UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 29, 1999
OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 333-26091
BOOTH CREEK SKI HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 84-1359604
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
1000 South Frontage Road West, Suite 100 81657
Vail, Colorado (Zip Code)
(Address of Principal Executive Offices)
(970) 476-4030
(Registrant's Telephone Number, Including Area Code)
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 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 [ ]
As of February 26, 1999, the number of shares outstanding of the
registrant's Common Stock, par value $.01 per share, was 1,000 shares.
<PAGE>
TABLE OF CONTENTS
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Item Page Number
- ----
PART I - FINANCIAL INFORMATION
1. Financial Statements............................................................................. 1
2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 8
3. Quantitative and Qualitative Disclosures about Market Risk....................................... 17
PART II - OTHER INFORMATION
1. Legal Proceedings................................................................................ 18
3. Defaults Upon Senior Securities.................................................................. 20
6. Exhibits and Reports on Form 8-K................................................................. 21
Signatures................................................................................................ 22
</TABLE>
<PAGE>1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BOOTH CREEK SKI HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
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January 29, October 30,
1999 1998
----------------- ---------------
ASSETS (Unaudited)
Current assets:
Cash ............................................................. $ 2,214 $ 625
Accounts receivable, net of allowance of $53 and
$54, respectively............................................... 2,345 1,573
Inventories....................................................... 5,284 4,370
Prepaid expenses and other current assets......................... 2,369 1,377
----------------- -----------------
Total current assets................................................. 12,212 7,945
Property and equipment, net.......................................... 159,530 156,469
Real estate held for development and sale............................ 10,249 10,155
Deferred financing costs, net of accumulated amortization
of $2,314 and $1,985, respectively................................ 6,523 6,649
Timber rights and other assets....................................... 8,421 7,428
Goodwill, net of accumulated amortization of $4,784 and $4,190,
respectively...................................................... 29,681 29,000
----------------- -----------------
Total assets......................................................... $ 226,616 $ 218,546
================= =================
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Senior credit facility............................................ $ 15,340 $ 17,143
Current portion of long-term debt................................. 989 1,785
Accounts payable and accrued liabilities.......................... 33,494 22,110
----------------- -----------------
Total current liabilities............................................ 49,823 41,038
Long-term debt....................................................... 136,944 137,352
Other long-term liabilities.......................................... 177 145
Commitments and contingencies
Preferred stock of subsidiary; 28,000 shares authorized,
20,000 shares issued and outstanding at January 29, 1999
(21,000 shares at October 30, 1998);
liquidation preference
and redemption value of $2,509 at January 29, 1999................ 2,509 2,634
Shareholder's equity:
Common stock, $.01 par value; 1,000 shares authorized,
issued and outstanding.......................................... - -
Additional paid-in-capital........................................ 72,000 72,000
Accumulated deficit............................................... (34,837) (34,623)
----------------- -----------------
Total shareholder's equity........................................... 37,163 37,377
----------------- -----------------
Total liabilities and shareholder's equity................... $ 226,616 $ 218,546
================= =================
</TABLE>
See accompanying notes.
<PAGE>2
BOOTH CREEK SKI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
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Three Months Ended
------------------------------
January 29, January 30,
1999 1998
-------------- --------------
(Unaudited)
Revenue:
Resort operations............................................... $ 46,299 $ 39,016
Operating expenses:
Cost of sales - resort operations............................... 29,289 22,853
Depreciation.................................................... 4,207 3,029
Amortization of goodwill........................................ 594 564
Selling, general and administrative expense..................... 7,071 3,949
-------------- --------------
Total operating expenses........................................... 41,161 30,395
-------------- --------------
Operating income................................................... 5,138 8,621
Other income (expense):
Interest expense................................................ (4,968) (4,087)
Amortization of deferred financing costs........................ (329) (279)
Other income.................................................... 4 -
-------------- --------------
Other income (expense), net..................................... (5,293) (4,366)
Income (loss) before minority interest............................. (155) 4,255
Minority interest.................................................. (59) (70)
-------------- --------------
Net income (loss).................................................. $ (214) $ 4,185
============== ===============
</TABLE>
See accompanying notes.
<PAGE>3
BOOTH CREEK SKI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
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Three Months Ended
-------------------------------
January 29, January 30,
1999 1998
-------------- --------------
(Unaudited)
Cash flows from operating activities:
Net income (loss)................................................. $ (214) $ 4,185
Adjustment to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation................................................. 4,207 3,029
Amortization of goodwill..................................... 594 564
Amortization of deferred financing costs..................... 329 279
Minority interest............................................ 59 70
Changes in operating assets and liabilities:
Accounts receivable........................................ (772) (110)
Inventories................................................ (914) (906)
Prepaid expenses and other current assets.................. (992) (1,668)
Accounts payable and accrued liabilities................... 11,384 9,902
Other long-term liabilities................................ 32 55
-------------- --------------
Net cash provided by operating activities......................... 13,713 15,400
Cash flows from investing activities:
Capital expenditures for property and equipment................... (7,246) (4,473)
Acquisition of businesses......................................... (525) -
Capital expenditures for real estate held for development
and sale....................................................... (94) -
Other assets ..................................................... (865) 439
-------------- --------------
Net cash used in investing activities............................. (8,730) (4,034)
Cash flows from financing activities:
Net repayments of senior credit facility.......................... (1,803) (8,500)
Principal payments of long-term debt.............................. (1,204) (1,681)
Deferred financing costs.......................................... (203) -
Purchase of preferred stock of subsidiary and payment of dividends
(184) (136)
-------------- --------------
Net cash used in financing activities............................. (3,394) (10,317)
-------------- --------------
Increase in cash.................................................. 1,589 1,049
Cash at beginning of period....................................... 625 462
-------------- --------------
Cash at end of period............................................. $ 2,214 $ 1,511
============== ==============
</TABLE>
See accompanying notes.
<PAGE>4
BOOTH CREEK SKI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 29, 1999
1. Organization, Basis Of Presentation and Summary of Significant Accounting
Policies
Booth Creek Ski Holdings, Inc. ("Booth Creek") was organized on October 8,
1996 in the State of Delaware for the purpose of acquiring and operating various
ski resorts, including Northstar-at-Tahoe ("Northstar"), Sierra-at-Tahoe
("Sierra"), Bear Mountain, Waterville Valley, Mt. Cranmore, the Summit at
Snoqualmie Pass (the "Summit"), Grand Targhee and Loon Mountain.
The consolidated financial statements include the accounts of Booth Creek
and its subsidiaries (collectively referred to as the "Company"). Booth Creek
owns all of the common stock of its subsidiaries. Ski Lifts, Inc. (the owner and
operator of the Summit) has shares of preferred stock owned by third parties.
All significant intercompany transactions and balances have been eliminated.
Booth Creek is a wholly-owned subsidiary of Booth Creek Ski Group, Inc.
("Parent").
The accompanying consolidated financial statements as of January 29, 1999
and for the three month periods ended January 29, 1999 and January 30, 1998 are
unaudited, but include all adjustments (consisting only of normal, recurring
adjustments) which, in the opinion of management of the Company, are considered
necessary for a fair presentation of the Company's financial position at January
29, 1999, and its operating results and cash flows for the three month periods
ended January 29, 1999 and January 30, 1998. Due to the highly seasonal nature
of the Company's business and the effect of acquisitions (Note 2), the results
for the interim periods are not necessarily indicative of results for the entire
year. Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to generally accepted accounting
principles applicable for interim periods. Management believes that the
disclosures made are adequate to make the information presented not misleading.
The unaudited consolidated financial statements should be read in conjunction
with the following notes and the Company's consolidated financial statements and
accompanying notes included in the Company's Annual Report on Form 10-K for the
year ended October 30, 1998.
Reporting Periods
The Company's reporting periods end on the Friday closest to the end of
each month.
Costs of Computer Software Developed or Obtained for Internal Use
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1, which has been
adopted prospectively by the Company as of October 31, 1998, requires the
capitalization of certain costs incurred in connection with developing or
obtaining internal use software. Prior to the adoption of SOP 98-1, the Company
expensed development, production and maintenance costs associated with computer
software developed for internal use. The effect of adopting SOP 98-1 was to
increase net income for the three months ended January 29, 1999 by approximately
$56,000.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
<PAGE>5
BOOTH CREEK SKI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. Acquisitions
Pro Forma Financial Information
The Company acquired Loon Mountain on February 26, 1998, which has been
included in the Company's results of operations since the date of acquisition.
The following table represents unaudited pro forma financial information which
presents the Company's consolidated results of operations for the three months
ended January 30, 1998 as if the Loon Mountain acquisition and related financing
transactions occurred on November 1, 1997.
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Three Months Ended
January 30, 1998
-----------------
(In thousands)
Statement of operations data:
Revenue................................................ $ 45,773
Operating income....................................... $ 10,359
Net income............................................. $ 5,326
Other data:
EBITDA................................................. $ 14,548
</TABLE>
EBITDA represents income from operations before depreciation, depletion and
amortization expense and the noncash cost of real estate sales. EBITDA is not
intended to represent cash flow from operations or net income as defined by
generally accepted accounting principles and should not be considered as a
measure of liquidity or an alternative to, or more meaningful than, operating
income or operating cash flow as an indication of the Company's operating
performance.
The pro forma information does not purport to be indicative of results that
actually would have occurred had the acquisition been made on the date indicated
or of results which may occur in the future.
Proposed Seven Springs Acquisition
On August 28, 1998, the Company, Booth Creek Ski Acquisition, Inc., a
wholly-owned subsidiary of Booth Creek ("Acquisition Sub"), and Seven Springs
Farm, Inc. ("Seven Springs"), the owner and operator of the Seven Springs
Mountain Resort, a ski resort and conference center in Pennsylvania, entered
into an Agreement of Merger (the "Merger Agreement"), pursuant to which the
Company would acquire Seven Springs through the merger of Acquisition Sub with
and into Seven Springs. The aggregate merger consideration and related payments
will be approximately $83 million plus certain deferred payments, subject to
certain price adjustments. The proposed acquisition is conditioned on the
receipt of a judicial determination that the terms of a certain shareholders'
agreement among Seven Springs and its shareholders (the "Seven Springs
Shareholder Agreement") does not apply to the transactions contemplated by the
Merger Agreement, as well as customary closing conditions. In connection with
the proposed acquisition, certain shareholders of Seven Springs filed a lawsuit
in the Court of Common Pleas of Somerset County, Pennsylvania against the
Company, Acquisition Sub, and Seven Springs and certain of its directors,
seeking a declaratory judgment, along with other relief including the rescission
of the Merger Agreement. Plaintiffs allege that the terms of the Seven Springs
Shareholder Agreement ban the consummation of the proposed acquisition. On
October 29, 1998, the Court entered a final judgment denying Plaintiff's motion
and has permitted the consummation of the transactions contemplated by the
Merger Agreement. On December 28, 1998, the Plaintiff's filed an amended notice
of appeal which is currently pending. While the Company believes that Seven
Springs will prevail with its position that the Seven Springs Shareholders
Agreement does not apply to the transactions contemplated by the Merger
Agreement, no assurance can be made regarding the timing or outcome of this
litigation.
<PAGE>6
BOOTH CREEK SKI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
3. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following:
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January 29, 1999 October 30, 1998
---------------- -----------------
(In thousands)
Accounts payable............................................. $ 13,440 $ 10,652
Accrued compensation and benefits............................ 3,403 3,164
Taxes other than income...................................... 1,431 973
Unearned income and deposits................................. 6,145 4,017
Interest..................................................... 6,429 2,349
Other........................................................ 2,646 955
----------------- ------------------
$ 33,494 $ 22,110
================= ==================
</TABLE>
4. Financing Arrangements
Senior Credit Facility
The borrowing availability under the provisions of the Company's Amended
and Restated Credit Agreement (the "Senior Credit Facility") is $25 million. The
Senior Credit Facility requires that the Company not have borrowings thereunder
in excess of $8 million in addition to certain amounts maintained by the Company
in certain depository accounts with BankBoston, N.A., for a period of 60
consecutive days each year commencing between February 1 and February 28. The
Company has obtained a waiver from the lender that reduced the period of time
during which borrowings may not exceed $8 million to 20 consecutive days
commencing between February 1 and February 28, 1999, and waives certain other
covenant violations at January 29, 1999. Total borrowings outstanding under the
Senior Credit Facility at January 29, 1999 were approximately $15.3 million,
which bore interest at 7.75%.
Long-Term Debt
As of January 29, 1999, the Company had outstanding $133.5 million
aggregate amount of its senior debt securities (the "Senior Notes"). The Senior
Notes mature on March 15, 2007, and bear interest at 12.5% per annum, payable
semi-annually on March 15 and September 15. The Senior Notes are redeemable at
the option of the Company, in whole or in part, at any time after March 15,
2002, with an initial redemption price of 106.25% declining through maturity,
plus accrued and unpaid interest to the redemption date.
The Senior Notes are unconditionally guaranteed, on an unsecured senior
basis, as to the payment of principal, premium, if any, and interest, jointly
and severally (the "Guarantees"), by all Restricted Subsidiaries of the Company
(as defined in the Indenture) having either assets or shareholders' equity in
excess of $20,000 (the "Guarantors"). All of the Company's direct and indirect
subsidiaries are Restricted Subsidiaries, except the Real Estate LLC. Each
Guarantee is effectively subordinated to all secured indebtedness of such
Guarantor. The Senior Notes are general senior unsecured obligations of the
Company ranking equally in right of payment with all other existing and future
senior indebtedness of the Company and senior in right of payment to any
subordinated indebtedness of the Company.
<PAGE>7
BOOTH CREEK SKI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
4. Financing Arrangements - (Continued)
Long-Term Debt - (Continued)
The Senior Notes are effectively subordinated in right of payment to all
secured indebtedness of the Company and the Guarantors, including indebtedness
under the Senior Credit Facility. In addition, the Senior Notes are structurally
subordinated to any indebtedness of the Company's subsidiaries that are not
Guarantors. The indenture for the Senior Notes (the "Indenture") contains
covenants for the benefit of the holders of the Senior Notes that, among other
things, restrict the ability of the Company and any Restricted Subsidiaries to:
(i) incur additional indebtedness; (ii) pay dividends and make distributions;
(iii) issue stock of subsidiaries; (iv) make certain investments; (v) repurchase
stock; (vi) create liens; (vii) enter into transactions with affiliates, (viii)
enter into sale and leaseback transactions, (ix) create dividend or other
payment restrictions affecting Restricted Subsidiaries; (x) merge or consolidate
the Company or any Guarantors; and (xi) transfer and sell assets.
The Guarantors are wholly-owned subsidiaries of Booth Creek and have fully
and unconditionally guaranteed the Senior Notes on a joint and several basis.
Booth Creek is a holding company and has no operations, assets or cash flows
separate from its investments in its subsidiaries. In addition, the assets,
equity, income and cash flow of the Real Estate LLC, Booth Creek's only
non-guarantor subsidiary, are inconsequential and the common stock of the Real
Estate LLC is entirely owned by Booth Creek. Accordingly, Booth Creek has not
presented separate financial statements and other disclosures concerning the
Guarantors or its non-guarantor subsidiary because management has determined
that such information is not material to investors.
5. Income Taxes
Due to the Company's lack of profitable history, the tax benefits of
operating losses are fully offset by a valuation reserve. Similarly, no federal
income tax benefit is expected for the year ended October 29, 1999 due to
continued operating losses. Accordingly, during the quarter ended January 29,
1999, no federal income tax benefit has been provided.
6. Subsequent Event
On February 26, 1999, the Company experienced an electrical fire which
destroyed the restaurant facility located at the peak of Northstar's ski
terrain. Subject to minor deductibles, the property loss and business
interruption are fully covered by insurance.
<PAGE>8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion and analysis below relates to the historical financial
statements and historical and pro forma results of operations of the Company and
the liquidity and capital resources of the Company. The following discussion
should be read in conjunction with the consolidated financial statements and
related notes thereto included elsewhere in this report.
Except for historical matters, the matters discussed in Part I, Item 2.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" are forward-looking statements that involve risks and uncertainties.
Forward-looking statements are based on management's current views and
assumptions and involve risks and uncertainties that could significantly affect
expected results. The Company wishes to caution the reader that certain factors
below could significantly and materially affect the Company's actual results,
causing results to differ materially from those in any forward-looking
statement. These factors include: regional and national economic conditions, the
successful or unsuccessful integration of acquired businesses, weather
conditions, natural disasters (such as earthquakes), industry competition,
governmental regulation and other risks associated with expansion and
development, the occupancy of leased property and property used pursuant to the
United States Forest Service permits, and the ability of the Company to make its
information technology assets and systems year 2000 compliant and the costs of
any modifications necessary in this regard.
General
The Company's ski operations are highly sensitive to regional weather
conditions and the overall strength of the regional economies in the areas in
which the Company operates. The Company believes that the geographic diversity
of the Company's resorts and the use of extensive snowmaking technology coupled
with advanced trail grooming equipment, which together can provide consistent
skiing conditions, can partially mitigate the risk of both economic downturns
and adverse weather conditions in any given region. However, the Company remains
vulnerable to warm weather, heavy rains and drought conditions, which can have a
significant effect on the operating revenues and profitability at any one of the
Company's resorts.
The Company's four most weather-sensitive resorts, Bear Mountain,
Waterville Valley, Loon Mountain and Mt. Cranmore, have invested heavily in
snowmaking capabilities to provide coverage on virtually all of their trails and
have been open for skiing at least 123, 144, 145, and 105 days, respectively,
during each of the last five ski seasons. The Company's Northstar, Sierra,
Summit and Grand Targhee resorts are less weather-sensitive based on their
historical natural snowfall, averaging approximately 326, 518, 422, and 512
inches of snowfall, respectively, per year for the past five ski seasons. As a
result of their historic natural snowfall, their snowmaking capabilities are
considerably less extensive than at Bear Mountain, Waterville Valley, Loon
Mountain or Mt. Cranmore.
The Company's results of operations are also highly dependent on its
ability to compete in each of the large regional ski markets in which it
operates. At Northstar and Sierra, more than 70% of the 1997/98 ski season total
skier days were attributable to residents of the San Francisco, Sacramento,
Central California Valley and Lake Tahoe regions. At Bear Mountain, more than
90% of the 1997/98 ski season total skier days were attributable to residents of
the Los Angeles and San Diego metropolitan regions. At Waterville Valley, Loon
Mountain and Mt. Cranmore, approximately 80% of the 1997/98 ski season total
skier days were attributable to residents of Massachusetts and New Hampshire,
with a large percentage of such visitors coming from the Boston metropolitan
area. At the Summit, the Company estimates that more than 90% of the 1997/98 ski
season total skier days were attributable to residents of the Seattle/Tacoma
metropolitan region. The Company's Grand Targhee resort attracts approximately
50% of its skiers from outside its local skiing population.
In addition to revenue generated from skiing operations, the Company's
resorts generate significant revenue from non-ski operations, including lodging,
conference center services, health and tennis clubs and summer activities such
as mountain biking rentals and golf course fees.
A significant portion of total operating costs at the Company's resorts are
variable, consisting primarily of retail and food service cost of sales,
utilities and labor expense. These variable costs can fluctuate significantly
based upon skier days and other seasonal factors. With the exception of certain
management, marketing and maintenance personnel, all of the Company's employees
are compensated on an hourly basis.
<PAGE>9
Results of Operations of the Company
Overview
The Company's results of operations are significantly impacted by weather
conditions. Northstar, Sierra and Grand Targhee have experienced generally
favorable snow conditions during the first half of the 1998/99 ski season. The
Summit has experienced a prolonged period of continual snowfall, which has
resulted in increased snow removal and other operating costs. The East
experienced mild temperatures through mid December and rainfall on most weekends
during January. These conditions negatively impacted snow conditions, terrain
availability and skier days at Waterville Valley, Mt. Cranmore and Loon
Mountain. While Bear Mountain enjoyed cold temperatures in early November which
facilitated an early opening on man-made snow, the resort has suffered from a
lack of natural snowfall through the end of January.
Historical Three Months Ended January 29, 1999 as Compared to the
Historical Three Months Ended January 30, 1998
The Company's results of operations for the historical three months ended
January 29, 1999 includes the results of all of the Company's resorts for the
entire period. The results of operations for the historical three months ended
January 30, 1998 excluded the results of Loon Mountain, which was acquired on
February 26, 1998.
Total revenue for the three months ended January 29, 1999 was $46,299,000,
an increase of $7,283,000, or 19%, over the Company's revenues for the three
months ended January 30, 1998. The increase is principally due to the inclusion
of Loon Mountain in the 1999 period, which contributed $5,407,000 in revenues
during the first quarter of fiscal 1999. In addition, Northstar and Sierra
generated additional revenues of $530,000 and $196,000, respectively, due to
improved yields. The Summit generated $1,503,000 in additional revenues due to
an earlier opening and improved yields in its food and beverage, snow school and
retail businesses. These gains were partially offset by reduced revenues at
Waterville Valley and Mt. Cranmore due to unfavorable weather conditions in
December and January. Bear Mountain realized increased revenues in November due
to an earlier opening. However, the early season gains at Bear Mountain were
eroded in January due to the continued lack of natural snowfall. Revenues for
Grand Targhee were generally comparable between the periods.
Total operating expenses for the three months ended January 29, 1999 were
$41,161,000, an increase of $10,766,000 over the 1998 period. The principal
causes of the increase are as follows:
<TABLE>
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(In thousands)
Total operating expenses - three months ended January 29, 1998.............. $ 30,395
Acquisition of Loon Mountain:
Cost of sales - resort operations......................................... 3,431
Selling, general and administrative....................................... 588
Depreciation and amortization............................................. 605
-----------------
4,624
-----------------
Nonrecurring maintenance, operations, snow removal and severance costs, and
costs associated with an earlier opening and revenue penetration efforts
and new operations at the Summit.......................................... 1,982
Costs of nonrecurring corporate initiatives and process improvements and costs
associated with new management personnel and functional expertise......... 1,236
Increased depreciation due to higher average asset balances................. 603
Increased snowmaking costs at Bear Mountain due to the lack of natural
snowfall.................................................................. 456
Lease costs for three new lifts at the Summit and Bear Mountain............. 247
Labor associated with earlier openings at Northstar, Sierra and
Bear Mountain............................................................. 197
Inflation, consistent accrual practices among resorts and other changes, net 1,421
---------------
Total operating expenses - three months ended January 29, 1999.............. $ 41,161
===============
</TABLE>
<PAGE>10
As reflected above, the inclusion of Loon Mountain in the 1999 period
resulted in an increase of $4,624,000 in expenses as compared to the 1998
period.
At the Summit, the Company incurred significant nonrecurring costs during
the three months ended January 29, 1999 to appropriately prepare its facilities,
vehicle and snow grooming fleet, communications infrastructure and processes and
systems for the operation of the resort. In addition, record levels of snowfall
have severely hampered operating efforts and resulted in significant increases
in snow removal, grounds maintenance and related costs. The Company also accrued
severance costs associated with certain personnel changes at the Summit.
Management believes that approximately $1,000,000 of the cost increases at the
Summit are of a nonrecurring nature and would not be incurred in a typical year
of operation. Further, the resort opened thirteen days earlier for the 1998/99
ski season as compared to the prior season. Also, the resort has implemented
various revenue penetration efforts and is operating a new ski school business
that was previously operated by a third party, which have contributed to the
cost increases at the Summit. The earlier opening, revenue penetration efforts
and new ski school have generated an increase in revenues of $1,503,000 for the
three months ended January 29, 1999 as compared to the 1998 period.
The Company has been executing numerous nonrecurring efforts to improve its
marketing collateral and database, establish strategic marketing alliances,
introduce new service offerings, install public relations channels, implement
enhanced guest service training for employees, institute performance management
systems and evaluate technology related tools and methodologies. Further, the
Company has been conducting system and process improvements in substantially all
key administrative and operations areas. Management believes that approximately
$500,000 of the increased corporate spending is of a nonrecurring nature. The
Company has also added certain key corporate personnel and functional expertise
to enhance its management team. Management believes that the nonrecurring
initiatives, process improvements and personnel additions have begun to
favorably impact the Company's operations through improved yields and higher
guest service survey scores, and will positively impact the Company's financial
performance in future periods.
Interest expense for the three months ended January 29, 1999 totaled
$4,968,000, an increase of $881,000 over the Company's interest expense for the
three months ended January 30, 1998, reflecting generally higher levels of
borrowings in the 1999 period due principally to debt incurred to finance the
Loon Mountain acquisition.
Due to the Company's lack of profitable history, the tax benefits of
operating losses are fully offset by a valuation reserve. Similarly, no federal
income tax benefit is expected for the year ended October 29, 1999 due to
continued operating losses. Accordingly, during the three months ended January
29, 1999, no federal income tax benefit has been provided.
Historical Three Months Ended January 29, 1999 as Compared to the Pro Forma
Three Months Ended January 30, 1998
The following unaudited pro forma results of operations of the Company for
the three months ended January 30, 1998 assume that the Loon Mountain
acquisition and related financing had occurred on November 1, 1997. These
unaudited pro forma results of operations are not necessarily indicative of the
actual results of operations that would have been achieved nor are they
necessarily indicative of future results of operations.
<PAGE>11
<TABLE>
<S> <C> <C>
Historical three Pro forma three
months ended months ended
January 29, 1998 January 30, 1998
----------------- ----------------
(In thousands)
Statement of Operations Data:
Revenue:
Resort operations............................................. $ 46,299 $ 45,773
Operating expenses:
Resort operations............................................. 36,360 31,225
Depreciation and amortization................................. 4,801 4,189
--------------- -------------
Operating income................................................ 5,138 10,359
Interest expense and other, net................................. 5,293 4,963
--------------- -------------
Income (loss) before minority interest.......................... (155) 5,396
Minority interest............................................... 59 70
--------------- -------------
Net income (loss)............................................... $ (214) $ 5,326
=============== =============
Other Data:
EBITDA.......................................................... $ 9,939 $ 14,548
</TABLE>
Total historical revenues for the three months ended January 29, 1999 were
$46,299,000, an increase of $526,000, or 1%, over the comparable pro forma
period in 1998. Total skier days for the three months ended January 29, 1999
were 1,046,000, a decrease of 35,000 days, or 3%, over the comparable pro forma
period in 1998. Skier day improvements at the Summit due to an earlier opening
were offset by reduced skier days at the Eastern resorts. Northstar and Sierra
generated increased revenues of $530,000 and $196,000, respectively, due to
improved yields. Revenues for the Summit increased by $1,503,000 due to an
earlier opening, increased skier visits and improved yields in its food and
beverage, snow school and retail businesses. Revenues for Waterville Valley, Mt.
Cranmore and Loon Mountain declined by $408,000, $129,000 and $1,359,000,
respectively, due to poor early season conditions and reduced skier days at
these resorts. The declines in revenues for the Eastern resorts due to lower
skier days were partially offset by improved yields in ticketing and ancillary
services such as ski rental, food and beverage and retail operations. Bear
Mountain realized increased revenues in November due to an earlier opening.
However, the early season gains were eroded in January due to the continued lack
of natural snowfall. Revenues for Grand Targhee were generally comparable
between the periods.
Historical resort operating expenses, excluding depreciation and
amortization, for the three months ended January 29, 1999 were $36,360,000, an
increase of $5,135,000, or 16%, over the comparable pro forma period in 1998.
Increased costs of operations at the Summit of $1,982,000 and higher corporate
expenses of $1,236,000 for nonrecurring corporate initiatives, process
improvements and new management personnel as previously discussed were the
principal contributors to the increase. Increased snowmaking costs at Bear
Mountain of $456,000 due to the lack of natural snowfall, lease costs in the
amount of $247,000 for three new lifts at the Summit and Bear Mountain, $197,000
of incremental labor costs associated with earlier openings at Northstar, Sierra
and Bear Mountain and normal inflationary impacts also contributed to the
increase.
Historical depreciation and amortization for the three months ended January
29, 1999 was $4,801,000. The increase of $612,000 or 15% over the 1998 pro forma
period was due to higher average asset balances in the 1999 period.
Net interest expense for the historical three months ended January 29, 1999
totaled $5,293,000, an increase of $330,000 or 7% from the comparable pro forma
period in 1998. The increase was principally due to interest expense on
borrowings under the Senior Credit Facility used to fund capital expenditures,
maintenance activities and normal seasonal working capital requirements in the
off-season period prior to the start of the 1998/99 ski season.
<PAGE>12
Liquidity and Capital Resources
The Company's primary liquidity needs are to fund capital expenditures,
service indebtedness and support seasonal working capital requirements. The
Company's primary sources of liquidity are cash flow from operations and
borrowings under the Senior Credit Facility. Virtually all of the Company's
operating income is generated by its subsidiaries. As a result, the Company is
dependent on the earnings and cash flow of, and dividends and distributions or
advances from, its subsidiaries to provide the funds necessary to meet its debt
service obligations. The Senior Credit Facility currently provides for borrowing
availability of up to $25 million during the term of such facility, which
expires November 15, 1999. The Senior Credit Facility requires that the Company
not have borrowings thereunder in excess of $8 million, in addition to certain
amounts maintained by the Company in certain depository accounts with
BankBoston, N.A., for a period of 60 consecutive days each year commencing
between February 1 and February 28. The Company has obtained a waiver from the
lender that reduces the period of time during which borrowings may not exceed $8
million to 20 consecutive days commencing between February 1 and February 28,
1999, and waives certain other covenant violations at January 29, 1999. The
Company intends to use borrowings under the Senior Credit Facility to meet
seasonal fluctuations in working capital requirements, primarily related to
off-season operations and maintenance activities during the months of May
through November, to fund capital expenditures for lifts, trail work, grooming
equipment and other on-mountain equipment and facilities, to build retail and
other inventories prior to the start of the ski season and for other cash
requirements. As of January 29, 1999 and February 28, 1999, outstanding
borrowings under the Senior Credit Facility totaled approximately $15.3 million
and $5.8 million, respectively.
While the Company's ski resorts typically generate significant amounts of
cash during the ski season, the Company had a working capital deficit of $37.6
million as of January 29, 1999 which will negatively affect liquidity during the
remainder of 1999.
The Company generated cash from operating activities of $13.7 million for
the three months ended January 29, 1999 as compared to $15.4 million for the
three months ended January 30, 1998. This decrease is principally due to the
reduced earnings for the quarter ended January 29, 1999 as compared to the 1998
period.
Cash used in investing activities totaled $8.7 million and $4 million for
the three months ended January 29, 1999 and January 30, 1998, respectively. The
results for the 1999 and 1998 periods primarily reflect capital expenditures for
the purchase of property and equipment.
Cash used in financing activities totaled $3.4 million and $10.3 million
for the three months ended January 29, 1999 and January 30, 1998, respectively.
The results for the 1999 and 1998 periods primarily reflect repayments on the
Senior Credit Facility and long-term debt.
The Company's capital expenditures for property and equipment for the three
months ended January 29, 1999 were approximately $7.2 million. Management
anticipates that remaining capital expenditures for property and equipment in
fiscal 1999 and fiscal 2000 will be approximately $14 million in the aggregate,
including approximately $4 million in resort maintenance for each year. The
Company plans to fund these capital expenditures from available cash flow,
vendor financing to the extent permitted under the Senior Credit Facility and
the Indenture and borrowings under the Senior Credit Facility. Commitments for
future capital expenditures through fiscal 1999 totaled approximately $3.3
million at January 29, 1999.
Management believes that there is a considerable degree of flexibility in
the timing (and, to a lesser degree, the scope) of its capital expenditure
program, and even greater flexibility as to its real estate development
objectives. While the capital expenditure program described above is regarded by
management as important, both as to timing and scope, discretionary capital
spending above maintenance levels can be deferred, in some instances for
substantial periods of time, in order to address cash flow or other constraints.
With respect to the Company's potential real estate development opportunities,
management believes that such efforts will enhance ski-related revenues and will
contribute independently to earnings. In addition, with respect to significant
development projects, the Company anticipates entering into joint venture
arrangements that would reduce infrastructure and other development costs.
Nonetheless, existing lodging facilities in the vicinity of each resort are
believed to be adequate to support current skier volumes and a deferral or
curtailment of development efforts is not regarded by management as likely to
adversely affect skier days and ski-related revenues or profitability. The
<PAGE>13
Company also believes that its current infrastructure is sufficient, and that
development of real estate opportunities is not presently necessary to support
its existing operations.
The Company's liquidity has been and will continue to be significantly
affected by its high leverage. As a result of its leveraged position, the
Company will have significant cash requirements to service debt and funds
available for working capital, capital expenditures, acquisitions and general
corporate purposes are limited. In addition, the Company's high level of debt
may increase its vulnerability to competitive pressures and the seasonality of
the skiing and recreational industries. Any decline in the Company's expected
operating performance could have a material adverse effect on the Company's
liquidity and on its ability to service its debt and make required capital
expenditures.
In addition, the Senior Credit Facility and the Indenture each contain
covenants that significantly limit the Company's ability to obtain additional
sources of capital and may affect the Company's liquidity. These covenants
restrict the ability of the Company and its Restricted Subsidiaries to, among
other things, incur additional indebtedness, create liens, make investments,
consummate certain asset sales, create subsidiaries, issue subsidiary stock,
consolidate or merge with any other person, or transfer all or substantially all
of the assets of the Company. Further, upon the occurrence of a Change of
Control (as defined in the Indenture), the Company may be required to repurchase
the Notes at 101% of the principal amount thereof, plus accrued and unpaid
interest. The occurrence of a Change of Control may also constitute a default
under the Senior Credit Facility. No assurance can be given that the Company
would be able to finance a Change of Control repurchase offer.
The Company currently has $133.5 million aggregate principal amount of
Senior Notes outstanding, which will result in annual cash interest requirements
of approximately $16.7 million. The Company expects that cash generated from
operations, together with borrowing availability, will be adequate to fund the
interest requirements on the Senior Notes and the Company's other cash operating
and debt service requirements over the next twelve months. However, any decline
in the Company's expected operating performance could have a material adverse
effect on the Company's liquidity. In such case, the Company could be required
to attempt to refinance all or a portion of its existing debt, sell assets or
obtain additional financing. No assurance can be given of the Company's ability
to do so or the terms of any such transaction. In addition, the Company would
require additional financing for future acquisitions.
Impact of the Year 2000 Issue
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions or engage in normal
business activities.
The Company has conducted an assessment of its information and
telecommunications technology ("IT") assets and systems. Substantially all of
the Company's IT systems, except for a portion of the Company's ticketing and
sales systems, operate using software developed and supported by third party
vendors. The Company is in the process of implementing its planned program to
remedy such third party developed systems, which will entail either
modifications to or replacement of certain existing IT systems. The cost of
modifications will be expensed as incurred and is not expected to be
significant. The cost of purchased replacements will be capitalized and is
expected to range from $500,000 to $700,000.
The Company is currently performing an assessment of the necessary efforts
to make its primary ticketing and sales system year 2000 compliant, and expects
to complete this assessment by April 1999. The cost of necessary modifications
to the ticketing and sales software will be expensed as incurred. Purchases of
replacement hardware, if any, will be capitalized. The expected cost of
necessary software modifications and hardware replacements is not currently
known.
The Company has commenced a program to ensure that significant vendors and
service providers with which it does business are year 2000 compliant. In
addition, the Company is conducting an assessment of its operating assets to
determine whether there will be any significant financial impacts to ensure year
2000 compliance for such assets.
<PAGE>14
The Company intends to complete its year 2000 assessments and remediation
program by the third calendar quarter of 1999. However, if the Company or its
vendors are unable to resolve the year 2000 issue in a timely manner, or the
Company's assessment of the extent of year 2000 issues surrounding its IT
systems, operating assets or significant vendors or service providers are
incorrect, the year 2000 issue could have a material impact on the operations of
the Company. The Company does not presently have a contingency plan in the event
its year 2000 compliance program is unsuccessful or not completed on a timely
basis.
The cost of the project and the date on which the Company believes it will
complete the year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates will
be achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes and similar
uncertainties.
Seasonality
The business of the Company is highly seasonal, with the vast majority of
its annual revenues expected to be generated between November and April of each
fiscal year. Management considers it essential to achieve optimal operating
results during key holidays and weekends during this period. During the
off-season months of May through October, the Company's resorts typically
experience a substantial reduction in labor and utility expense due to the
absence of ski operations, but make significant expenditures for maintenance,
expansion and capital improvement in preparation for the ensuing ski season.
Regulation and Legislation
The Company's operations are dependent upon its ownership or control over
the real property constituting each resort. The real property presently used at
the Northstar and Mt. Cranmore resorts is owned by the Company. The Company has
the right to use a substantial portion of the real property associated with the
Bear Mountain, Sierra, Summit, Grand Targhee, Loon Mountain and Waterville
Valley resorts under the terms of Special Use Permits issued by the United
States Forest Service. The Special Use Permits for the Bear Mountain, Sierra,
Waterville Valley, the Summit and Grand Targhee resorts were reissued at the
time of the Company's acquisition of such resorts, with the Bear Mountain permit
expiring in 2020, the Sierra permit expiring in 2008, the Waterville Valley
permit expiring in 2034, the Summit permit expiring in 2032 and the Grand
Targhee permit expiring in 2034.
A substantial portion of the real property associated with the Loon
Mountain resort is likewise used under United States Forest Service permits. In
1993, the United States Forest Service authorized various lift, trail and
snowmaking improvements on Loon Mountain and an expansion onto South Mountain.
In 1996, the United States Court of Appeals for the First Circuit (the "First
Circuit") overturned this authorization on the ground that the United States
Forest Service had failed to properly address certain environmental issues under
the National Environmental Policy Act ("NEPA"). Certain improvements, including
a snowmaking pipeline, and part of the expansion had been constructed before the
First Circuit ruled. On May 5, 1997, the United States District Court for the
District of New Hampshire (the "District Court") entered a stipulated order
which authorized existing improvements to remain in place and existing
operations to continue but generally prohibited future construction, restricted
use of a major snowmaking water source, and required certain water discharge
permits to be pursued, pending United States Forest Service reconsideration of
the projects under NEPA. In a December 4, 1998 filing, the United States Forest
Service targeted the Fall of 1999 for issuance of a draft NEPA document
regarding the improvements and the proposed expansion and stated that it
intended to combine such NEPA review with review of the existing snowmaking
pipeline. The District Court entered a final order on December 11, 1998
specifying that the conditions imposed on operations at Loon Mountain in the May
5, 1997 order will remain in effect until the United States Forest Service
completes its NEPA review and issues a new decision. On February 12, 1999, the
District Court agreed that the United States Forest Service may combine its
evaluation and analysis of the existing snowmaking pipeline with its NEPA review
of the improvements and proposed expansion.
In August 1997, the United States Forest Service authorized the Loon
<PAGE>15
Mountain resort to construct a new snowmaking pipeline across permitted land.
The United States Forest Service found that such construction was consistent
with the District Court order and enabled the resort to modify its snowmaking
operations to better protect water resources and replace snowmaking capacity
lost under the order. Although the pipeline was completed, its use was
challenged by private parties who asserted that the United States Forest Service
violated NEPA. On January 20, 1998, the District Court issued a decision finding
that the United States Forest Service violated NEPA in failing to address the
potential for the new pipeline to increase the amount of snow made and any
associated environmental effects. On March 10, 1998, the District Court issued a
series of further orders which, among other things, direct the United States
Forest Service to re-evaluate the pipeline, allow such re-evaluation to proceed
separate from and prior to the United States Forest Service's reconsideration of
the larger expansion, and enjoin the Loon Mountain Resort from using the
pipeline pending further action by the court. On July 2, 1998, the United States
Forest Service issued a new decision approving the pipeline and addressing its
potential to increase the amount of snow made. This decision was challenged by
several private parties, who again, asserted that it violated NEPA. The United
States Forest Service subsequently withdrew its decision authorizing the
pipeline to conduct further review and the District Court consolidated the
lawsuits concerning the pipeline. On November 19, 1998, the District Court
modified the injunction precluding use of the pipeline to permit Loon Mountain
Resort to use the pipeline to withdraw and convert 159.7 million gallons of
water per ski season into snow while the United States Forest Service further
reviews the pipeline under NEPA. On February 12, 1999, the District Court
dismissed the consolidated lawsuit concerning the pipeline in light of the
United States Forest Service's decision to combine review of the pipeline's
construction and operation with its NEPA review of the improvements and proposed
expansion.
Existing use of Loon Mountain is authorized under a Term Special Use
Permit, which covers facilities and expires in 2006, and a supplemental permit,
which covers the balance of Loon Mountain; existing non-skiing use of South
Mountain is authorized under an annual permit issued by the United States Forest
Service that is expected to be reissued each year. After the United States
Forest Service reconsiders the pipeline improvements and expansion under NEPA,
it will need to render a new decision and, if appropriate, issue a new permit.
At that time, the District Court order will terminate. Based upon the existing
administrative record, and certain proposed modifications to the resort's
snowmaking operations which are intended to better protect water resources, the
Company expects that the pipeline improvements and expansion will be approved by
the United States Forest Service. However, no assurance can be given regarding
the timing or outcome of this process.
The United States Forest Service has the right to approve the location,
design and construction of improvements in permit areas and many operational
matters at resorts with permits. Under the permits, the Company is required to
pay fees to the United States Forest Service. Under recently enacted
legislation, retroactively effective to the 1995/96 ski season, the fees range
from 1.5% to approximately 4.0% of certain revenues, with the rate generally
rising with increased revenues. Through fiscal 1998, the Company is required to
pay the greater of (i) the fees due under the new legislation and (ii) the fees
actually paid for the 1994/95 ski season unless gross revenue in a ski season
falls more than 10% below that of the 1994/95 ski season in which case the fees
due are calculated solely under the new legislation. The calculation of gross
revenues includes, among other things, revenue from lift ticket, ski school
lesson, food and beverage, rental equipment and retail merchandise sales. Total
fees paid to the United States Forest Service by the Company during the year
ended October 30, 1998 were $1,014,000. The new legislation is not expected to
have a material effect on fees payable in future periods.
The Company believes that its relations with the United States Forest
Service are good, and, to the best of its knowledge, no Special Use Permit for
any major ski resort has ever been terminated by the United States Forest
Service. Prior to permit termination, the United States Forest Service would be
required to notify the Company of the grounds for such action and to provide it
with reasonable time to correct any curable non-compliance.
The Company's resorts are subject to a wide variety of federal, state and
local laws and regulations relating to land use, water resources, discharge,
storage, treatment and disposal of various materials and other environmental
matters. Management believes that the Company's resorts are presently in
compliance with all land use and environmental laws, except where non-compliance
is not expected to result in a material adverse effect on its financial
condition. The Company also believes that the cost of complying with known
requirements, as well as anticipated investigation and remediation activities,
will not have a material adverse effect on its financial condition or future
results of operations. However, failure to comply with such laws could result in
the imposition of severe penalties and other costs or restrictions on operations
by government agencies or courts that could adversely affect operations.
<PAGE>16
The operations at the resorts require permits and approvals from certain
federal, state and local authorities. In addition, the Company's operations are
heavily dependent on 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
could have a detrimental effect on the Company, or that material permits,
licenses or agreements will not be canceled, not renewed, or renewed on terms
materially less favorable to the Company. Major expansions of any one or more
resorts could require, among other things, the filing of an environmental impact
statement or other documentation with the United States Forest Service and state
or local governments under NEPA and certain state or local NEPA counterparts if
it is determined that the expansion may have a significant impact upon the
environment. Although the Company has no reason to believe that it will not be
successful in implementing its operations and development plans, no assurance
can be given that necessary permits and approvals will be obtained.
The Company has not received any notice of material non-compliance with
permits, licenses or approvals necessary for the operation of its properties or
of any material liability under any environmental law or regulation. However, at
Grand Targhee, the Wyoming Department of Environmental Quality (the "DEQ") has
issued the Resort a Notice of Violation of state water pollution requirements
based on alleged discharge from a wastewater lagoon without a permit. The
Company has entered into an negotiated compliance order with the DEQ requiring
construction and operation of a new wastewater facility at a cost of
approximately $1 million. The Company has substantially completed the
construction of the new wastewater facility and is awaiting final approval of
the facility by the DEQ.
Pursuant to the air emissions reduction program currently in effect in the
area regulated by the South Coast Air Quality Management District in California
where Bear Mountain is located, Bear Mountain will be required to "bank"
emission credits from other facilities which have already implemented nitrogen
oxide emission reductions. The Company may purchase "banked" emission credits in
a one-time transaction at the current market rate of approximately $700,000 or
over time up to the year 2010 at prevailing market rates.
Bear Mountain has a water supply contract for 500 acre-feet per year with
Big Bear Municipal Water District executed January 8, 1988, the initial
fifteen-year term of which expires on January 7, 2003. Big Bear Municipal Water
District's primary source of water is from a portion of the water in Big Bear
Lake shared with Bear Valley Mutual Water Company, the senior water rights
holder. The water supply contract provides for water primarily for snow making
and slope irrigation purposes. The obligation of Big Bear Municipal Water
District to supply water is excused only if the level of Big Bear Lake recedes
below 6,735.2 feet above sea level or eight feet below the top of Big Bear Lake
Dam. Bear Valley Mutual Water Company recently claimed that its rights in the
lake are not subject to Big Bear Municipal Water District's obligation to supply
water to Bear Mountain. This claim is vigorously contested by all interested
parties including Bear Mountain and a two-year moratorium agreement between Bear
Valley Mutual Water Company and Big Bear Municipal Water District was executed
in November 1998, which withdraws Bear Valley's claim for two years while the
issues between Bear Valley and Big Bear Municipal are worked out. This allows
continued service to Bear Mountain on an uncontested basis during the moratorium
period. The Company expects that the issue will be resolved favorable to the
interests of Bear Mountain because of its contribution to the local economy, the
strength of its contract rights with Big Bear Municipal Water District and the
alternate sources of water supply that are available. It should be noted the
foregoing is premised on normal conditions prevailing and the absence of
droughts, earthquakes, dam failure or other types of similar calamities that
impact the ability to obtain or supply water. No assurance can be made regarding
the outcome of this situation or the timing negotiations during the next two
years.
Pursuant to the decision of the First Circuit and the order of the District
Court the Loon Mountain Resort has applied to the Environmental Protection
Agency ("EPA") for a Clean Water Act (the "CWA") discharge permit covering
discharges associated with its snowmaking operations. Certain ongoing discharges
are authorized by the District Court order pending final action on the permit
and subject to the District Court's reserved power to modify such approval to
address any resulting environmental issues. The EPA issued a discharge permit
prior to the 1998/99 ski season.
Certain regulatory approvals associated with the new snowmaking pipeline at
Loon Mountain impose minimum stream flow requirements on Loon Mountain Resort.
<PAGE>17
These requirements will compel Loon Mountain Resort to construct water storage
facilities within the next ten years, and such construction will require further
regulatory approvals and environmental documentation under NEPA.
In addition, the Loon Mountain Resort was notified in September 1997 that
it had allegedly filled certain wetlands at the resort in violation of the CWA.
In response, the Loon Mountain Resort worked with the EPA to remove the alleged
fill and implement certain erosion control measures. On January 15, 1998, an
individual notified the EPA, the Loon Mountain Resort, and certain other persons
that he intended to initiate a lawsuit under the CWA regarding the alleged
wetland violation. On February 2, 1998, the EPA wrote to such individual stating
that the alleged fill had been removed and that the EPA does not believe there
is a continuing violation at the site. The Company does not have any further
notice of a threatened action since the September 1997 notice. While the Company
believes that such position would prevail in any lawsuit, no assurance can be
given regarding any outcome.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISLCOSURES ABOUT MARKET RISK
There have been no material changes in information relating to market risk
since the Company's disclosure in Item 7a. of the Company's Annual Report on
Form 10-K for the year ended October 30, 1998 as filed with the Securities and
Exchange Commission.
<PAGE>18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Each of the Company's resorts has pending and is regularly subject to
litigation with respect to personal injury claims relating principally to skiing
activities at its resorts. The Company and each of its resorts maintain
extensive liability insurance that the Company considers adequate to insure
claims related to usual and customary risks associated with the operation of ski
resorts. The Company does not believe that it or any of its resorts are involved
in any litigation that will, individually or in the aggregate, have a material
adverse effect on its financial condition or future results of operations.
On March 25, 1997, Killington West, Ltd., a California corporation formerly
known as Bear Mountain, Ltd. ("Killington"), filed a breach of contract lawsuit
in the Superior Court of the State of California (County of San Bernardino)
against Fibreboard Corporation ("Fibreboard") and Bear Mountain, Inc. The
lawsuit alleges that Fibreboard and Bear Mountain, Inc. breached a change in
control provision in the asset purchase agreement dated October 6, 1995 (the
"Original Bear Mountain Agreement") among Killington, Fibreboard and Bear
Mountain, Inc., pursuant to which Bear Mountain, Inc. acquired the Bear Mountain
ski resort from Killington. In connection with the Company's acquisition of Bear
Mountain, Inc. in December 1996, the Company obtained from Fibreboard
indemnification for any claim that might be made by Killington, and further,
required that $1 million of the purchase price be held in escrow pending the
outcome of any potential disputes with Killington. Fibreboard has acknowledged
its obligation to indemnify Bear Mountain, Inc. with respect to the Killington
lawsuit and has commenced the defense of such lawsuit on behalf of Fibreboard
and Bear Mountain, Inc., however, no assurances can be given regarding the
outcome of this litigation.
In connection with the Loon Mountain acquisition, certain shareholders (the
"Plaintiffs") of Loon Mountain Recreation Corporation filed lawsuits in New
Hampshire state court against Loon Mountain Recreation Corporation ("LMRC") and
its former directors, alleging breach of fiduciary duty, and against the
Company, alleging that the Company failed to comply with the New Hampshire
Security Takeover Disclosure Act (the "Takeover Statute"). Prior to the filing
of the lawsuit against the Company, the Company had sought and received a "no
action" order from the Bureau of Securities Regulation, New Hampshire Department
of State (the "Bureau") finding that the Takeover Statute was inapplicable to
the proposed merger. The two lawsuits were consolidated in the Superior Court in
Grafton County, New Hampshire. The Plaintiffs' initial request for a preliminary
injunction prohibiting the Company (or its affiliates) from proceeding with the
Loon Mountain Acquisition based on allegations that the Company failed to comply
with the Takeover Statute was denied on October 28, 1997. Before the litigation
proceeded further, both parties amended the merger agreement relating to the
Loon Mountain Acquisition. The Company then sought and obtained an additional
order by the Bureau that the Takeover Statute did not apply. On January 30,
1998, the Company filed its answer to the Plaintiffs' petition and, on February
10, 1998, filed a motion to dismiss the action against the Company under the
Takeover Statute in its entirety, asserting, inter alia, that the Takeover
Statute did not apply to the transaction as a matter of law. On June 11, 1998,
the Court denied the Company's motion to dismiss. On July 2, 1998, the Company
filed a motion to reconsider the Court's decision. On August 1, 1998, the Court
granted the Company's motion for reconsideration and dismissed Plaintiffs'
claims under the Takeover Statute. Plaintiffs filed a motion for reconsideration
as to the Court's dismissal of the Takeover Statute claim which was denied on
October 1, 1998, and Plaintiffs have appealed the dismissal of their Takeover
Statute claim to the New Hampshire Supreme Court. Plaintiffs' breach of
fiduciary duty action against LMRC and its directors remains pending. Plaintiffs
have conducted limited discovery and a trial date has not been set. On December
15, 1998, Plaintiffs moved to amend their complaint to allege a cause of action
seeking money damages against the Company, LMRC and the former LMRC directors
for breach of fiduciary duty and omissions and misrepresentations in connection
with the approval of the Loon Mountain acquisition and the solicitation of
proxies from the LMRC shareholders to approve the transaction. Plaintiffs'
potential remedies include monetary damages for the directors' alleged failure
to maximize the consideration to LMRC shareholders and/or failing to properly
disclose material information to LMRC shareholders in connection with the Loon
Mountain acquisition. If Plaintiffs are successful in pursuing their claims
against the former LMRC directors, LMRC has certain indemnity obligations to the
former directors and is currently involved in such directors' defense. The
Company may have available to it as a defense the exclusive remedy provisions of
the New Hampshire statute on dissenters' rights, which rights, as described
below, the Plaintiffs have exercised. While management of the Company believes
that the former LMRC directors will prevail against Plaintiffs' claims and
appeals, no assurance can be given regarding the outcome of the above described
litigation.
<PAGE>19
In connection with the Loon Mountain acquisition, Plaintiffs exercised
dissenters' rights under the New Hampshire Business Corporation Act (the
"NHBCA"). Under the statutory procedure for settling the Plaintiffs' dissenters'
rights, LMRC paid Plaintiffs an aggregate of $34,436, or $30.61 per share, as
its estimate of the fair value of their 1,125 shares. Plaintiffs demanded
additional payments necessary to compensate them for the $71.38 per share price,
plus interest, which they have asserted as the fair value of their shares.
Pursuant to the NHBCA, LMRC commenced a proceeding in the Grafton County New
Hampshire Superior Court on July 20, 1998 seeking a judicial appraisal of the
value of Plaintiffs' shares in LMRC. On September 30, 1998, Plaintiffs moved to
dismiss the appraisal proceeding on the grounds that LMRC's payments to them
were untimely and that the accompanying notice omitted certain required
information. The court denied the Plaintiff's motion to dismiss on December 14,
1998. LMRC anticipates that discovery will commence in the first half of 1999.
While the Company believes that the amount paid to the Plaintiffs prior to the
commencement of the appraisal proceeding represents the fair value of their
shares, there can be no assurance as to the value which the appraisal proceeding
will assign to the Plaintiffs 1,125 shares.
In 1995, an individual sued the United States Forest Service in the United
States District Court for the District of New Hampshire (the "District Court")
alleging that the United States Forest Service had violated NEPA, the Clean
Water Act (the "CWA"), and an executive order in 1993 approving improvements to
facilities on Loon Mountain and an expansion of the Loon Mountain resort on to
South Mountain. LMRC and an environmental group intervened. The District Court
entered summary judgment for the United States Forest Service on all claims and
the original plaintiff along with an intervening party appealed. In December
1996, the United States Court of Appeals for the First Circuit (the "First
Circuit") reversed the District Court and ruled that the United States Forest
Service must reconsider certain environmental issues under the National
Environmental Policy Act ("NEPA ") and that LMRC must obtain a discharge permit
under the CWA for certain discharges from its snowmaking system. On May 5, 1997,
later finalized December 11, 1998, the District Court entered a stipulated order
that: enjoins LMRC from any further construction implementing the project with
certain limited exceptions; imposes various restrictions on LMRC's existing
snowmaking operations and requires LMRC to apply for a CWA discharge permit for
discharges of water and any associated pollutants associated with its
snowmaking; allows existing construction to remain in place and existing uses to
continue; requires LMRC to undertake certain erosion control and monitoring
measures; requires the United States Forest Service to prepare supplemental NEPA
documentation on the improvements and expansion; and reserves the right to
require restoration of areas developed under the 1993 United States Forest
Service decision to their preexisting condition if not ultimately approved by
the United States Forest Service. This order will remain in effect until the
supplemental NEPA process is completed and the United States Forest Service
issues a new special use permit. The Company has received a CWA permit for its
snowmaking system, and the United States Forest Service currently expects to
issue draft NEPA documentation in the Fall of 1999. However, no assurance can be
provided on the timing, terms or outcome of this proceeding.
Following the First Circuit's decision, the plaintiffs filed a motion with
the District Court asking it to impose a civil penalty under the CWA of
$5,550,125 and attorney's fees and costs against LMRC for unpermitted discharges
into Loon Pond without a discharge permit during its snowmaking operations in
the 1996/97 ski season and preceding years. The discharge at issue involves
water transfers from the East Branch of the Pemigewasset River and drain back
from the snowmaking system into Loon Pond. In connection with the Loon Mountain
acquisition, the Company obtained environmental pollution insurance for
$4,500,000 of coverage above a $1.2 million deductible to cover any penalties,
fees, and costs that the court assesses against LMRC. LMRC asserted defenses to
the merits and amount of penalty sought. In a December 11, 1998 final order, the
District Court dismissed the claim for civil penalties and attorney's fees under
the CWA on grounds of mootness and standing. One of the plaintiffs filed a
notice of appeal on January 8, 1999 to appeal the final order to the First
Circuit but has not yet identified issues on appeal. No assurances can be given
regarding the outcome of this litigation.
On August 29, 1997, the plaintiffs filed a second lawsuit against the
United States Forest Service in the District Court alleging that the United
States Forest Service violated NEPA in authorizing LMRC to construct and operate
a snowmaking pipeline across permitted land. Another party intervened as
plaintiff, and LMRC intervened as defendant. The United States Forest Service
and LMRC asserted various defenses. On January 20, 1998, the District Court held
that the pipeline may be analyzed and approved by the United States Forest
Service separately from the South Mountain expansion, but that the United States
Forest Service violated NEPA by failing to consider the potential environmental
effects of the alleged increase in snowmaking capacity. On March 10, 1998, the
District Court issued a series of further orders which establish a schedule for
the United States Forest Service's reconsideration of the pipeline and any
resulting challenges, deny plaintiffs' request that such reconsideration be
<PAGE>20
deferred until the United States Forest Service's decision on the larger
expansion, and enjoin Loon Mountain from using the pipeline pending further
action by the Court. Three of the plaintiffs have appealed the District Court's
denial of their claim that reconsideration of the pipeline be deferred until the
United States Forest Service's decision on the larger expansion, but briefing on
these appeals has not yet commenced in the First Circuit.
On July 2, 1998, the United States Forest Service issued a new decision
reauthorizing the pipeline and addressing the potential environmental effects of
the projected increase in snowmaking capacity. Three of the prior plaintiffs
filed challenges to this decision with the District Court, alleging that it,
too, violated NEPA. The United States Forest Service subsequently withdrew its
decision authorizing the pipeline to conduct further review under NEPA.
On August 20, 1998, two of the plaintiffs who have challenges to the new
pipeline decision pending before the District Court, filed a separate lawsuit
against the United States Forest Service in the same court challenging the
pipeline decision on the same grounds, as well as additional grounds that
another party has asserted in that case or that are identical to claims that the
District Court addressed in its January 20, 1998 decision. The District Court
consolidated the new lawsuit with the existing action on the pipeline on
November 19, 1998. That same day, the District Court modified the injunction
precluding Loon Mountain from using the pipeline to permit Loon Mountain to use
the pipeline to withdraw and convert 159.7 million gallons of water per ski
season into snow until the United States Forest Service completes its
environmental review of the pipeline. On December 4, 1998, the United States
Forest Service filed a Notice of Administrative Action stating that it intends
to combine its NEPA review of the pipeline with the NEPA review of the
improvements and proposed expansion at Loon Mountain. The United States Forest
Service currently expects to release a draft NEPA document for public comment on
the pipeline, the improvements, and the proposed expansion in Fall 1999. No
assurances can be given regarding the timing or outcome of this process or the
litigation on the pipeline.
The plaintiffs in the Loon Mountain pipeline litigation have stated that
they intend to seek attorney fees in the combined amount of $52,965. One
plaintiff has indicated that he will claim $23,581 in attorney's fees against
LMRC on grounds of bad faith. The other plaintiffs have not ruled out claims for
attorney's fees against LMRC. The Company believes LMRC has substantial defenses
in the event claims for attorney's fees are filed, however, it cannot guarantee
any particular result.
On August 1, 1997, two plaintiffs filed a lawsuit against the Town of
Lincoln Planning Board (the "Lincoln Planning Board") and LMRC in the Grafton
County Superior Court in the State of New Hampshire alleging that the Lincoln
Planning Board had improperly approved various facilities associated with the
snowmaking pipeline. On September 30, 1997, LMRC moved to dismiss the claims
against it, but sought to remain in the case as in intervenor. Also on September
30, 1997, the Lincoln Planning Board answered the complaint, denying most of the
allegations and raising various defenses. On February 23, 1998, the court
granted LMRC's motion to dismiss. However, in the event that the plaintiffs are
successful, the Lincoln Planning Board would be requested to reconsider the
facilities and issue a new decision. No assurance can be given regarding the
outcome or timing of this litigation or any resulting Lincoln Planning Board
review.
In connection with the Seven Springs acquisition certain shareholders of
Seven Springs filed a lawsuit in the Court of Common Pleas of Somerset County,
Pennsylvania against the Company, Acquisition Sub, and Seven Springs and certain
of its directors, seeking a declaratory judgment, along with other relief
including the rescission of the Merger Agreement by and among the Company,
Acquisition Sub and Seven Springs. Plaintiffs allege that the terms of the Seven
Springs Shareholder Agreement ban the consummation of the Seven Springs
acquisition. On October 29, 1998, the court entered a final judgment denying
Plaintiff's motion and has permitted the consummation of the transactions
contemplated by the Merger Agreement. On December 28, 1998, the Plaintiff's
filed an amended notice of appeal which is currently pending. While the Company
believes that Seven Springs will prevail with its position that the Seven
Springs Shareholders Agreement does not apply to the transactions contemplated
by the Merger Agreement, no assurance can be made regarding the timing or
outcome of this litigation.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There has been no material default with respect to any of the Company's
senior securities which has not been waived or cured.
<PAGE>21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit No. Description of Exhibit
10 Waiver Agreement dated
March 12, 1999, to Credit
Agreement dated as of
October 30, 1998 among
Booth Creek Ski Holdings,
Inc., Booth Creek Ski
Acquisition Corp., Trimont
Land Company,
Sierra-at-Tahoe, Inc., Bear
Mountain, Inc., Waterville
Valley Ski Resort, Inc.,
Mount Cranmore Ski Resort,
Inc., Ski Lifts, Inc.,
Grand Targhee Incorporated,
LMRC Holding Corp., Loon
Mountain Recreation
Corporation, Loon Realty
Corp. and BankBoston, N.A.
27 Financial Data Schedule
b. Reports on Form 8-K
No reports on Form 8-K were filed during the quarterly period ended January
29, 1999.
<PAGE>22
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.
BOOTH CREEK SKI HOLDINGS, INC.
(Registrant)
By: /s/ ELIZABETH J. COLE
---------------------------------
Elizabeth J. Cole
Executive Vice President and
Financial Officer
By: /s/ BRIAN J. POPE
---------------------------------
Brian J. Pope
Vice President of Accounting and
Finance,
(Chief Accounting Officer)
March 12, 1999
WAIVER OF COVENANT VIOLATIONS
This Waiver (this "Waiver") is entered into as of this 12th day of March,
1999, by and among BOOTH CREEK SKI HOLDINGS, INC., BOOTH CREEK SKI ACQUISITION
CORP., TRIMONT LAND COMPANY, SIERRA-AT-TAHOE, INC., BEAR MOUNTAIN, INC.,
WATERVILLE VALLEY SKI RESORT, INC., MOUNT CRANMORE SKI RESORT, INC., SKI LIFTS,
INC., GRAND TARGHEE INCORPORATED, LMRC HOLDING CORP., LOON MOUNTAIN RECREATION
CORPORATION, and LOON REALTY CORP. (collectively, the "Borrowers") and
BankBoston, N.A., as a Lender and as agent for itself and other Lenders (the
"Lender").
Reference is made to the Amended and Restated Credit Agreement dated
as of October 30, 1998, by and among the Borrowers and the Lender, as amended
through the date hereof (the "Credit Agreement"). Capitalized terms used herein
and not otherwise defined shall have the meanings ascribed to them in the Credit
Agreement.
The Borrowers have informed the Lender that:
1. As of January 29, 1999, the ratio of the unpaid principal amount of
Consolidated Financing Debt of the Borrowers to Trailing Four Fiscal Quarter
Cash Flow for the quarter then ending was 6.84-to-1.0, which exceeds the maximum
ratio of 6.5-to-1.0 for such quarter then ending as required by Section 7.5.1 of
the Credit Agreement.
2. As of January 29, 1999, the sum of (i) the Trailing Four Fiscal Quarter
Cash Flow measured on such date, minus (ii) Cash Flow Adjustment for the four
fiscal quarters then ending was 86%, which is below the minimum percentage of
100% as required by Section 7.5.2 of the Credit Agreement.
3. The Revolving Loan will not be equal to or less than $8,000,000 for
the sixty (60) day period required under Section 2.1.2 of the Credit
Agreement.
4. The Borrowers will not submit a written action plan (the "Action Plan")
addressing the items listed on Exhibit 7.18 of the Credit Agreement to the
Lender on or before March 15, 1999, as required under Section 7.17 of the Credit
Agreement.
The Lender, hereby (i) waives the covenant violations set forth under
paragraphs 1 through 4 above, and (ii) agrees that the Borrowers may deliver to
the Lender the Action Plan required under Section 7.17 of the Credit Agreement
on or before May 15, 1999.
<PAGE>
In order to induce the Lender to enter into this Waiver, the Borrowers
hereby represent and warrant that (i) no Default or Event of Default under the
Credit Agreement exists on the date hereof after giving effect to this Waiver
and (ii) all of the representations and warranties contained in the Credit
Agreement are true and correct in all material respects as of the date hereof
after giving effect to this Waiver, with the same effect as if those
representations and warranties had been made on and as of the date hereof (it
being understood that any representation or warranty made as of a specified date
shall be required to be true and correct in all material respects only as of
such specified date).
This Waiver is limited as specified and shall not constitute a
modification, amendment or waiver of any other provision of the Credit Agreement
or constitute a course of dealing between the parties. This Waiver may be
executed in any number of counterparts and by the different parties hereto on
separate counterparts, each of which counterpart when executed and delivered
shall be an original, but all of which together shall constitute one and the
same instrument. From and after the date hereof, all references in the Credit
Agreement and in any other Credit Documents to the Credit Agreement shall be
deemed to be references to the Credit Agreement as modified hereby.
*The remainder of this page has been intentionally left blank*
<PAGE>
IN WITNESS WHEREOF, each of the undersigned has caused this Waiver to be
executed under seal and delivered by its duly authorized officer as of the date
first above written.
BOOTH CREEK SKI HOLDINGS, INC.
BOOTH CREEK SKI ACQUISITION CORP.
TRIMONT LAND COMPANY
SIERRA-AT-TAHOE, INC.
BEAR MOUNTAIN, INC.
WATERVILLE VALLEY SKI RESORT, INC.
MOUNT CRANMORE SKI RESORT, INC.
SKI LIFTS, INC.
GRAND TARGHEE INCORPORATED
LMRC HOLDING CORP.
LOON MOUNTAIN RECREATION CORPORATION
LOON REALTY CORP.
By: /s/ ELIZABETH J. COLE
----------------------------
Elizabeth J. Cole
Title: Executive Vice President
BANKBOSTON, N.A., as Agent
By: /s/ CARLTON WILLIAMS
----------------------------
Carlton Williams
Title: Director
BANKBOSTON, N.A.
By: /s/ CARLTON WILLIAMS
----------------------------
Carlton Williams
Title: Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED UNAUDITED INTERIM FINANCIAL STATEMENTS OF BOOTH CREEK SKI HOLDINGS,
INC. AS OF JANUARY 29, 1999 AND FOR THE THREE MONTHS THEN ENDED, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-29-1999
<PERIOD-END> JAN-29-1999
<CASH> 2,214
<SECURITIES> 0
<RECEIVABLES> 2,398
<ALLOWANCES> 53
<INVENTORY> 5,284
<CURRENT-ASSETS> 12,212
<PP&E> 188,082
<DEPRECIATION> 28,552
<TOTAL-ASSETS> 226,616
<CURRENT-LIABILITIES> 49,823
<BONDS> 133,500
2,509
0
<COMMON> 0
<OTHER-SE> 37,163
<TOTAL-LIABILITY-AND-EQUITY> 226,616
<SALES> 0
<TOTAL-REVENUES> 46,299
<CGS> 0
<TOTAL-COSTS> 29,289
<OTHER-EXPENSES> 11,872
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,297
<INCOME-PRETAX> (155)
<INCOME-TAX> 0
<INCOME-CONTINUING> (155)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (214)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
