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 OCTOBER 25, 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 of (I.R.S. Employer Identification No.) incorporation or organization) P.O. Box 450 Bethel, Maine 04217 (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.) The registrant meets the conditions set forth in General Instruction (H) (1) (a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format provided therein. 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 was 978,300 shares of common stock $.01 par value outstanding as at December 9, 1998. ASC East, Inc. and Subsidiaries Table of Contents Part I - Financial Information.................................................1 Item 1. Financial Statements ..................................................1 Condensed Consolidated Statement of Operations (Unaudited) for the three months ended October 25, 1998 and October 26, 1997...................... 1 Condensed Consolidated Balance Sheet of October 25, 1998 (Unaudited) and July 26, 1998 .......................................................... 2 Condensed Consolidated Statement of Cash Flows (Unaudited) for the three months ended October 25, 1998 and October 26, 1997 ..................... 3 Notes to (Unaudited) Condensed Consolidated Financial Statements ............ 4 Item 2. Changes in Results of Operations............................................. 12 Year 2000 Disclosure ........................................................ 13 Forward-Looking Statements .................................................. 15 Part II - Other Information.................................................. 17 Item 6. Exhibits and Reports on Form 8-K..................................... 18 ASC East, Inc. and Subsidiaries Part I - Financial Information Item 1 Financial Statements Condensed Consolidated Statement of Operations (in thousands, except share and per share amounts) For the three months ended October 25, 1998 October 26, 1997 (unaudited) (unaudited) Net revenues: Resort $ 15,799 $ 13,655 Real estate 4,323 810 ------------------ ------------------ Total net revenues 20,122 14,465 Operating expenses Resort 19,646 17,533 Real estate 3,937 925 Marketing, general and administrative 5,092 6,540 Stock compensation charge (Note 7) - 3,271 Depreciation and amortization 1,827 1,450 ------------------ ------------------ Total operating expenses 30,502 29,719 ------------------ ------------------ Loss from operations (10,380) (15,254) Interest expense 6,900 6,707 ------------------ ------------------ Loss before benefit for income taxes (17,280) (21,961) Benefit for income taxes (6,730) (8,433) ------------------ ------------------ Net loss $ (10,550) $ (13,528) ================== ================== Retained earnings, beginning of period $ 9,268 $ 12,352 Net loss (10,550) (13,528) ------------------ ------------------ Accumulated deficit, end of period $ (1,282) $ (1,176) ================== ================== Net loss per share-basic and diluted (Note 5) $ (10.78) $ (13.83) Weighted average shares outstanding 978,300 978,300 ================== ================== See accompanying notes to (Unaudited) Condensed Consolidated Financial Statements. 1 ASC East, Inc. and Subsidiaries Condensed Consolidated Balance Sheet (in thousands, except share and per share amounts) October 25, 1998 July 26, 1998 (unaudited) Assets Current assets Cash and cash equivalents $ 5,563 $ 4,157 Restricted cash 6,378 1,769 Accounts receivable 4,682 7,138 Inventory 9,096 10,226 Prepaid expenses 2,960 1,705 Deferred income taxes 1,289 1,289 ----------------- ---------------- Total current assets 29,968 26,284 Property and equipment, net 303,373 296,756 Real estate developed for sale 91,242 38,023 Goodwill 19,563 19,702 Intangible assets 2,032 2,050 Deferred financing costs 6,463 6,643 Long-term investments 2,051 2,202 Other assets 8,158 4,691 ----------------- ---------------- Total assets $ 462,850 $ 396,351 ----------------- ---------------- Liabilities and Shareholders' Equity Current liabilities Current portion of long-term debt $ 47,285 $ 28,100 Accounts payable and other current liabilities 27,390 26,557 Deposits and deferred revenue 20,778 3,574 Demand note, Principal Shareholder 1,846 1,846 Due to affiliates 53,602 17,132 ----------------- ---------------- Total current liabilities 150,901 77,209 Long-term debt, excluding current portion 83,897 85,045 Subordinated notes and debentures, excluding current portion 127,539 127,497 Other long-term liabilities 7,780 7,313 Deferred income taxes 20,119 26,873 ----------------- ---------------- Total liabilities 390,236 323,937 Shareholders' Equity Common stock, Class A, par value $.01 per share; 1,000,000 shares Authorized; 978,300 issued and outstanding 10 10 Additional paid-in capital 73,886 63,136 Retained earnings (deficit) (1,282) 9,268 ----------------- ---------------- Total shareholders' equity 72,614 72,414 ----------------- ---------------- Total liabilities and shareholders' equity $ 462,850 $ 396,351 ----------------- ---------------- See accompanying notes to (Unaudited) Condensed Consolidated Financial Statements. 2 ASC East, Inc. and Subsidiaries Condensed Consolidated Statement of Cash Flows (in thousands) For the three months ended October 25, 1998 October 26, 1997 (unaudited) (unaudited) Cash flows from operating activities Net loss $ (10,550) $ (13,528) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,827 2,350 Discount on convertible debt 67 - Deferred income taxes (6,730) (8,573) Stock compensation charge - 3,271 Decrease (increase) in assets: Restricted cash (118) (267) Accounts receivable 1,696 (373) Inventory 1,130 (3,520) Prepaid expenses (171) (747) Real estate developed for sale (12,820) (21,938) Other assets (3,467) 155 Increase (decrease) in liabilities: Accounts payable and other current liabilities 1,595 6,742 Deposits and deferred revenue 11,107 9,981 Other long-term liabilities 467 209 Due to/from affiliates 9,338 5,250 ----------------- ------------------ Net cash used in operating activities (6,629) (20,988) ----------------- ------------------ Cash flows from investing activities Capital expenditures (8,602) (11,175) Long-term investments 151 127 Cash contribution from parent 1,600 - Other, net (5) - ----------------- ------------------ Net cash used in investing activities (6,856) (11,048) ----------------- ------------------ Cash flows from financing activities Net proceeds from Old Credit Facility - 1,189 Net borrowings (repayment of) under Senior Credit Facility (3,727) - Proceeds from (repayment of) long-term debt 18,657 32,836 Deferred financing costs (39) (50) ----------------- ------------------ Net cash provided by financing activities 14,891 33,975 ----------------- ------------------ Net increase in cash and cash equivalents 1,406 1,939 Cash and cash equivalents, beginning of period 4,157 2,634 ----------------- ------------------ Cash and cash equivalents, end of period $ 5,563 $ 4,573 ================= ================== See accompanying notes to (Unaudited) Condensed Consolidated Financial Statements. 3 ASC East, Inc. and Subsidiaries Notes to (Unaudited) Condensed Consolidated Financial Statements 1. Change in Accounting Estimate. Effective July 27, 1998, the Company made changes in the estimated useful lives of certain of its operating fixed assets. This change had no effect on the net loss or loss per share for the quarter ended October 25, 1998 as the Company records a full year of depreciation relating to its operating assets over the second and third quarters of its fiscal year. 2. 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 October 25, 1998 and July 26, 1998, the results of operations for the three months ended October 25, 1998 and October 26, 1997, and the statement of cash flows for the three months ended October 25, 1998 and October 26, 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 consolidated financial statements in the Form 10-K which was filed with the Securities and Exchange Commission on November 9, 1998. 3. Income Taxes. The expense (benefit) for taxes on income (loss) 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. Net Loss per Share. Net loss per share figures are based on the average shares outstanding during the first quarter of fiscal 1999 and 1998 of 978,300. The shares outstanding are the actual shares outstanding for Class A common stock. 6. Adjustments and Reclassifications. Certain amounts in the prior year's unaudited condensed consolidated financial statements and the audited financial statements as filed with the Securities and Exchange Commission on November 9, 1998 have been reclassified to conform to the current presentation. 7. Stock option plan. In the first quarter of fiscal 1998 the Company's parent incurred a stock compensation charge associated with the grant of non-qualified stock options to certain key members of senior management. A portion of the parent's stock compensation charge ($3.3 million) was allocated to ASC East based on an approximation of the actual time management employees comprising the stock compensation charge spent on ASC East related activities during the year ended July 26, 1998. 4 ASC East, Inc. and Subsidiaries 8. Related party transactions. The Company's parent incurs certain common expenses that are allocable to ASC East, including marketing and other overhead related costs. The total allocation of these costs charged to the Company of $420,000 is included in the marketing, general and administrative component in the accompanying consolidated statement of operations. The marketing and other overhead cost were allocated to the Company based on the estimate of amounts benefitting ASC East. It is management's opinion that the methods used to allocate the other common costs are reasonable. 9. Guarantors of Debt. The Notes are fully and unconditionally guaranteed by the Company and all of its subsidiaries with the exception, of SKI Insurance Company, Killington West, Ltd., Mountain Water Company, Uplands Water Company, and Club Sugarbush, Inc., (the "Non-Guarantors"). Prior to the S-K-I Acquisition and issuance of the Notes on June 28, 1996, the bank loan agreements were collateralized by virtually all of the assets of the companies comprising the Company. The guarantor subsidiaries are wholly-owned subsidiaries of the Company and the guarantees are fully, unconditional, and joint and several. The guarantor information for the quarters ended October 25, 1998 and October 26, 1997, is as follows: 10. Recently Issued Accounting Standards. In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 was effective for all fiscal quarters of all fiscal years beginning after December 15, 1997, (the fiscal year ended July 25, 1999 for the Company). This pronouncement requires disclosure of comprehensive income and its components in interim and annual reports. Total comprehensive income components included in stockholders' equity include any changes in equity during a period that are not the result of transactions with owners, including cumulative translation adjustments, unrealized gains and losses on available-for-sale securities and minimum pension liabilities. As of October 25, 1998, the Company has no such items of comprehensive income. As such, the adoption of SFAS 130 had no effect on the Company's financial statements. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segment of an Enterprise and Related Information" ("SFAS 131"). This statement established standards for reporting information on operating segments in interim and annual financial statements. SFAS 131 is effective for fiscal years beginning after December 15, 1997 (the fiscal year ended July 25, 1999 for the Company) and does not require application to interim financial statements in the initial year of application. As the company already discloses segment information under SFAS 14, "Financial Reporting for Segments of a Business Enterprise", management does not believe the adoption of SFAS 131 will result in a change in the composition of the Company's operating segments, or in the previously reported net income for each segment. Additional disclosure to comply with SFAS 131 will be required. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instrument and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for fiscal quarters of all fiscal years beginning after June 15, 1999 (the fiscal year ended July 30, 2000 for the Company). This pronouncement required that all derivative instrument 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 of 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. 11. Subsequent Events. On September 30, 1998, the Company entered into a $30 million credit arrangement with BankBoston Morgan Stanley Capital Funding (the "Bridge Financing"). The Bridge Financing bears interest at a rate of 14% per annum, payable monthly in arrears, and was to mature on December 4, 1998. The maturity date for the loan was extended to December 30, 1998. The Company is currently in the process of obtaining permanent financing to repay the Bridge Financing and provide additional capital for real estate developments. 5 ASC East, Inc. and Subsidiaries Balance Sheet as of October 25, 1998 (in thousands) (unaudited) ASC East Guarantor Non- Guarantor Elimination Consolidated Subsidiaries Subsidiaries Entries ASC East Assets Current assets Cash and cash equivalents $ - $ 4,605 $ 958 $ - $ 5,563 Restricted cash - 6,346 32 - 6,378 Accounts receivable 71 8,549 2,116 (6,054) 4,682 Inventory 1,603 7,493 - - 9,096 Prepaid expenses 1 2,958 1 - 2,960 Deferred income taxes - 1,289 - - 1,289 Investment in subsidiaries 174,312 139,806 - (314,118) - -------------- --------------- -------------- ------------- -------------- Total current assets 175,987 171,046 3,107 (320,172) 29,968 Property and equipment, net 89 302,585 699 - 303,373 Real estate developed for sale - 91,242 - - 91,242 Goodwill 17,388 2,175 - - 19,563 Intangible assets - 2,032 - - 2,032 Deferred financing costs 6,462 - 1 - 6,463 Long-term investments - - 2,051 - 2,051 Other assets - 8,158 - - 8,158 Due from affiliate - - - - - -------------- --------------- -------------- ------------- -------------- Total assets $ 199,926 $ 577,238 $ 5,858 $ (320,172) $462,850 -------------- --------------- -------------- ------------- -------------- Liabilities and Shareholders' Equity Current liabilities Current portion of long-term debt $ 17,782 $ 29,503 $ - $ - $ 47,285 Accounts payable and other current liabilities 6,413 22,575 422 (2,020) 27,390 Deposits and deferred revenue 300 19,916 562 - 20,778 Demand note, Principal Shareholder - 1,846 - - 1,846 Due to affiliates (53,018) 107,067 (447) - 53,602 -------------- --------------- -------------- ------------- -------------- Total current liabilities (28,523) 180,907 537 (2,020) 150,901 Long-term debt, excluding current portion 39,253 48,635 42 (4,033) 83,897 Subordinated notes and debentures, excluding current 117,044 10,495 - - 127,539 portion Other long-term liabilities 1,716 2,753 3,311 - 7,780 Deferred income taxes (9,788) 30,441 (534) - 20,119 -------------- --------------- -------------- ------------- -------------- Total liabilities 119,702 273,231 3,356 (6,053) 390,236 Shareholders' Equity Common stock, Class A, par value $.01 per share; 1,000,000 shares authorized; 978,300 issued and 10 181 2 (183) 10 outstanding Additional paid-in capital 73,886 252,371 1,651 (254,022) 73,886 Retained earnings (deficit) 6,328 51,455 849 (59,914) (1,282) -------------- --------------- -------------- ------------- -------------- Total shareholders' equity 80,224 304,007 2,502 (314,119) 72,614 -------------- --------------- -------------- ------------- -------------- Total liabilities and shareholders' equity $ 199,926 $ 577,238 $ 5,858 $ (320,172) $ 462,850 -------------- --------------- -------------- ------------- -------------- 6 ASC East, Inc. and Subsidiaries Statement of Operations for the three months ended October 25, 1998 (in thousands) (unaudited) ASC East Guarantor Non- Elimination Consolidated Subsidiaries Guarantor Entries ASC East Subsidiaries Net revenues: Resort $ 515 $ 15,247 $ 268 $ (231) $ 15,799 Real estate - 4,323 - - 4,323 ------------- --------------- -------------- -------------- ---------------- Total net revenues 515 19,570 268 (231) 20,122 ------------- --------------- -------------- -------------- ---------------- Operating expenses: Resort 574 19,074 229 (231) 19,646 Real estate - 3,937 - - 3,937 Marketing, general and administrative 440 4,652 - - 5,092 Depreciation and amortization 344 1,469 14 - 1,827 ------------- --------------- -------------- -------------- ---------------- Total operating expenses 1,358 29,132 243 (231) 30,502 ------------- --------------- -------------- -------------- ---------------- Income (loss) from operations (843) (9,562) 25 - (10,380) Interest expense (income) 3,706 3,223 (29) - 6,900 ------------- --------------- -------------- -------------- ---------------- Income (loss) before provision (benefit) for income taxes (4,549) (12,785) 54 - (17,280) Provision (benefit) for income taxes (1,600) (5,149) 19 - (6,730) ------------- --------------- -------------- -------------- ---------------- Net loss $ (2,949) $ (7,636) $ 35 $ - $ (10,550) ------------- --------------- -------------- -------------- ---------------- 7 ASC East, Inc. and Subsidiaries Statement of Cash Flows for the three months ended October 25, 1998 (in thousands) (unaudited) ASC East Guarantor Non- Elimination Consolidated Subsidiaries Guarantor Entries ASC East Subsidiaries Cash flows from operating activities Net loss $ (2,949) $ (7,636) $ 35 $ - $ (10,550) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 344 1,469 14 - 1,827 Amortization of discount on subordinated notes and debentures and other liabilities 42 25 - - 67 Deferred income taxes (1,600) (5,150) 20 - (6,730) Decrease (increase) in assets: Restricted cash and investments held in escrow - (110) (8) - (118) Accounts receivable 618 1,978 (427) (473) 1,696 Inventory (41) 1,171 - - 1,130 Prepaid expenses - (170) (1) - (171) Real estate developed for sale - (12,820) - - (12,820) Other assets - (3,467) - - (3,467) Increase (decrease) in liabilities: Accounts payable and other current liabilities 4,912 (3,224) (93) - 1,595 Deposits and deferred revenue (221) 10,781 547 - 11,107 Other long-term liabilities - 387 80 - 467 Due to/from affiliate 2,522 7,156 (340) - 9,338 ------------ ------------- -------------- ------------- ------------ Net cash provided by (used in) operating activities 3,627 (9,610) (173) (473) (6,629) ------------ ------------- -------------- ------------- ------------ Cash flows from investing activities Capital expenditures (39) (8,563) - - (8,602) Long-term investments - - 151 - 151 Cash contribution from parent - 1,600 - - 1,600 Other, net - (5) - - (5) ------------ ------------- -------------- ------------- ------------ Net cash used in investing activities (39) (6,968) 151 - (6,856) ------------ ------------- -------------- ------------- ------------ Cash flows from financing activities Net borrowings under Senior Credit Facility (3,727) - - - (3,727) Proceeds from (repayment of) long-term debt - 18,189 (5) 473 18,657 Deferred financing costs (39) - - - (39) ------------ ------------- -------------- ------------- ------------ Net cash provided by (used in) financing activities (3,766) 18,189 (5) 473 14,891 ------------ ------------- -------------- ------------- ------------ Net increase (decrease) in cash and cash equivalents (178) 1,611 (27) - 1,406 Cash and cash equivalents, beginning of period 178 2,994 985 - 4,157 ------------ ------------- -------------- ------------- ------------ Cash and cash equivalents, end of period $ - $ 4,605 $ 958 $ - $ 5,563 ------------ ------------- -------------- ------------- ------------ 8 ASC East, Inc. and Subsidiaries Balance Sheet as of October 26, 1997 (in thousands) (unaudited) ASC East Guarantor Non-Guarantor Elimination Consolidated Subsidiaries Subsidiaries Entries ASC East Assets Current assets Cash and cash equivalents $ 18 $ 4,341 $ 214 $ - $ 4,573 Restricted cash - 3,079 - - 3,079 Accounts receivable 383 3,618 1,457 (1,284) 4,174 Inventory 391 11,711 - - 12,102 Prepaid expenses 388 1,918 20 - 2,326 Deferred income taxes - 422 - - 422 Investment in subsidiaries 120,118 138,800 - (258,918) - -------------- --------------- -------------- ------------- -------------- Total current assets 121,298 163,889 1,691 (260,202) 26,676 Property and equipment, net 2,309 250,184 786 - 253,279 Real estate developed for sale - 45,478 - - 45,478 Goodwill 10,595 - - - 10,595 Deferred financing costs 8,105 - - - 8,105 Long-term investments - - 3,380 - 3,380 Other assets - 4,744 - - 4,744 -------------- --------------- -------------- ------------- -------------- Total assets $ 142,307 $ 464,295 $ 5,857 $ (260,202) $ 352,257 -------------- --------------- -------------- ------------- -------------- Liabilities and Shareholders' Equity Current liabilities Current portion of long-term debt $ 25,255 $ 4,481 $ - $ - $ 29,736 Accounts payable and other current liabilities 6,192 26,114 469 (1,292) 31,483 Deposits and deferred revenue 730 13,614 16 - 14,360 Demand note, Principal Shareholder - 1,933 - - 1,933 Due to affiliates (48,965) 85,208 (28,982) - 7,261 -------------- --------------- -------------- ------------- -------------- Total current liabilities (16,788) 131,350 (28,497) (1,292) 84,773 Long-term debt, excluding current portion 170,753 66,110 62 - 236,925 Other long-term liabilities 298 3,536 4,188 - 8,022 Deferred income taxes (12,812) 33,557 (804) - 19,941 -------------- --------------- -------------- ------------- -------------- Total liabilities 141,451 234,553 (25,051) (1,292) 349,661 Shareholders' Equity Common stock, par value of $.01 per share; 1,000,000 shares authorized; 978,300 issued and outstanding 10 181 2 (183) 10 Additional paid-in capital 3,762 209,876 30,383 (240,259) 3,762 Retained earnings (2,916) 19,685 523 (18,468) (1,176) -------------- --------------- -------------- ------------- -------------- Total shareholders' equity 856 229,742 30,908 (258,910) 2,596 -------------- --------------- -------------- ------------- -------------- Total liabilities and shareholders' equity $ 142,307 $ 464,295 $ 5,857 $ (260,202) $ 352,257 -------------- --------------- -------------- ------------- -------------- 9 ASC East, Inc. and Subsidiaries Statement of Operations for the three months ended October 26, 1997 (in thousands) (unaudited) ASC East Guarantor Non-Guarantor Elimination Consolidated Subsidiaries Subsidiaries Entries ASC East Net revenues: Resort $ 759 $ 12,807 $ 422 $ (333) $ 13,655 Real estate - 810 - - 810 ------------- --------------- -------------- -------------- ---------------- Total net revenues 759 13,617 422 (333) 14,465 ------------- --------------- -------------- -------------- ---------------- Operating expenses: Resort 355 17,121 390 (333) 17,533 Real estate - 925 - - 925 Marketing, general and administrative 1,932 4,606 2 - 6,540 Stock compensation charge 3,271 - - - 3,271 Depreciation and amortization 447 1,001 2 - 1,450 ------------- --------------- -------------- -------------- ---------------- Total operating expenses 6,005 23,653 394 (333) 29,719 ------------- --------------- -------------- -------------- ---------------- Income (loss) from operations (5,246) (10,036) 28 - (15,254) Interest expense 5,897 808 2 - 6,707 ------------- --------------- -------------- -------------- ---------------- Income (loss) before provision (benefit) for income taxes (11,143) (10,844) 26 - (21,961) Provision (benefit) for income taxes (4,109) (4,334) 10 - (8,433) ------------- --------------- -------------- -------------- ---------------- Net loss available $ (7,034) $ (6,510) $ 16 $ - $(13,528) ------------- --------------- -------------- -------------- ---------------- 10 ASC East, Inc. and Subsidiaries Statement of Cash Flows for the three months ended October 26, 1997 (in thousands) (unaudited) ASC East Guarantor Non-Guarantor Elimination Consolidated Subsidiaries Subsidiaries Entries ASC East Cash flows from operating activities Net loss $ (7,034) $ (6,510) $ 16 $ - $ (13,528) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,285 1,063 2 - 2,350 Stock compensation charge 3,271 - - - 3,271 Deferred income taxes (4,109) (4,334) (130) - (8,573) Decrease (increase) in assets: Restricted cash - (273) 6 - (267) Accounts receivable (243) (51) (410) 331 (373) Inventory (107) (3,413) - - (3,520) Prepaid expenses (20) (806) 79 - (747) Real estate developed for sale - (21,938) - - (21,938) Other assets 250 (95) - - 155 Increase (decrease) in liabilities: Accounts payable and other current liabilities 4,110 2,936 27 (331) 6,742 Deposits and deferred revenue 192 9,773 16 - 9,981 Other long-term liabilities (194) 413 (10) - 209 Due to/from affiliate 2,441 2,789 20 - 5,250 ------------ ------------- -------------- ------------- ------------ Net cash used in operating activities (158) (20,446) (384) - (20,988) ------------ ------------- -------------- ------------- ------------ Cash flows from investing activities Capital expenditures (981) (10,194) - - (11,175) Long-term investments - - 127 - 127 ------------ ------------- -------------- ------------- ------------ Net cash provided by (used in) investing activities (981) (10,194) 127 - (11,048) ------------ ------------- -------------- ------------- ------------ Cash flows from financing activities Net proceeds from Senior Credit Facility 1,189 - - - 1,189 Proceeds from construction loan - 33,453 - - 33,453 Proceeds from (repayment of) long-term debt - (613) (4) - (617) Deferred financing costs (50) - - - (50) ------------ ------------- -------------- ------------- ------------ Net cash provided by financing activities 1,139 32,840 (4) - 33,975 ------------ ------------- -------------- ------------- ------------ Net increase (decrease) in cash and cash equivalents - 2,200 (261) - 1,939 Cash and cash equivalents, beginning of period 18 2,141 475 - 2,634 ------------ ------------- -------------- ------------- ------------ Cash and cash equivalents, end of period $ 18 $ 4,341 $ 214 $ - $ 4,573 ------------ ------------- -------------- ------------- ------------ 11 ASC East, Inc. and Subsidiaries Item 2 The following discussion and analysis of the results of operations of the Company should be read in conjunction with the condensed consolidated financial statements and related notes contained elsewhere in this report and the audited financial statements and related notes contained in our Form 10-K filed on November 9, 1998. The presentation has been reduced in scope pursuant to General Instruction (H) of Form 10-Q. Changes in Results of Operations Fiscal 1999 compared to the First Quarter of Fiscal 1998. 1. Resort revenues. Resort revenues increased $2.1 million, or 15.3%, from $13.7 million for the three months ended October 26, 1997 to $15.8 million for the three months ended October 25, 1998. The increase is primarily attributable to the operation of Grand Summit Resort Hotels at the Company's Killington, Mt. Snow and Sunday River Resorts which opened during the 1997/1998 ski season. 2. Real estate revenues. Real estate revenue increased $3.5 million, or 437.5%, from $0.8 million for the three months ended October 26, 1997 to $4.3 million for the three months ended October 25, 1998. The increase is primarily attributable to the sale of quartershare units at Grand Summit Resort Hotel projects at the Company's Killington, Mt. Snow and Sunday River Resorts and the sale of Locke Mt. townhouses at the Company's Sunday River Resort. 3. Cost of resort operations. Cost of resort operations increased $2.1 million, or 12.0%, from $17.5 million for the three months ended October 26, 1997 to $19.6 million for the three months ended October 25, 1998. The increase is primarily attributable to the operation of Grand Summit Resort Hotels at the Company's Killington, Mt. Snow and Sunday River Resorts which opened during the 1997/1998 ski season. 4. Cost of real estate operations. Cost of real estate operations increased $3.0 million, or 333.3% from $.9 million for the three months ended October 26, 1997 to $3.9 million for the three months ended October 25, 1998. The increase is primarily attributable to an increase in cost of goods sold relating to the sale of quartershare units at Grand Summit Resort Hotel projects at the Company's Killington, Mt. Snow and Sunday River Resorts and the sale of Locke Mt. townhouses at the Company's Sunday River Resort. 5. Marketing, general and administrative. Marketing, general and administrative expenses decreased $1.4 million, or 21.5%, from $6.5 million for the three months ended October 26, 1997 to $5.1 million for the three months ended October 25, 1998. The decrease is attributable to certain marketing, general and administrative expenses being assumed by the Company's parent subsequent to the parents initial public offering on November 6, 1997. 6. Stock compensation charge. Stock compensation charge decreased $3.3 million, or 100%. This charge was recognized during the three months ended October 26, 1997 to reflect stock options granted to certain members of senior management in relation to the Company's parents initial public offering. 7. Benefit for income taxes. Benefit for income taxes decreased $1.7 million, or 20.2%, from a benefit of $8.4 million for the three months ended October 26, 1997 to a benefit of $6.7 million for the three months ended October 25, 1998. The decrease is attributable to the decrease in the Company's net loss for the three months ended October 25, 1998 as compared to the three months ended October 26, 1997. 12 Year 2000 disclosure Background The "Year 2000 Problem" is the result of many existing computer programs and embedded chip technology 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. The Company has developed a 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 September 1999. The disclosure below addresses the Company's Year 2000 Project. Company's state of readiness The Year 2000 Project is divided into three initiatives--Information Technology ("IT") Systems, Non-IT Systems and Related Third Party Providers. The Company has identified the following phases with actual or estimated dates of completion: 1) identify an inventory of systems expected to be complete by January 31, 1999; 2) gather certificates and warranties from providers; expected to be complete by January 31, 1999, 3) determine required actions and budgets; estimated to be completed by January 31, 1999, 4) perform remediation and tests: estimated to be completed by September 1, 1999 and 5) designing contingency and business continuation plans for each Company location: estimated to be completed by May 31, 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 was acquiring ski resorts, the technology was being updated. The Company's main IT systems include an enterprise wide client server financial 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 and 2, as noted above, are complete and the remaining phases are currently on schedule. During phase 1 and 2, the Company noted that Sugarloaf and Sugarbush have not yet converted to the Springer Miller lodging system and the central reservation system, both of which the company belives are compliant. Also, the Company estimates that approximately 20% of personal computers for employees are not Year 2000 compliant. The Company has estimated that these deficiencies will be remedied by September 1, 1999, which is in accordance with the original timetable. 13 ASC East, Inc. and Subsidiaires Non-IT Systems: Internal non-IT systems are comprised of faxes, copiers, printers, postal systems, security systems, elevators and telecommunication systems. Phases 1, 2 and 3 are scheduled for completion by January 31, 1999 which is 45 days behind schedule. The Company has estimated that remediation is scheduled for completion by September 1, 1999, which is in accordance with the original timetable. 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, 2 and 3, are scheduled for completion by January 31, 1999, which is 45 days behind schedule. The Company has estimated that remediation is scheduled for completion by September 1, 1999, which is in accordance with the original timetable. 14 ASC East, Inc. and Subsidiaries 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 $150,000. This estimate does not include Information System conversions at Sugarloaf and Sugarbush for the Springer Miller lodging system or the central reservations system since those replacement costs were not due to, or accelerated by, the Year 2000 Project. The Company is updating those systems to standardize systems within American Skiing Company resorts. The total amount expended on the Year 2000 Project through October 25, 1998 was $0, of which approximately (1) $0 related to costs to modify software, hire internal personnel and hire outsourced Year 2000 solution providers and (2) $0 and $0 related to replacement costs of non-compliant IT systems and non-IT systems, respectively. The estimated future costs of the Year 2000 Project through October 25, 1998 was $150,000, of which approximately (1) $0 related to cost to modify software, hire internal personnel and hire outsourced Year 2000 solution providers and (2) $150,000 and $0 related to replacement costs of non-compliant IT systems and non-IT systems respectively. 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 Update should be read in conjunction with the Company's disclosures under the heading: "Forward Looking Statements" beginning on page 14. Contingency plans As of October 25, 1998, the Company has not developed a contingency plan related to Year 2000. The Company is planning on developing a contingency plan by May 31, 1999. 15 ASC East, Inc. and Subsidiaries Forward-Looking Statements The above information includes forward-looking statements, the realization of which may be impacted by the factors discussed below. The forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (the "Act"). This report contains forward looking statements that are subject to risks and uncertainties, including, but not limited to, uncertainty as to future financial results, the substantial leverage of the Company, the capital intensive nature of development of the Company's ski resorts; rapid and substantial growth that could place a significant strain on the Company's management, employees and operations; uncertainties associated with obtaining financing with which to repay the Bridge Loan and undertake future capital improvements; demand for and costs associated with real estate development; change in market conditions affecting the interval ownership industry; regulation of marketing and sales of the Company's quartershare interests; seasonality of resort revenues; fluctuations in operating results; dependence on favorable weather conditions; the discretionary nature of consumers' spending for skiing and resort real estate; competition; regional and national economic conditions; laws and regulations relating to the Company's land use, development, environmental compliance and permitting obligations; renewal or extension terms of the Company's leases and permits; the adequacy of water supply; and other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission. These risks could cause the Company's actual results for fiscal year 1999 and beyond to differ materially from those expressed in any forward looking statements made by, or on behalf of, the Company. The foregoing list of factors should not be construed as exhaustive or as any admission regarding the adequacy of disclosures made by the Company prior to the date hereof or the effectiveness of said Act. 16 ASC East, Inc. and Subsidiaries Part II - Other Information Exhibits and Reports on Form 8-K Item 6 a) Exhibits Included herewith is the Financial Data Schedule submitted as Exhibit 27 in accordance with Item 601(c) of Regulation S-K. Also included are the following material agreements entered into in the Company's first fiscal quarter of 1999. Exhibit No. Description - - ----------- ----------- 1) Loan and Security Agreement among Grand Summit Resort Properties, Inc., Textron Financial Corporation and certain lenders dated as of September 1, 1998.* 2) Credit Agreement among American Skiing Company Resort Properties, Inc., certain lenders and BankBoston, N.A. as agent dated as of September 4, 1998.* 3) Supplemental Indenture dated as of September 4, 1998 among American Skiing Company Resort Properties, Inc., its subsidiaries party thereto, and United States Trust Company of New York as Trustee.* * Incorporated by reference to the Company's Parent Form 10Q for Period Ending October 25, 1998. (File No. 333-33483) b) Reports on Form 8-K The Company filed a Form 8-K during the first quarter of 1999 on September 29, 1998, reporting the closing of the Bridge Financing and the Textron Facility. 17 ASC East, Inc. and Subsidiaries 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. December 9, 1998 By: /s/ Christopher E. Howard --------------------------------------- Christopher E. Howard Senior Vice President Chief Administrative Officer General Counsel, Clerk and acting Chief Financial Officer (Duly Authorized Officer) /s/ Christopher D. Livak --------------------------------------- Christopher D. Livak Vice President (Principal Financial Officer) 18