility amortizes at a rate of approximately 1.0% of
the principal amount for the first six years with the remaining portion of the
principal due in two substantially equal installments in years seven and eight.
Beginning July 1999, the New Credit Facility requires mandatory prepayment of
50% of excess cash flows during any period in which the ratio of the Company's
total senior debt to EBITDA exceeds 3.50 to 1, tested on a consolidated basis
with that of ASC and its remaining subsidiaries. In no event, however, will such
mandatory prepayments reduce the revolving facility commitment below $35
million. The New Credit Facility contains affirmative, negative and financial
covenants customary for this type of senior credit facility including
maintenance of customary financial ratios. With the exception of a leverage
test, compliance with financial covenants is determined on a consolidated basis
14
<PAGE>
with the remainder of the credit facility for ASC and its other subsidiaries,
notwithstanding the bifurcation of that facility into sub-facilities. The New
Credit Facility is secured by substantially all the assets of the Company and
its subsidiaries, except for the Company's real estate development subsidiaries,
which are not borrowers under the New Credit Facility.
The Company's 1998 summer capital program is expected to total
approximately $30 million. The combination of capital contributions from ASC,
cash flow from resort operations, capital leases and the New Credit Facility are
expected to provide sufficient funds to meet short-term liquidity needs for
working capital and skiing related capital expenditures.
The Company expects to benefit from an exchange offer ("Exchange
Offer") currently being made by the Company's parent corporation to holders of
the Company's $120 million 12% Senior Subordinated Notes due 2006 (the "12%
Notes") to exchange those obligations for substantially similar obligations of
ASC. The consummation of the Exchange Offer would benefit the Company because it
would enable the free movement of funds between the Company and ASC. As part of
the Exchange Offer, holder of the Company's 12% Senior Subordinated Notes are
being asked to consent to certain amendments to the indenture under which such
Notes were issued. No commitments have been made by the Company or ASC relating
to the Exchange Offer and no assurance can be given that the Exchange Offer will
be consummated.
The Company runs its existing real estate development through a single
purpose subsidiary. Construction of the Company's existing Grand Summit Hotel
projects is financed through an independent construction loan facility with
recourse limited to the real estate development subsidiaries. The facility is a
customary construction lending facility allowing advances as construction
progresses. Each advance is subject to certain conditions, including obtaining
certain levels of preconstruction sales. The loan is secured by first mortgages
on the Company's Grand Summit properties. Principal is to be repaid at a rate of
80% to 85% of the proceeds generated by quartershare sales. The construction
facility matures December, 2000. This facility is sufficient to fund the Grand
Summit Hotel projects which were substantially completed during the 1997-1998
ski season.
Long-Term. The Company's primary long-term liquidity needs are to fund
skiing related capital improvements at certain of its resorts. There is a
considerable degree of flexibility in the timing and, to a lesser degree, in the
scope of these capital improvements. Although specific capital expenditures can
be deferred for extended periods, continued growth in skier visits, revenues and
profitability will require continued capital investment in on-mountain
improvements. The Company's practice is to finance on-mountain capital
improvements through resort cash flow and its New Credit Facility. The size and
scope of the capital improvement program will generally be determined annually
depending on future availability of cash flow from each season's resort
operations and future borrowing availability under the New Credit Facility.
No further real estate development is expected to occur through the
Company. ASC's real estate development is expected to be undertaken by a
separate direct ASC subsidiary.
Changes in Results of Operations
Changes for the Third Quarter of Fiscal 1998 compared to the Third Quarter of
Fiscal 1997.
1. Resort revenues. Resort revenues increased $2.0 million or 2.4% from
$81.7 million in the third quarter of fiscal 1997 to $83.7 million in the third
15
<PAGE>
quarter of fiscal 1998. The increase is primarily attributable to the
acquisition of new food, beverage and retail operations at Killington, Sugarloaf
and Attitash.
2. Real estate revenues. Real estate revenues increased $37.3 million
in the third quarter of fiscal 1998 as compared to the third quarter of fiscal
1997. The increase is attributable to completion of the Company's new hotels at
Killington, Mount Snow and Sunday River and the closings of quartershare unit
sales at these projects.
3. Cost of resort operations. Cost of resort operations increased 12.9%
from $38.0 million to $42.9 million. The $4.9 million increase is principally
attributable to increased costs associated with increased business volume.
4. Cost of real estate operations. Cost of real estate operations
increased $25.1 million due to increased sales and also to non-capitalizable
costs associated with future projects currently under development.
5. Marketing, general and administrative. Marketing, general and
administrative costs decreased $3.1 million or 34.1% from $9.1 million to $6.0
million. The decrease is primarily attributable to assumption of certain
corporate marketing and administrative costs by ASC beginning in November 1997.
6. Depreciation and amortization. Depreciation and amortization
expenses increased $2.0 million or 24.7% from $8.1 million to $10.1 million. The
increase is primarily attributable to capital expenditures made in the summer of
1997.
7. Interest expense. Interest expense increased $.4 million or 8.3% from
$5.3 million to $5.8 million. The increase is due to additional debt outstanding
on the New Credit Facility and the construction loan facility related to the
Grand Summit Hotel projects. These increases are partially offset by a decrease
in interest expense related to the Subordinated Notes.
8. Provision for income taxes. Provision for income taxes increased
$3.3 million and is entirely related to the $10.0 million increase in net income
before provision for income taxes.
16
<PAGE>
Changes in Results of Operations
Changes for the First Nine Months of Fiscal 1998 compared to the
First Nine Months of Fiscal 1997.
1. Resort revenues. Resort revenues increased 6.7% from $157.7 million
for the nine months ended April 26, 1998 to $168.2 million for the nine months
ended April 27, 1997. The $10.5 million increase in revenues is principally
attributable to increased skier visits at the Company's resorts, an increase in
yield per skier visit, and the acquisition of various retail and food and
beverage operations.
2. Real estate revenues. Real estate revenues increased $42.7 million
for the nine months ended April 26, 1998 as compared to the nine months ended
April 27, 1997. The increase is attributable to completion of the Company's
Grand Summit hotels at Killington, Mount Snow and Sunday River, and the closings
of quartershare unit sales at these projects.
3. Cost of resort operations. Cost of resort operations increased 8.7%
from $96.2 million to $104.6 million. The $8.4 million increase is principally
attributable to increased costs associated with increased business volume at the
Company's resorts.
4. Cost of real estate operations. Cost of real estate operations
increased $28.6 million due to increased sales and also to non-capitalizable
costs associated with future projects currently under development.
5. Marketing, general, and administrative. Marketing, general, and
administrative costs decreased 8.3% from $21.6 million to $19.8 million. The
decrease is attributable to assumption of certain corporate and marketing and
administrative expense by ASC which began in November 1997.
6. Depreciation and amortization. Depreciation and amortization expense
increased $2.8 million or 16.6% from $16.9 million in the third quarter of
fiscal 1997 to $19.7 million. The increase is due primarily to capital
expenditures made in the summer of 1997.
7. Interest expense. Interest expense increased $.6 million or 3.3% from
$18.4 million to $19.0 million. The increase is due to additional debt
outstanding on the New Credit Facility and the construction loan facility
related to the Grand Summit Hotel projects. These increases are partially offset
by a decrease in interest expense related to the Subordinated Notes.
8. Provision for income taxes. Provision for income tax expense
increased by $5.4 million from $2.5 million to $7.9 million. The increase is
entirely related to the $14.6 million increase in net income before provision
for income taxes.
9. Extraordinary loss. The extraordinary loss recorded by the Company
relates to the early retirement of the Company's revolving line of credit and
Subordinated Notes and indebtedness related to the acquisition of Sugarbush.
17
<PAGE>
Changes in Financial Condition
Changes for the First Nine Months of Fiscal 1998 Compared to
year-end Fiscal 1997.
1. Cash and cash equivalents. Cash and cash equivalents increased 47.0%
or $1.3 million from $2.6 million as of July 27, 1997 to $3.9 million as of
April 26, 1998. The primary reason for the increase is due to the increased
activity related to the operating cycle of the Company.
2. Accounts receivable. Accounts receivable increased 325% or $12.4
million from $3.8 million to $16.2 million. The primary reason for the increase
is due to increased operating activities due to the seasonal nature of the
Company's business cycle and to increased real estate sales activity.
3. Inventory. Inventories increased 46.6% or $3.4 million from $7.3
million as of July 27, 1997 to $10.7 million. The increased inventory levels are
directly related to the Company's operating cycle and additional food, beverage
and retail operations in the Northeast.
4. Property and equipment, net. Property and equipment, net increased
9.0% or $21.9 million from $242.6 million to $264.5 million. The $21.9 million
increase is related to the capital improvement program at the resorts and the
acquisition of the Wobbly Barn restaurant in Killington, VT.
5. Real estate developed for sale. Real estate developed for sale
increased 163.8% or $38.5 million from $23.5 million to $62.0 million. The
increase is attributable to capital expenditures for the quartershare Grand
Summit hotel projects being constructed at the Killington, Mount Snow and Sunday
River ski resorts.
6. Goodwill. Goodwill increased 76.6% or $8.2 million from $10.7
million to $18.9 million as of April 26, 1998. The increase (net of amortization
of existing goodwill) is attributable to ASC's exchange of shares of its common
stock for shares of ASC East's common stock held by the minority interest
shareholders.
7. Deferred financing costs. Deferred financing costs decreased $1.4
million or 17.7% from $8.3 million to $6.9 million. The decrease is attributable
to the write-off of deferred financing fees related to the Subordinated Notes
and the Company's previous line of credit; both of which resulted in an
extraordinary loss. The Company also incurred additional deferred financing
costs related to the New Credit Facility which offset part of the decrease.
8. Current portion of long-term debt. Current portion of long-term debt
decreased 14.1% or $4.6 million from $33.2 million to $28.6 million. The reason
for the decrease is due to the New Credit Facility and its payment structure
relative to the senior credit facility.
9. Accounts payable and other current liabilities. Accounts payable and
other current liabilities increased $4.1 million or 16.0% from $25.7 million to
$29.8 million. The increase is attributable to the seasonal nature of the
Company's business cycle.
10. Deposits and deferred revenue. Deposits and deferred revenue
decreased 31.8% or $1.4 million from $4.4 million to $3.0 million. The decrease
18
<PAGE>
is primarily attributable to decreases in deposits on quartershare Grand Summit
units at the Killington, Mount Snow, and Sunday River resorts as the result of
real estate closings throughout fiscal 1998.
11. Due to affiliate. Due to affiliate increased $25.6 million. The
increase is primarily attributable to advances to the Company from its parent
for operations and the retirement of the senior credit facility.
12. Long-term debt, excluding current portion. Long-term debt,
excluding current portion increased 50.9% or $23.8 million from $46.8 million to
$70.6 million. The increase results primarily from a construction loan which was
closed in August 1997 and has a balance of $34.0 million as of April 26, 1998.
13. Subordinated notes and debentures. Subordinated notes and
debentures decreased 14.6% or $21.9 million which is primarily attributable to
the early retirement of the Subordinated Notes on December 30, 1997.
14. Deferred income taxes. Deferred income taxes increased 19.3% or
$5.5 million from $28.5 million to $34.0 million. The increase is attributable
to the provision for income taxes, most of which is not currently payable.
15. Additional paid-in capital. Additional paid in capital increased
$45.1 million from $3.8 million as of July 27, 1997 to $48.9 million as of April
26, 1998. The increase is due to the following factors: (1) ASC exchanged shares
of its common stock for the minority interest of the Company resulting in an
increase of $8.7 million and (2) ASC contributed $36.4 million to the Company to
repay various outstanding debt obligations which included the Subordinated Notes
and Sugarbush acquisition indebtedness.
16. Retained earnings. Retained earnings increased from $12.4 million
to $20.3 million. The increase is directly attributable to the $7.9 million net
income for the nine months ended April 26, 1998.
19
<PAGE>
Significant Events
New Credit Facility. The Company entered into the New Credit Facility
described above under the heading "Liquidity and Capital Resources"
contemporaneously with the closing by ASC of its initial public offering on
November 12, 1997.
Consent Solicitation. Contemporaneously with the November 12, 1997
closing, the Company closed the amendment (the "Amendment") of the indenture
(the "12% Note Indenture") relating to its 12% Notes to permit the consummation
of the initial public offering of ASC without requiring the Company to make a
Change of Control Offer (as defined). The 12% Note Indenture required the
consent of the holders of at least a majority in aggregate principal amount of
the 12% Notes to amend the 12% Note Indenture. The Company obtained the
requisite amount of consents pursuant to the consent solicitation, and executed
a supplemental indenture to give effect to the Amendment. In connection with the
consent solicitation, the Company paid to the consenting holders of the 12%
Notes a customary consent payment.
Redemption of Subordinated Notes. A portion of the proceeds from ASC's
initial public offering have been contributed to the Company. The capital
contribution was used to make an approximate $27.7 million redemption of all
outstanding 13 3/4% Subordinated Discount Notes due 2007 of the Company (the
"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 a pretax loss of
approximately $4.3 million related to the repayment of the Subordinated Notes.
Land Exchange. The Company consummated a land exchange with the State
of Vermont on December 1, 1997. The exchange results in the Company obtaining
ownership of over 1,000 acres of valuable developmental real estate at the base
of the Killington resort.
Interest Rate Swap. On February 5, 1998 the Company entered into an
interest rate swap arrangement with BankBoston that effectively lowers the
interest rate on its 12% notes to 9%. The Company's principal risk on the
transaction is that LIBOR decreases below 6.9% in July 2001 when another swap
agreement can be entered into.
Subsequent Events
Exchange Offer. On May 8, 1998, the Company's parent initiated an
exchange offer and Consent solicitation whereby the Company's parent offered to
exchange up to $120 million of its senior subordinated notes for the company's
12% Senior Subordinated Notes due 2006. The Company's parent filed a report on
Form 8-K making publicly available certain portions of its Exchange offer. As
part of the Exchange offer, holders of the Company's 12% Senior Subordinated
Notes are being asked to consent to certain amendments to the indenture under
which such Notes were issued. The deadline for response to the exchange has been
extended from June 5, 1998 to June 12, 1998.
20
<PAGE>
Forward-Looking Statements
Certain of the statements contained in this section of the report,
including those under "Financial Condition," are forward-looking. While the
Company believes that these statements are accurate, its business is highly
seasonal and is dependent upon weather and general economic conditions and
various conditions specific to its industry. Future trends and results cannot be
predicted with certainty and actual results could differ materially from the
forward-looking statements. In particular:
1. Ski and resort operations are highly seasonal. Over the last five
fiscal years, the Company realized an average of approximately 86% of its resort
revenues during the period from November through April, with a significant
portion of these resort revenues (and approximately 23% of annual skier visits)
being generated during the Christmas and Presidents' Day vacation weeks.
Unfavorable weather or market conditions during these periods could have a
material adverse effect on operating results and financial performance.
2. The development of ski resorts is capital intensive. The Company's
expansion of its resorts is dependent upon availability of the necessary
capital. There can be no assurance that the Company will have adequate funds,
from internal or external sources, to make all planned and required capital
expenditures over the long term.
3. Real estate development and the Company's ability to generate
revenues from sales therefrom may be adversely affected by numerous factors,
many of which are beyond the control of the Company. These factors include the
national and regional economic climate, the ability of the Company to obtain the
necessary zoning, land use, building, occupancy and other required governmental
permits and authorizations and changes in real estate, zoning, land use,
environmental and tax laws. In addition, real estate development will be
dependent upon, among other things, receipt of adequate financing on suitable
terms, obtaining and maintaining the requisite permits and licenses and, in
certain circumstances, acquiring additional real estate. There can be no
assurance that such financing, permits, licenses and real estate are obtainable.
21
<PAGE>
Part II - Other Information
Item 6
Exhibits
Included herewith is the Financial Data Schedule submitted as Exhibit
27 in accordance with Item 601(c) of Regulation S-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ASC East, Inc.
Date: June 11, 1998 /s/ Thomas M. Richardson
------------- -------------------------
Thomas M. Richardson
Senior Vice President Finance Chief
Financial Officer (Principal
Financial and Accounting Officer)
Date: June 11, 1998 /s/ Christopher E. Howard
------------- --------------------------
Christopher E. Howard
Chief Administrative Officer and
General Counsel
(Duly Authorized Officer)
22
<PAGE>
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