-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, THX3Tmk0jcs+khdZnHiMmDPRsUwQAUQnIilXsHIZ+JMsEoaTOcnnVmFFDdz4OhIb AttW1UncH9wwkL5lv+WdPQ== 0000950124-98-000450.txt : 19980130 0000950124-98-000450.hdr.sgml : 19980130 ACCESSION NUMBER: 0000950124-98-000450 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971031 FILED AS OF DATE: 19980129 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BOOTH CREEK SKI HOLDINGS INC CENTRAL INDEX KEY: 0001037253 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS AMUSEMENT & RECREATION [7990] IRS NUMBER: 841359604 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-26091 FILM NUMBER: 98516674 BUSINESS ADDRESS: STREET 1: HIGHWAY 267 & NORTHSTAR DR CITY: TRUCKEE STATE: CA ZIP: 96160 BUSINESS PHONE: 9165621010 10-K405 1 10-K405 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K
(Mark one) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended October 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from ________________ to________________ 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 of.......... (IRS Employer incorporation or organization)............ Identification No.)
HIGHWAY 267 AND NORTHSTAR DRIVE TRUCKEE, CALIFORNIA 96160 (916) 562-1010 (Address, including zip code and telephone number, including area code, of registrant's principal executive offices) ------------------------ Securities registered pursuant to Section 12(b) of the Act: NONE. Securities registered pursuant to Section 12(g) of the Act: NONE. ------------------------ 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] AS OF JANUARY 15, 1998, THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK, PAR VALUE $.01 PER SHARE, WAS 1,000 SHARES. THERE IS NO TRADING MARKET FOR THE COMMON STOCK. ACCORDINGLY, THE AGGREGATE MARKET VALUE OF THE COMMON STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT IS NOT DETERMINABLE. SEE PART II, ITEM 5 OF THIS REPORT. ================================================================================ 2 CROSS REFERENCE SHEET AND TABLE OF CONTENTS
PAGE NUMBER ITEM OR REFERENCE - ---- ------------ PART I 1. Business.................................................... 2 2. Properties.................................................. 17 3. Legal Proceedings........................................... 17 4. Submission of Matters to a Vote of Security Holders......... 17 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................... 18 6. Selected Financial Data..................................... 19 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 21 8. Financial Statements and Supplementary Data................. 33 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 33 PART III 10. Directors and Executive Officers of the Registrant.......... 34 11. Executive Compensation...................................... 36 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 39 13. Certain Relationships and Related Transactions.............. 40 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................................................... 44
3 PART I As used in this Report, unless the context otherwise requires, "Booth Creek" or the "Company" refers to Booth Creek Ski Holdings, Inc. and its subsidiaries. Since November 27, 1996, the Company has acquired the Northstar-at-Tahoe ("Northstar") and Sierra-at-Tahoe ("Sierra") ski resorts in the Lake Tahoe region of Northern California, the Bear Mountain ski resort (together with Northstar and Sierra, the "California Resorts") in Southern California, the Waterville Valley and Mt. Cranmore ski resorts in New Hampshire (the "New Hampshire Resorts"), the Summit at Snoqualmie ski resort complex (formerly known as Snoqualmie Pass), which consists of four separate and distinct resorts (the "Summit") in the Cascade Mountains of Northwest Washington and the Grand Targhee ski resort ("Grand Targhee") in the Grand Tetons in Wyoming. ITEM 1. BUSINESS OVERVIEW Booth Creek owns and operates seven ski resort complexes encompassing ten separate resorts, making the Company the fourth largest operator in North America based on approximately 1.8 million skier days recorded during the 1996/97 ski season at such resorts. Booth Creek primarily operates regional ski resorts which, in the aggregate, attract approximately 85% of their guests from their regional ski markets, within a 200 mile driving radius of each resort. The Company's properties offer approximately 9,000 acres of skiable terrain, 351 trails, 84 lifts (including 13 high-speed lifts) and on-mountain capacity to accommodate approximately 50,000 guests daily. The Company's resort properties are primarily located near major skiing populations, including four of the five largest regional ski markets: Los Angeles/San Diego, San Francisco/Sacramento, Boston and Seattle/Tacoma. The Company believes this geographical diversification serves to limit the Company's exposure to regional economic downturns and unfavorable weather conditions. The Company's California Resorts have introduced what management believes to be one of the industry's leading marketing programs, Vertical Plus, an electronic annual frequent skier program designed to build customer loyalty, increase visitation frequency and maximize guest revenue yields. In addition, the Company has introduced another frequent skier program, Vertical Value, which offers an incentive for frequent visitation at all of the Company's resorts. The Company also uses targeted advertising, database marketing and strategic marketing alliances to enhance the image of its resorts and increase regional market share. The Company also offers extensive development programs to improve the technical skill level of all types of skiers, which management believes is important to expand the total skier population and increase skier visitation frequency. Northstar and Sierra are consistently rated by consumer publications as having premier ski instruction and development programs. The Company intends to implement similar skier development programs at its other resorts in future ski seasons. The Company's principal executive offices are located at Highway 267 and Northstar Drive, Truckee, California 96160. Its telephone number at that location is (916) 562-1010. The Company was incorporated in Delaware on October 8, 1996. INDUSTRY There are 507 ski areas in the United States, which during the 1996/97 ski season generated approximately 52.5 million skier days. These areas range from small ski resort operations, which cater primarily to day skiers and regional overnight skiers from nearby population centers, to larger resorts which, given the scope of their operations and their accessibility, are able to attract skiers and snowboarders from their regional ski markets as well as destination resort guests who are seeking a comprehensive vacation experience. While regional ski market skiers tend to focus primarily on lift ticket price and round-trip travel time, destination travelers tend to be heavily influenced by the number of amenities and activities offered as 2 4 well as the perceived overall quality of the vacation experience. The table below summarizes regional skier days from the 1992/93 ski season through the 1996/97 ski season. U.S. SKI INDUSTRY REGIONS AND SKIER DAYS
ROCKY PACIFIC LAKE SEASON NORTHEAST SOUTHEAST MIDWEST MTS WEST TAHOE TOTAL ------ --------- --------- ------- ----- ------- ----- ----- (IN THOUSANDS) 1992/93............................ 13,217 4,660 6,978 18,602 7,375 3,200 54,032 1993/94............................ 13,718 5,808 7,364 17,503 7,144 3,100 54,637 1994/95............................ 11,265 4,746 6,907 18,412 7,446 3,900 52,676 1995/96............................ 13,825 5,693 7,284 18,148 6,033 3,000 53,983 1996/97............................ 12,407 4,231 7,137 18,904 7,341 2,500 52,520 5 year average..................... 12,886 5,028 7,134 18,314 7,068 3,140 53,570
Northeast: CT, MA, ME, NH, NY, VT, RI Southeast: AL, GA, KY, MD, NC, NJ, PA, TN, VA, WV Midwest: IA, IL, IN, MI, MN, MO, ND, NE, OH, SD, WI Rocky Mts: CO, ID, MT, NM, UT, WY Pacific West: AK, AZ, CA (excluding Lake Tahoe Region), NV, OR, WA Source: 1996/97 Kottke National End of Season Survey The ski resort industry is presently experiencing a period of consolidation. The number of U.S. ski areas has declined from 709 in 1986 to 507 in 1997 and, based on industry estimates, the number of ski areas is expected to decline further, as many mountain resorts lack the infrastructure, capital and management capability to compete in this multi-dimensional and service-intensive industry. No major new ski resort has opened in the United States since 1989. Of the 507 ski areas, RRC Associates estimates the average resort recorded approximately 103,590 skier days and only approximately 25% of all resorts reported more than 200,000 skier days during the 1996/97 ski season. All of the Company's resorts except Mt. Cranmore and Grand Targhee typically record more than 200,000 annual skier days. The trend among leading resorts is toward investing in improving technology and infrastructure, including high speed lifts, attractive facilities and extensive snowmaking capabilities to deliver a more consistent, quality experience. The Company's resorts have spent over $30.0 million in expansion-related capital expenditures over the last three years to improve their competitive position. Management believes the need for increased investment in a resort has required a greater access to capital and has enhanced the position of larger and better capitalized resort owners. Despite this consolidation, the ski industry remains highly fragmented, with no one resort accounting for more than 4%, and no one resort operator accounting for more than approximately 10%, of the United States' 52.5 million skier days during the 1996/97 ski season. The Lake Tahoe region has averaged approximately 3.1 million annual skier days over the last five years. Management estimates that approximately 80% of the skiers visiting Lake Tahoe resorts during the 1996/97 ski season were from the San Francisco, Sacramento and Central Valley metropolitan areas. Other guests come principally from Southern California and states with large ski populations, such as Texas, Illinois and Florida. Skiers in this market can choose from among six major resorts, which include Northstar, Sierra, Squaw Valley, Heavenly Valley, Alpine Meadows, and Kirkwood. Northstar, Squaw Valley and Heavenly Valley attract a significantly greater share of destination skiers than the area's other resorts. The Southern California market has averaged approximately 2.3 million annual skier days over the last five years. Management estimates that approximately 95% of the skiers visiting Southern California resorts during the 1996/97 ski season were drawn primarily from the Los Angeles, Orange County and San Diego metropolitan areas. Skiers in this market can choose from among three major resorts, which include Bear Mountain, Snow Summit and Mammoth. The Northeast market (including New York) has averaged approximately 12.9 million annual skier days over the last five years. The Northeast market consists of a significant percentage of day or weekend skiers due 3 5 to the relatively short driving radius to major metropolitan areas. While the Northeast does not draw significant numbers of vacationing skiers from the Western regions of the United States, it does compete with the Rocky Mountains and Pacific West areas for Eastern vacationing skiers. Within the Northeast region, skiers can choose from among over 50 major ski areas and resorts. The region's major ski areas and resorts are concentrated in the mountainous areas of New England and eastern New York, with the bulk of skiers coming from the population centers located in eastern Massachusetts, southern New Hampshire, Connecticut, eastern New York, New Jersey and the Philadelphia area. The Company's Summit resort complex operates in the Washington State segment of the Pacific West market, which recorded approximately 1.5 million skier days during the 1996/97 ski season. Management estimates that approximately 95% of the skier days recorded at Washington State resorts during the 1996/97 ski season were attributable to residents of the Seattle/Tacoma metropolitan area. Other guests come primarily from other parts of Washington, Oregon and Western Canada. Washington State resorts do not attract a significant number of destination skiers. Within Washington State, skiers can choose from among 14 ski resorts, including the four resorts comprising the Summit. The largest ski areas in Washington State are the Summit, Stevens Pass and Crystal Mountain, each of which had over 275,000 skier days during the 1996/97 ski season. Other ski areas in Washington are moderate to small in size. The Rocky Mountains market has averaged approximately 18.3 million skier days over the last five years, with a high percentage of visitors consisting of destination skiers. Of the 91 ski areas in the region, 28 are located in Colorado, accounting for approximately 62% of all recorded skier days during the 1996/97 ski season. The 38 ski resorts in the northern Rocky Mountain states of Montana, Idaho and Wyoming recorded a total of approximately 2.9 million skier days during the 1996/97 ski season. Because resorts in this part of the region are generally less accessible than resorts in Colorado or Utah, they tend to be smaller and attract fewer destination skiers from outside of the northern Rocky Mountain states. 4 6 RESORT OPERATIONS The Company's seven resort complexes offer a variety of ski and non-ski activities. The table below provides a summary of each resort's ski operations and is followed by a more detailed description of each resort.
TOTAL SNOW 1996/97 SKIABLE VERTICAL SNOWMAKING GROOMING SKIER BEDS WITHIN RESORT ACRES DROP TRAILS LIFTS COVERAGE MACHINES VISITS 12 MILES ------ ------- -------- ------ ----- ---------- -------- ------- ----------- Northstar-at-Tahoe............. 2,400 2,280 63 1 Gondola 50% 14 445,753 16,000 4 High-Speed Quads(1) 4 Fixed Grip 3 Surface Sierra-at-Tahoe................ 1,663 2,212 46 3 High-Speed 10% 12 213,156 30,000 Quads 6 Fixed Grip 1 Surface Bear Mountain.................. 195 1,665 32 1 High-Speed 100% 8 276,729 11,000 Quad 8 Fixed Grip 3 Surface Waterville Valley.............. 255 2,020 50 2 High-Speed 100% 8 219,313 6,500 Quads 6 Fixed Grip 4 Surface Mt. Cranmore................... 190 1,167 36 1 High-Speed 100% 4 120,052 16,000 Quad 4 Fixed Grip 1 Surface The Summit at Snoqualmie....... 1,916 2,200 96 23 Fixed Grip 0% 20 476,218 1,000 5 Surface Grand Targhee.................. 2,412 2,200 28 1 High-Speed 0% 7 94,898 750 Quad 2 Fixed Grip 1 Surface
- ------------------------- (1) High-Speed Quads are four-person chairlifts which decelerate and detach from a cable during passenger loading and unloading and reattach and accelerate thereafter. Northstar-at-Tahoe In management's opinion, Northstar-at-Tahoe, located near the north end of Lake Tahoe, offers more activities and services in both winter and summer than any of its competitors in the Lake Tahoe area. The resort's 8,600-foot Mt. Pluto features 2,400 acres of skiable terrain for all abilities and a 2,280 foot vertical drop. Northstar's 63 ski trails are served by 12 operating lifts, including one gondola, four high-speed quads, two triple lifts and two double lifts, which combine to transport up to 19,275 skiers uphill per hour. Northstar also has approximately 42 kilometers of groomed trails for cross-country skiing and snowshoeing and several on-mountain terrain parks for snowboarders and adventurous skiers offering non-traditional bumps, jumps and turns. Since the 1988 ski season, Northstar has spent over $25.0 million in capital expenditures, including $10.0 million to install four new high-speed lifts, $12.0 million to install snowmaking equipment, upgrade trail grooming equipment, and expand skiable terrain, and $3.0 million to upgrade lodging and retail facilities. Other facilities at Northstar include a European-style village that consists of condominium/hotel accommodations, various restaurants, bars, shops, a day-care center and entertainment and convention facilities and a 22,700 sq. ft. on-mountain ski lodge. Summer recreation facilities include an 18-hole golf course, ten tennis courts, a horseback riding stable, mountain bike rentals and trails and a swimming pool. Northstar currently ranks third in skier days in the Lake Tahoe area and is one of only 18 resorts in the United States to surpass the 500,000 skier days milestone, which it did during the 1994/95 ski season. Between 1990 and 1997, Northstar was named one of the top ten United States family resorts by Travel & Leisure, Better Homes & 5 7 Gardens and Family Circle, as well as one of the best 50 North American ski resorts by Snow Country and Ski magazines. Northstar provides a full-service skiing experience for its clientele, which typically includes the upper-income, baby boomer population. Northstar's marketing is focused on the San Francisco Bay and the Sacramento Valley areas as a destination alternative to Colorado and Utah resorts. Northstar also markets aggressively in Southern California and states with large ski populations. Northstar is within a one hour drive of the Reno International Airport, which offers convenient scheduled air service to all parts of the United States, Western Canada and Mexico. Small private planes can fly into the all-weather Truckee Airport, where Northstar operates transit buses to the resort. Typical Northstar guests include single male intermediate skiers between the ages of 25 and 44 earning between $50,000 and $100,000 and families headed by professionals or business executives with incomes in excess of $100,000. Northstar is within a 200 mile driving radius of the major population centers of San Francisco and Sacramento and, therefore, attracts a significant number of its guests from Northern California. Northstar has approximately 6,000 beds at the resort with an additional 40,000 beds in the vicinity, 10,000 of which are within a 12 mile radius. Management estimates that during the 1996/97 ski season 77% of the skiers visiting Northstar came from Northern California, 10% from Southern California, 12% from other states, and 1% from international locales. Northstar's snowmaking system is engineered to cover approximately 50% of its ski trails, which management believes is adequate given the area's heavy annual snowfall, which averaged approximately 286 inches per year during the past six years. Northstar has pumping rights from nearby water sources which, when coupled with its 60 million gallon water storage capacity, have been more than sufficient to support the resort's needs. Snowmaking during the 1996/97 ski season consumed approximately 35.3 million gallons of water, which was slightly below Northstar's six year average of 35.7 million gallons per year. Northstar consists of over 6,500 acres of privately owned land, of which less than one-third has been developed. Management believes that Northstar has significant opportunities to develop additional ski terrain as well as residential and commercial space. See Part I, Item 1. "Business -- Real Estate Development." Sierra-at-Tahoe Sierra-at-Tahoe is conveniently located near the large bed base of South Lake Tahoe and is the closest major ski resort to Sacramento and the Central California Valley. The resort's 8,852-foot peak offers 1,663 skiable acres and a 2,212 foot vertical drop. Sierra's 46 ski trails are currently served by 10 operating lifts, including three high-speed quads, one triple lift and five double lifts, which combine to transport up to 14,921 skiers uphill per hour. In addition to significantly upgrading its retail and restaurant facilities in recent years, Sierra has invested approximately $11.5 million since 1994 to install new high-speed lifts, upgrade its grooming equipment and rebuild its base lodge facilities. Sierra operates a 46,000 sq. ft. base lodge which offers a variety of food and beverage services. Management believes that Sierra's recent investment in its ski infrastructure has made it the best ski value in the South Lake Tahoe area. Sierra does not offer summertime activities. Sierra's demographic characteristics closely parallel Northstar's, although Sierra's core customer base is slightly younger and less affluent with more aggressive skiing demands. Sierra does not own or manage any real estate units in the area but there are 50,000 beds in the South Lake Tahoe vicinity, including 30,000 beds within a 12 mile radius. Sierra attracts a larger share of its guests from the Sacramento and Central Valleys than the San Francisco Bay area. Sierra owns 20 acres of its 1,689 gross acreage and leases the remainder under a special use permit with the United States Forest Service. See Part I, Item 1. "Business -- Regulation and Legislation." Sierra's skiable terrain, notable for its extensive summer grooming and wind-protected slopes, requires less snow than other resorts to provide ideal ski conditions. Due to its abundant annual snowfall, which has averaged approximately 470 inches per year since 1991, Sierra is not dependent upon snowmaking and, as a result, its 6 8 snowmaking equipment covers only 10% of Sierra's total acreage. Sierra also employs a modern fleet of snow grooming machines which maintain high-quality skiing surfaces. Bear Mountain Bear Mountain is located in the San Bernardino mountains of Southern California. Its 8,805-foot peak features 195 acres of skiable terrain and a 1,665 foot vertical drop. Bear Mountain's 32 ski trails are served by 12 lifts, including one high-speed quad, one fixed grip quad, three triple lifts and four double lifts, which combine to transport up to 14,790 skiers uphill per hour. During the last two ski seasons, Bear Mountain invested approximately $1.5 million to upgrade its base lodge facilities. Other facilities at Bear Mountain include three lodges which provide an aggregate of approximately 31,000 sq. ft. of space for food and beverage services (restaurants and cafeterias), skier services and entertainment. Summer recreation facilities include a nine-hole golf course. Bear Mountain is within a one to three hour drive of the Los Angeles and San Diego metropolitan areas, providing it with access to nearly 16 million Southern Californians of whom approximately 800,000 actively participate in skiing and snowboarding. Nearly 95% of Bear Mountain's skiers are from Southern California. Bear Mountain appeals to the younger generations of skiers, the echo boom and "X" generations, who are generally less affluent than the targeted customers at the Company's Lake Tahoe resorts. While Bear Mountain is in the middle of an 11,000 bed base area, it is primarily a day ski facility. Bear Mountain owns 116 of its 819 gross acreage and leases 698 acres of mountain terrain under a Forest Service special use permit. See Part I, Item 1. "Business -- Regulation and Legislation." Management believes that Bear Mountain has one of the largest snowmaking capacities per acre of any resort west of the Mississippi and incorporates a state-of-the-art system which allows it to efficiently cover 100% of its ski trails. Bear Mountain also has access to three reservoirs capable of holding six million gallons of water for snowmaking. Management believes that the skiing infrastructure at Bear Mountain, including lifts, snowmaking and trail grooming equipment, is very strong, making it one of the most attractive ski areas in Southern California. Waterville Valley Waterville Valley has long been recognized as one of the largest and most picturesque ski resorts in New Hampshire. Waterville Valley's major base facilities are located on the 4,004 foot high Mt. Tecumseh and offer 255 skiable acres and a vertical drop of 2,020 feet. Waterville Valley's 50 trails are served by 12 operating lifts, including two high-speed quads, two triple lifts and four double lifts, which combine to transport up to 15,672 skiers uphill per hour. The resort operates a 41,872 sq. ft. base lodge (complete with multiple food service centers and child care), a mid-mountain lodge featuring a cafeteria and deli and a mountain-top lodge with snack bar and acclaimed restaurant dining. The Waterville Valley resort has a year-round Base Camp Adventure Center offering mountain bikers, cross-country skiers, and hikers access to 105 kilometers of trails in the White Mountain National Forest. Other resort amenities include an ice skating arena, golf course, tennis center, sports and fitness center, and horseback riding. Waterville Valley's Conference Center has 17,000 sq. ft. of meeting space and provides banquet facilities for up to 1,000 people. With 11 meeting rooms, a business center, audio-visual capabilities and a self-contained pub, the Conference Center's on-site staff supports events year-round. Waterville Valley has traditionally created an environment conducive to families who are either day skiers, regional overnight skiers or vacation skiers. Its location adjacent to Interstate 93 (a major north-south thoroughfare for skiers) makes it one of the most accessible of the larger New England resorts and it has the facilities, trails and programs to satisfy adults and children of all abilities. Waterville Valley's proximity to large East Coast markets (Boston is less than two and one-half hours away by car) attracts day skiers, while the town's substantial bed base can accommodate the regional overnight skiers and vacationers who will stay an average of two to four days. There are approximately 6,500 beds in the Waterville Valley area, of which approximately 3,000 can be rented. The majority of Waterville Valley's skiers come from Massachusetts 7 9 (43%) and New Hampshire (36%), with the remainder coming from Rhode Island, Connecticut, New York, New Jersey and other regional locations. Waterville Valley owns 35 acres on its smaller Snow's Mountain and two acres at the Conference Center. It leases 790 acres of land on Mt. Tecumseh from the federal government under a Special Use Permit issued by the Forest Service. See Part I, Item 1. "Business -- Regulation and Legislation." Waterville Valley's snowmaking system is engineered to cover 100% of the ski trails on Mt. Tecumseh. Snowmaking during the 1996/97 ski season consumed approximately 89 million gallons of water for about 558 acre feet of coverage; water for snowmaking is currently pumped from a local river and a pond. Waterville Valley is in the process of obtaining permits for additional water sources and water storage facilities for snowmaking. Mt. Cranmore Mt. Cranmore is the oldest continuously operated ski area in the United States. Strategically located in the hub of New Hampshire's Mount Washington Valley, Mt. Cranmore's 1,714 foot summit offers 190 skiable acres and a 1,167 foot vertical drop. Mt. Cranmore's 36 trails, including nine trails lighted for night skiing, are served by six operating lifts, including one high-speed quad, one triple lift, three double lifts and one surface lift, which combine to transport up to 6,420 skiers uphill per hour. The installation of the high-speed quad in 1995 and other recent capital improvements totaling $3.0 million, together with an aggressive marketing program, contributed to a 24% increase in skier days for Mt. Cranmore during the 1996/97 ski season compared to the 1994/95 ski season. The mountain is serviced by two base lodges, offering multiple eating locations and pub/restaurant facilities, as well as a restaurant at the summit. In addition, Mt. Cranmore owns a year-round 46,000 sq. foot athletic facility which includes an outdoor tennis stadium with seating for up to 5,500 people, four indoor tennis courts, a pool, a spa, a weight-lifting area, aerobic rooms, an indoor-climbing wall, locker rooms, a snack area and a nursery. Mt. Cranmore also operates on-premises ski and rental shops. Management believes that Mt. Cranmore has great appeal to the family skier due to its intimate size, high percentage of intermediate trails (45%, with 33% for advanced) and its well-developed children's ski programs. An additional family attraction is Mt. Cranmore's neighboring town of North Conway, which is within walking distance of the mountain and has one of New England's largest rural retail outlet and restaurant centers. North Conway is part of the White Mountains area, which is the dominant tourist destination in New Hampshire. Approximately 13 million people live within a four-hour drive of Mt. Cranmore. During the 1996/97 ski season, management estimates that 57% of the resort's guests were from the Boston metropolitan area, 22% were from New Hampshire and 10% were from Rhode Island. To accommodate destination/vacation skiers there are 16,000 rental beds in the Mt. Washington Valley, including 76 condominium units at Mt. Cranmore itself. Mt. Cranmore owns 754 acres and holds deeded easements enabling it to develop an additional 1,200 acres of ski terrain. Mt. Cranmore does not lease any of its land from the federal government. Mt. Cranmore's snowmaking equipment consists of a computerized Hydralink weather-monitoring snowmaking system which, when installed in 1995, increased snowmaking output by 40% and currently covers 100% of the resort's ski trails. In addition to pumping rights from a nearby stream, Mt. Cranmore has an agreement with the local water district for unrestricted access to an additional reservoir of 1 million gallons of water for snowmaking. Mt. Cranmore's base area pond also holds 2.5 million gallons. Snowmaking during the 1996/97 ski season consumed approximately 90 million gallons of water. The Summit at Snoqualmie The Summit is located in the Cascade mountains of Northwest Washington and consists of four separate resorts, Alpental at the Summit, Summit West, Summit Central, and Summit East, which collectively offer 1,916 acres of skiable terrain. Individually, Alpental has a 5,400 foot top elevation, a 2,200 foot vertical drop and 170 acres of skiable trails and runs (93 of which are lighted); Summit West has a 3,860 foot top elevation, an 810 foot vertical drop and 172 acres of skiable trails and runs (166 of which are lighted); Summit Central has a 3,860 foot top elevation, a 1,020 foot vertical drop and 246 acres of skiable trails and runs (176 of which are lighted); and Summit East has a 3,760 foot top elevation, a 1,080 vertical drop and 110 acres of skiable 8 10 trails and runs (58 of which are lighted). In total, the Summit complex has 96 designated trails and runs served by 28 operating lifts, including two fixed grip quads, four triple lifts, 17 double lifts and various surface lifts, which combine to transport up to 32,490 skiers uphill per hour. The Summit Nordic Center also offers approximately 55 kilometers of cross-country skiing on an expert trail system and a lighted beginner student trail which hosts a season-long night racing series. In addition, the Summit West, Summit Central, and Summit East areas are interconnected by a cross-over trail system. Since 1987, the Company and its predecessors have invested approximately $11.5 million to improve base facilities and install additional lifts, including approximately $3.1 million in the last two years. The Summit operates seven lodges which provide an aggregate of approximately 111,175 sq. ft. of space for food and beverage services (restaurants and cafeterias), skier services and entertainment. The Summit is within a one-hour drive of the Seattle/Tacoma metropolitan area, providing it with access to nearly 450,000 active skiers and snowboarders. Although the complex offers a relatively even variety of trail difficulty, each of the separate properties have been designed to appeal to specific skier profiles: Alpental at the Summit's trails are designed primarily for intermediate to expert skiers; Summit West's open slopes are geared toward beginner and intermediate skiers; Summit Central's trail systems are heavily weighted toward intermediate to advanced skiers; and Summit East's trails are designed primarily for novice to intermediate skiers. Overall, the Summit complex is one of the largest learn-to-ski areas in the United States, with approximately 26% of its 1996/97 skier days being attributable to guests enrolled in ski school. In addition, the Summit is the largest night ski complex in the United States, with approximately 40% of its skier visits being recorded at night. The Summit owns 686 acres of its 4,152 gross acreage, leases over 1,400 acres under a private permit and utilizes 1,864 acres of mountain terrain under a Forest Service special use permit. The Summit enjoys abundant annual snowfall, averaging approximately 379 inches per year since 1991. As a result, there are no snowmaking capabilities at any of the resorts. The Company does, however, possess water rights that would allow it to engage in snowmaking, if necessary. Grand Targhee Grand Targhee is located in the Grand Teton mountains of Wyoming, approximately 50 miles northwest of the town of Jackson. Jackson, Wyoming is a major ski destination resort center, recording an average of 434,000 skier days at the area's three resorts in the last three ski seasons. Grand Targhee, with a top elevation of 9,873 feet, 2,412 acres of skiable terrain for all abilities and a 2,200 foot vertical drop, offers two different mountain ski areas. The first mountain is served by four operating lifts, including the longest high-speed quad in the state of Wyoming, which combine to transport up to 5,460 skiers uphill per hour. The second mountain is reserved for Snowcat powder skiing. Grand Targhee also has approximately 15 kilometers of groomed trails for cross-country skiing. Grand Targhee recently has invested approximately $4.0 million to improve uphill capacity and the overall ski experience. Other facilities at Grand Targhee include base lodge facilities, hotel accommodations, restaurants, shops, a child care center and retail stores. In addition, Grand Targhee owns and operates a spa, fitness and conference center. Grand Targhee competes for day and regional overnight skiers in the northern Rocky Mountain region as well as national destination skiers traveling to the greater Jackson, Wyoming area. Guests from Idaho, Utah, Wyoming and Montana have accounted for approximately 38% of Grand Targhee's total skier days over the past five ski seasons. Grand Targhee's national destination guests, those guests residing outside the northern Rocky Mountain region, accounted for the remaining 62% of the resort's skier days during the same period. A majority of these guests came from California, Washington, New York and Minnesota. Overall, approximately 60% of Grand Targhee's skiers reside more than 200 miles from the resort. Given that Grand Targhee only operates 96 rental units, many of the resort's overnight regional and destination skiers secure hotel accommodations at other resorts or hotels in the area. The Company believes that there are in excess of 5,000 beds in the vicinities of Jackson, Wyoming and Driggs, Idaho. Management believes that the distinguishing features of Grand Targhee are well-maintained and uncrowded facilities, excellent ski conditions, attractive vacation packages and a high quality family ski school. 9 11 Grand Targhee is located entirely on land leased under a Forest Service special use permit. See Part I, Item 1. "Business -- Regulation and Legislation." Grand Targhee has averaged approximately 528 inches of snowfall during the last five years, and historically has received the second highest snowfall amount of all ski resorts in the United States. In 1997, Snow Country magazine rated Grand Targhee as the best ski area in North America for snow conditions. Management believes that Grand Targhee is currently underutilized, and that a key component of increasing skier days at the resort will be expanding its on-mountain bed base. Grand Targhee has recently received United States Forest Service approval to build 590 rental units and has had discussions that would allow for the future development of private dwellings. REAL ESTATE DEVELOPMENT The Company believes that it has significant opportunities to develop available acreage for additional skiing terrain and trails as well as for residential lodging and commercial uses. Management believes that selective real estate development can enhance the Company's resorts and that there is opportunity for synergy between real estate development and the Company's ski operations. In management's view, increasing the on-mountain bed base, expanding retail and other commercial services and developing additional skiable terrain at a resort can accelerate growth in skier days and ski-related revenues. The following table lists certain owned or leased land available to the Company for expansion.
RESIDENTIAL/ COMMERCIAL/ NUMBER LOCATION OWNED/DEEDED SKI TERRAIN OF ACRES PRINCIPAL USES -------- ------------ ------------ -------- -------------- Northstar: Big Springs.... Owned Residential 90 On-mountain housing Northstar: North Lookout Mountain.................. Owned Ski Terrain 1,300 Expand ski terrain by 65% Northstar: Sawtooth Ridge..................... Owned Ski Terrain 700 Expand ski terrain by 35% Northstar: Zoned/Undeveloped......... Owned Residential/ 550 On-mountain housing Commercial Mt. Cranmore: Black Cap... Deeded: Ski Terrain 700 Significantly expand and Privately Owned vary ski terrain Bear Mountain............. Leased: Ski Terrain 126 Expand ski terrain by 25% Forest Service Bear Mountain: Big Bear Lake...................... Owned Residential 6 56 condominiums Grand Targhee............. Leased: Ski Terrain 680 Expand ski terrain by 25% Forest Service Grand Targhee............. Leased: Residential/ 107 Ski Village which would Forest Service Commercial increase on-mountain bed base by 615% and expand commercial facilities The Summit................ Owned Residential 84 On-mountain housing
The Company's strategy with regard to the expansion of skiable terrain at its resorts is based on the evaluation of several key factors, including (i) the anticipated growth of the skier base within the relevant market and the Company's ability to improve its competitive market position in that market, as measured by the potential increase in the number of skier days and revenue per skier on a long-term basis which the Company believes it can capture through expansion and (ii) the return on capital expected to be realized from an expansion project versus alternative projects. Management plans to undertake extensive planning and pre-development steps prior to investing significant capital into any development project. Currently, the Company 10 12 is in the process of developing comprehensive master plans for Northstar, Waterville Valley, the Summit and Grand Targhee. As the Company has done with Northstar's "Big Springs" development project, management intends to undertake a number of these projects with real estate partners who can provide a substantial portion of the construction capital. The Company's resorts have traditionally taken a conservative approach toward residential and commercial development and real estate development efforts have taken place primarily at Northstar. Beginning in 1995, the resort developed a new single family home residential community on Mt. Pluto ("Big Springs") consisting of 158 private residential subdivision lots. The total project has been planned in five phases to reduce infrastructure development costs and maximize returns by controlling both the timing and inventory of lots on the market. Northstar sold all of the 44 lots offered in phase one and all of the 35 lots offered in phase two for an average price of approximately $154,000. New homes built by the owners of such properties range in price from approximately $600,000 to $1.2 million. Phases three, four and five will require an estimated $5.0 million in capital expenditures, at an average price per lot for 79 lots of approximately $63,000, to complete infrastructure development. Northstar expects to sell the remaining properties over the next five years. Management believes that the Big Springs development project alone will increase the on-mountain bed base by 5% over the next two years, and should contribute to an increase in paid skier days. Northstar also has opportunities to develop an additional 550 acres of owned real property on Mt. Pluto, which has been zoned for commercial and residential use. In addition, Northstar has begun a program to harvest timber through third party contracting. The timber harvesting program, which produced revenues of approximately $678,000 in the period from December 3, 1996 through October 31, 1997, is managed carefully to avoid interference with Northstar's resort operations and prevent any diminution in the quality of the resort's natural environment. The Company also intends to eventually expand Northstar's ski operations to the challenging additional terrain it owns on both North Lookout Mountain and Sawtooth Ridge, which are adjacent to the resort's current operations. Management believes that the skiable acreage at Northstar could more than double with the development of this terrain. The timing and scope of this expansion will depend on market conditions and on an evaluation of the Company's other expansion criteria. Mt. Cranmore holds an easement entitling it to develop at least 700 acres of additional ski terrain known as the "Black Cap Mountain area" or "Black Cap." The Black Cap easement was granted in 1951 and allows the Company to expand Mt. Cranmore's existing ski and recreational infrastructure and develop additional trails. The Black Cap property underlying the Company's easement is privately owned and therefore not subject to the same governmental regulations which presently restrict the activities of many New England ski areas that are located on national or state forest land. The Black Cap land available for development by the Company is high-quality, mostly north and west-facing ski terrain located in an area that can accommodate alpine and cross country trails, ski lifts and snowmaking. Expansion would not only significantly increase Mt. Cranmore's skier capacity, but would also enhance the quality and diversity of its skiable terrain. Given the resort's location in the heart of the Mt. Washington region, the dominant tourist destination in New Hampshire, the Company believes that expansion into Black Cap could position Mt. Cranmore as a premier attraction in the White Mountains area and one of the largest and most appealing resorts in New Hampshire. Bear Mountain has received final approval from the Forest Service and local governmental authorities of an expansion plan that would, among other things, increase the resort's skiable terrain by 114 acres and increase daily skier capacity by approximately 25%. The approval, however, is subject to numerous mitigation conditions, including a requirement that Bear Mountain acquire and dedicate to the Forest Service two acres of spotted owl habitat and one acre of flying squirrel habitat in exchange for each acre proposed for development. Bear Mountain has also entered into a developer's agreement with the City of Big Bear Lake that generally authorizes, subject to certain conditions, the construction of up to 56 condominium units on property currently owned by Bear Mountain. The Company does not presently have any imminent expansion or development plans for Bear Mountain, and any future expansion or development would depend on a variety of factors, including local market conditions and the resolution of regulatory and Forest Service permitting issues. 11 13 The Summit owns 84 acres of real property at the base of its mountain, which is available for residential development. The developmental real estate at the Summit is currently owned by DRE, L.L.C. (the "Real Estate LLC"), a subsidiary of the Company. The Real Estate LLC has executed a deed of trust with respect to the real property in favor of the holders of the Ski Lifts Preferred Stock to secure the Real Estate LLC's obligation to purchase such preferred stock. In the event the Real Estate LLC defaults under its obligation to purchase the Ski Lifts Preferred Stock, the holders thereof could foreclose on the developmental real property and deprive the Company of the benefit thereof. The Company, through a study commissioned by Grand Targhee, has identified approximately 320 acres of additional skiable terrain adjacent to the resort which could be developed with Forest Service approval. The study also contains numerous recommendations for the further development of Grand Targhee's infrastructure, including the creation of a European-style village center comprising a variety of tightly-knit structures with central pedestrian streets, plazas, commercial and recreation facilities and amenity spaces which reflect and complement the sloped mountain topography. The village center design includes nine additional or renovated hotel/condotel developments providing 590 additional public accommodation units, which would increase the resort's on-mountain bed base by 615%. The village center would be built on Forest Service land, and the Company has received preliminary approval for the construction of the residential units envisioned by the study, together with the development of an additional 320 acres of skiable terrain, subject to certain conditions. Management believes that the expansion of Grand Targhee's on-mountain bed base will be an important component in addressing the resort's historic underutilization. The Company intends to pursue long-term development opportunities with third parties, although the timing and scope of any such development is still being evaluated. The Company has no agreements, arrangements or understandings with respect to financing the development of any of the real estate projects discussed herein. Any future development would be subject to, among other things, the Company's ability to obtain the necessary financing and all necessary permits and approvals. No assurance can be given that the Company will develop successfully any additional properties or, if completed, any such properties will be successful. In addition, there are risks inherent in any expansion project and in the implementation of the Company's development strategy. MARKETING AND SALES Staff The Company has a total marketing staff of approximately 45 persons, including a marketing director at each resort who reports to the corporate director of marketing as well as to each resort's general manager. The marketing staff at each resort is responsible for the development of resort-specific marketing plans and also participates in the development of the Company's overall marketing strategy. Strategy The Company's marketing plans are designed to attract both day skiers and vacationers by emphasizing the Company's diverse facilities and services and proximity to approximately 20% of the total skiers in the United States. The Company intends to position each of its resorts as an attractive alternative to competing regional resorts and to other forms of leisure and entertainment. The primary objectives of the Company's marketing efforts are to (i) increase each of its resorts' relative market share, (ii) expand the number of skiers in each of its markets, (iii) increase skier visitation frequency, (iv) increase the expenditures of each of its visitors and (v) influence the vacation destination choice of its prospective guests. The Company's marketing efforts are predicated on knowing its guests and understanding the markets in which it competes. Accordingly, the Company's resorts, typically through professional firms, conduct extensive market research, including on-site guest surveys, focus groups, advertising tests and regional phone surveys. Each of the Company's resorts develops its own resort-specific marketing program based upon its unique qualities and characteristics as well as the demographics of its skier base. Management believes that a major benefit of being a multiple resort operator will be the ability to coordinate resort marketing programs in a manner that makes them more effective. For example, the extension of frequency/loyalty programs to all of 12 14 the Company's resorts will, in management's view, reinforce the existing marketing programs at each resort and create significant cross-marketing opportunities. The Company's resorts offer a variety of terrain for alpine skiing and snowboarding, with most providing a high percentage of intermediate trails and well developed skier development programs, which can accommodate skiers and snowboarders of all skill levels. Northstar markets primarily to the upper income baby boom generation and their families residing in the San Francisco Bay and Sacramento Valley areas as a full service, all season resort for day and vacation guests. In addition, the resort has been successful in attracting vacationing skiers from major Southern California markets largely through the use of targeted marketing programs, including tour packages with major airlines and tour operators. Management believes that Northstar's diverse year round activities and services have made it attractive to affluent families interested in recreation-centered vacation homes. Real estate development and the resulting increase in on-mountain bed base likewise provide Northstar with significant opportunities for future growth. Sierra has been positioned as Lake Tahoe's economical "value" resort, primarily targeted to families, teenagers and young adults from the Central California Valley. Bear Mountain primarily targets generation "X" skiers and snowboarders as well as value-oriented families from the major Southern California metropolitan areas. Waterville Valley generally focuses on regional and vacationing families from the Southern New Hampshire and Boston metropolitan markets by promoting the resort's diverse year round facilities and New England village atmosphere. Mt. Cranmore targets vacationing families (including non-skiers) from the Boston metropolitan area by emphasizing its proximity to the Mt. Washington 16,000 area bed base and North Conway retail and restaurant district. The Summit's diversity of terrain among its four resorts and significant night skiing programs allow the resort to target multiple demographic groups including families, teenagers and young adults from the Seattle/Tacoma metropolitan area. Grand Targhee primarily targets destination skiers visiting the Jackson Hole area as well as day skiers and regional overnight skiers from Wyoming, Idaho and Utah. Programs The Company has developed a number of specific marketing programs to achieve its objectives, including the following: - Customer loyalty programs - Multimedia advertising - Data-based marketing programs - Skier development programs - Strategic marketing alliances - School, group and business affiliations Customer loyalty programs. The Company believes that the success of each of its resorts depends, in large part, on its ability to retain and increase the skier visitation frequency of its existing customer base. For example, approximately 82% of Northstar's 1996/97 ski season skier days were attributable to guests who had visited the resort on at least one other occasion. The Company believes a critical component to developing customer loyalty will be the expansion of the Company's two-tiered approach to frequent skier programs, Vertical Plus and Vertical Value. For an annual membership fee of $49, Vertical Plus members receive a special, personalized identification wristband containing a preprogrammed computer microchip which acts as their lift access for the season. In addition to offering daily ticket discounts, the system tracks the amount of vertical feet skied at participating resorts and rewards members with prizes based on the number of vertical feet skied in a season. Other benefits of the program include members-only lift lines, direct lift access, the convenience of being able to make cashless retail transactions and electronic messaging. An additional major benefit provided by this proprietary program is a state-of-the-art data collection system that provides "real-time" information for marketing, operations and capital investment analysis. Vertical Plus is currently in operation at Northstar, Sierra and Bear Mountain, and experienced a 27% increase in membership during the 1996/97 ski season over the prior year. In addition to Vertical Plus, the Company has developed Vertical Value, a program that appeals to a broader range of skiers and offers an incentive for frequent visitation at all of the Company's resorts. Visitors also receive a welcome packet with targeted offers and a newsletter which allows the resorts to communicate effective and timely information to their frequent guests. 13 15 Multimedia advertising. The Company's marketing efforts include print, broadcast, outdoor, Internet and direct mail advertising, with the particular method tailored for each resort and existing market opportunities. The Company is also very active in a variety of promotional programs designed to attract guests from population centers in and around the Los Angeles, San Diego, San Francisco, Sacramento and Boston metropolitan areas and states with large skier populations such as Texas, Illinois, Florida and New York. For example, the Company's Northstar and Sierra resorts have participated in extensive cooperative marketing with other Lake Tahoe resorts to promote the region as a premier vacation destination. Data-based marketing programs. Through the information obtained from Vertical Plus, Vertical Value and extensive market surveys and other market research, the Company maintains a database containing detailed information on its existing customers. Management believes that database marketing is an effective and efficient method to identify, target and maintain an on-going relationship with the Company's best customers. For example, the Company has been successful in the use of targeted direct mailings and e-mail broadcasts, which are designed to match customer preferences with special ski package offers to build peak and off-peak volume. Management believes that these types of relationship-based marketing programs build guest loyalty and play an important role in solidifying a resort's existing customer base. Skier development programs. The Company's resorts operate a variety of skier development programs designed to improve the skills of children and beginners, as well as more advanced skiers and snowboarders. Management believes that these development programs increase skier days at the Company's resorts by expanding the total market of skiers and making skiing more enjoyable. Northstar, Sierra and Waterville Valley operate ski schools that are consistently rated among the best in their respective regions. In addition, several of the Company's resorts have introduced a development program, Vertical Improvement, geared toward intermediate and advanced skiers, which offers free specialized instruction and daily training. Northstar has also been an industry leader in developing interesting terrain features and trails designed to improve the skill levels of its guests. For example, the resort recently developed four "terrain feature" ski trails geared toward its intermediate and advanced-level guests. The Company intends to expand its highly successful skiing and snowboarding instruction programs developed at Northstar and Sierra to all of its resorts over the next two ski seasons. Strategic marketing alliances. The Company is a national ski resort operator with more than 1.8 million skier days recorded during the 1996/97 ski season. At least one of the Company's resorts is within driving distance of four of the five largest consumer markets in the United States. These factors, together with the attractive demographics of the Company's skier base, position the Company to further develop resort marketing programs with major corporate sponsors. Sponsorship opportunities include potential relationships with automobile manufacturers, soft drink companies, and ski and snowboard equipment manufacturers. For example, Northstar and Sierra have a relationship with a major automobile manufacturer that involves over $1 million worth of television exposure, free use of vehicles for Company purposes and a vehicle give-away promotion for resort guests. Management believes that the media exposure generated by this partnership is important in building market share and the image of the resorts, and that current joint marketing programs can be greatly expanded. School, group and business affiliations. The Company is dedicated to developing special programs designed to attract school, business and other groups. By introducing skiing and snowboarding to a wider audience, these programs broaden the Company's customer base and have proven to be a particularly effective way to build name recognition and brand loyalty. Ski groups have also emerged as the fastest and most profitable way of increasing business during non-peak periods. Marketing personnel at each resort provide year-round assistance to group leaders in organizing and developing events. Business affiliations are developed and maintained through corporate tickets programs, whereby participating businesses are given an opportunity to provide their employees with incentive-based pricing. 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 14 16 optimal operating results during key holidays and weekends during this period. The Company has sought to mitigate the downside risk of its seasonal business by purchasing a skier day insurance policy for the 1997/98 ski season. 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. COMPETITION The general unavailability of new mountains, regulatory requirements and the high costs and expertise required to build and operate resorts present significant barriers to entry in the ski industry. The last major new ski resort to open in the United States was in 1989, and in the past 15 years, management believes at least 85 proposed resorts have been stalled or abandoned due to environmental issues and the high costs of entering into the capital intensive ski industry. The domestic ski industry is currently comprised of 507 resorts and is highly competitive. The Company's competitive position in the markets in which it competes is dependent upon many diverse factors, including proximity to population centers, pricing, snowmaking capabilities, type and quality of skiing offered, prevailing weather conditions, quality and price of complementary services. The Company's Lake Tahoe resorts, Northstar and Sierra, face strong competition from Lake Tahoe's seven other major ski resorts. Northstar's primary competition in the North Lake Tahoe area is from Squaw Valley and Alpine Meadows. Northstar also competes with major ski and non-ski destination resorts throughout North America. Sierra primarily competes in the Southern Lake Tahoe area with Heavenly Valley and Kirkwood. The Company's other California Resort, Bear Mountain, competes primarily with Snow Summit and Mammoth. The Company's New England resorts, Waterville Valley and Mt. Cranmore, compete in the highly competitive Northeast ski market, which consists of Maine, New Hampshire, Vermont, Massachusetts, Connecticut and New York. Within the Northeast region, skiers can choose from over 50 major resorts and ski areas, most of which are located in the mountainous areas of New England and eastern New York. Waterville Valley's primary regional competitors include Loon Mountain, Bretton Woods, Attitash/Bear Peak and Gunstock. Mt. Cranmore's primary regional competitors are the Attitash/Bear Peak ski resort and Gunstock. The Summit competes primarily with five local ski areas, including Crystal Mountain, Stevens Pass, White Pass, Mission Ridge and Mt. Baker. Additional competition comes from the regional destination resorts at Mt. Bachelor, Mt. Hood Meadows, Sun Valley and Whistler/Blackcomb, as well as other day and weekend ski facilities in Washington, Oregon and British Columbia. Grand Targhee competes for day and regional overnight skiers in the northern Rocky Mountain region as well as national destination skiers traveling to the greater Jackson, Wyoming area. Jackson Hole Ski Resort is the resort's largest single competitor. Grand Targhee has participated in joint marketing programs with Jackson Hole to promote the Jackson area and many visitors to the region ski at both resorts. Grand Targhee also competes for day and regional overnight skiers with Sun Valley and resorts in Utah. On a regional basis, at least one of the Company's resorts is readily accessible to four of the five largest ski markets in the United States. Management estimates that approximately 80% of the skiers visiting the Company's Lake Tahoe resorts are from the San Francisco, Sacramento Valley and Central Valley metropolitan areas, while approximately 95% of Bear Mountain's skiers are from the Los Angeles and San Diego metropolitan areas. Waterville Valley and Mt. Cranmore are estimated to attract approximately 79% of their guests from the Boston metropolitan area and southern New Hampshire. The Summit attracts approximately 95% of its skier guests from the Seattle/Tacoma region. Grand Targhee primarily attracts day and regional overnight skiers from the northern Rocky Mountain region and destination skiers visiting the region. REGULATION AND LEGISLATION The Company's operations are dependent upon its ownership or control over the real estate 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 15 17 Mountain, Sierra, Summit, Grand Targhee and Waterville Valley resorts under the terms of special use permits issued by the Forest Service. The special use permits for the Bear Mountain, Sierra, Waterville Valley, 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. The Forest Service has the right to approve the location, design and construction of improvements in the permit area and many operational matters. Under the permits, the Company is required to pay fees to the 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. However, 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, lift tickets, ski school lessons, food and beverages, rental equipment and retail merchandise revenues. Total fees paid to the Forest Service by the Company during the year ended October 31, 1997 were approximately $665,000. 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 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 Forest Service. Prior to permit termination, the USFS 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. EMPLOYEES As of December 15, 1997, the Company employed a full-time corporate staff of 12 persons. In addition, the Company's resorts employ an aggregate of approximately 406 full-time and 4,700 seasonal employees. None of the employees of the Company or its resorts is represented by a labor union, and the Company considers its employee relations to be good. REGULATORY MATTERS 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. 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 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 by November 1998 at a cost of approximately $1.0 million. In November 1997, the concrete construction of the footings, walls and treatment tanks of such facility was completed. Pursuant to the air emissions reduction program currently in effect in the area regulated by the South Coast Air Quality Management District (the "SCAQMD"), where Bear Mountain is located, Bear Mountain will be required to "bank" emission credits from other facilities which have already implemented NOx 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. 16 18 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 upon its continued ability, under applicable laws, regulations, policies, permits, licenses or contractual arrangements, to have access to adequate supplies of water with which to make snow and service the other needs of its facilities, and otherwise to conduct its operations. There can be no assurance that new applications of existing laws, regulations and policies, or changes in such laws, regulations and policies will not occur in a manner that could have a detrimental effect on the Company, or that material permits, licenses or agreements will not be canceled, non-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 Forest Service and state or local governments under the NEPA and certain state or local 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. ITEM 2. PROPERTIES Northstar consists of over 6,500 acres of privately owned land, of which less than one-third has been developed. Sierra owns 20 acres of its 1,689 gross acreage and leases the remainder under a special use permit with the United States Forest Service. Bear Mountain owns 116 of its 819 gross acreage and leases 698 acres of mountain terrain under a Forest Service special use permit. Waterville Valley owns 35 acres on its smaller Snow's Mountain and two acres at the Conference Center, and leases 790 acres of land on Mt. Tecumseh from the federal government under a Special Use Permit issued by the Forest Service. Mt. Cranmore owns 754 acres and holds deeded easements enabling it to develop an additional 1,200 acres of ski terrain. The Summit owns 686 acres of its 4,152 gross acreage, leases 1,400 acres under a private permit and utilizes 1,864 acres of mountain terrain under a Forest Service special use permit. For further information regarding the Company's properties, see Part I, Item 1. "Business -- Resort Operations" and "-- Regulation and Legislation." ITEM 3. 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 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. alleging that Fibreboard and Bear Mountain, Inc. breached 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. Killington's lawsuit concerns an alleged breach by Fibreboard and Bear Mountain, Inc. of a change of control provision in the Original Bear Mountain Agreement. 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 $1.0 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. ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of fiscal 1997. 17 19 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS There is no established trading market for any class of equity securities of the Company. 18 20 ITEM 6. SELECTED FINANCIAL DATA The selected financial data presented below should be read in conjunction with the combined financial statements of the Fibreboard Resort Group and the consolidated financial statements of the Company and related notes thereto included elsewhere in this Report and Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." The selected combined financial data (except for the other financial and operating data) of the Fibreboard Resort Group (i) as of December 31, 1993 have been derived from the unaudited combined financial statements of the Fibreboard Resort Group, (ii) for the year ended December 31, 1993 and as of and for the years ended December 31, 1994 and 1995 and as of and for the ten months ended October 31, 1996 have been derived from the audited combined financial statements of the Fibreboard Resort Group, which have been audited by Arthur Andersen LLP, independent accountants, (iii) for the ten months ended October 31, 1995 have been derived from the unaudited combined financial statements of the Fibreboard Resort Group and (iv) for the period from November 1, 1996 to December 2, 1996 have been derived from the audited combined financial statements of the Fibreboard Resort Group, which have been audited by Ernst & Young LLP, independent auditors. The selected consolidated financial data (except for the other financial and operating data) of the Company as of and for the year ended October 31, 1997 have been derived from the audited consolidated financial statements of the Company, which have been audited by Ernst & Young LLP, independent auditors. The Company was formed in October 1996 and had no operations until its acquisition of seven ski resort complexes during the first six months of fiscal 1997. The other financial and operating data presented below includes information on "EBITDA" and "EBIDTA margin." "EBITDA" represents income from operations before depreciation, depletion and amortization expense and the non-cash cost of real estate sales. "EBITDA margin" is EBITDA divided by total revenue. Although EBITDA is not a measure of performance under United States generally accepted accounting principles ("GAAP"), the term is presented because management believes it provides useful information regarding a company's ability to incur and service debt. EBITDA should not be considered in isolation or as a substitute for net income, cash flows from operating activities and other income or cash flow statement data prepared in accordance with GAAP, or as a measure of profitability or liquidity. In addition, "EBITDA" and "EBITDA margin" as determined by the Company may not be comparable to related or similar measures as reported by other companies and do not represent funds available for discretionary use.
FIBREBOARD RESORT GROUP COMPANY ------------------------------------------------------------------------ ----------- PERIOD FROM 10 MONTHS 10 MONTHS NOVEMBER 1, YEAR ENDED DECEMBER 31, ENDED ENDED 1996 TO YEAR ENDED ------------------------------ OCTOBER 31, OCTOBER 31, DECEMBER 2, OCTOBER 31, 1993(A) 1994(B) 1995(C) 1995(C) 1996(D) 1996(D) 1997(E) -------- -------- -------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS, EXCEPT REVENUE PER SKIER DAY) STATEMENT OF OPERATIONS DATA: Revenue: Resort Operations...................... $ 25,528 $ 40,810 $ 39,823 $ 32,072 $ 36,829 $ 1,395 $ 68,136 Real Estate and Other.................. -- 610 5,213 4,659 4,288 304 3,671 -------- -------- -------- -------- -------- ------- ---------- 25,528 41,420 45,036 36,731 41,117 1,699 71,807 Operating Expenses: Cost of Sales -- Resort Operations..... 15,603 23,471 24,545 18,547 22,596 2,884 44,624 Cost of Sales -- Real Estate and Other................................ -- 280 1,989 1,780 2,142 161 2,799 Depreciation, Depletion and Amortization......................... 2,514 3,449 4,024 2,989 4,354 6 11,681 Selling, General and Administrative.... 4,579 5,545 5,871 4,399 5,220 1,766 11,048 Management Fees and Corporate Expenses............................. 507 655 1,247 513 701 70 2,671 -------- -------- -------- -------- -------- ------- ---------- Operating Income (Loss).................. 2,325 8,020 7,360 8,503 6,104 (3,188) (1,016) Interest (Income) Expense, (net)......... 186 666 821 334 1,189 206 14,912 -------- -------- -------- -------- -------- ------- ---------- Pre-tax Income (Loss).................... 2,139 7,354 6,539 8,169 4,915 (3,394) (15,928) Income Taxes (Benefit)................... 876 2,979 2,624 3,308 2,018 (1,358) (1,728) -------- -------- -------- -------- -------- ------- ---------- Income (Loss) Before Minority Interest and Extraordinary Item................. 1,263 4,375 3,915 4,861 2,897 (2,036) (14,200) Minority Interest........................ -- -- -- -- -- -- 229 -------- -------- -------- -------- -------- ------- ---------- Income (Loss) Before Extraordinary Item................................... 1,263 4,375 3,915 4,861 2,897 (2,036) (14,429) Extraordinary Loss on Early Retirement of Debt................................... -- -- -- -- -- -- (2,664) -------- -------- -------- -------- -------- ------- ---------- Net Income (Loss)............... $ 1,263 $ 4,375 $ 3,915 $ 4,861 $ 2,897 $(2,036) $ (17,093) ======== ======== ======== ======== ======== ======= ========== OTHER FINANCIAL AND OPERATING DATA: Skier Days............................... 436,153 837,179 784,964 $626,500 706,075 30,818 1,565,917 Revenue per Skier Day (f)................ $ 58.53 $ 48.75 $ 50.73 $ 51.19 $ 52.16 $ 45.27 $ 43.51 Non-cash Cost of Real Estate and Other (g).................................... $ -- $ -- $ 1,618 $ 1,488 $ 1,461 $ 133 $ 2,237 Capital Expenditures Excluding Acquisitions and Real Estate and Other.................................. $ 4,619 $ 6,199 $ 5,226 $ 3,786 $ 5,761 $ 5,587 $ 9,459 Net cash provided by (used in): Operating activities................... $ 4,212 $ 9,482 $ 7,861 $ 7,506 $ 4,923 $ 5,769 $ 1,552 Investing activities................... (18,336) (6,287) (29,430) (28,321) (8,467) (6,151) (152,685) Financing activities................... 9,027 (2,664) 26,071 18,059 (2,778) 1,115 151,595 EBITDA................................... $ 4,839 $ 11,469 $ 13,002 $ 12,980 $ 11,919 $(3,049) $ 12,902 EBITDA Margin............................ 19.0% 27.7% 28.9% 35.3% 29.0% (179.5)% 18.0%
(see footnotes on following page) 19 21
FIBREBOARD RESORT GROUP COMPANY ----------------------------------------------------- ----------- AS OF DECEMBER 31, AS OF OCTOBER 31, AS OF ---------------------------- ---------------------- OCTOBER 31, 1993(A) 1994(B) 1995(C) 1995(C) 1996(D) 1997(E) ------- ------- ------- ------- ------- ----------- (DOLLARS IN THOUSANDS) BALANCE SHEET DATA: Working Capital (Deficit)................................ $(3,271) $(6,555) $(35,980) $(36,123) $(36,187) $(26,634) Total Assets............................................. 39,618 43,065 73,316 64,125 69,602 186,416 Total Debt Including Intercompany Payable................ 15,743 15,422 41,493 33,487 38,715 136,327 Preferred Stock of Subsidiary (h)........................ -- -- -- -- -- 3,125 Common Stockholders' Equity/Net Assets................... 17,826 19,752 23,667 24,606 26,564 29,407
NOTES TO SELECTED FINANCIAL DATA The selection of a December 31 year end by the Fibreboard Resort Group does not result in the presentation of the results of the resorts for a single ski season. Accordingly, as the results of a single ski season are split into two reporting periods, differing trends may develop, as compared to results of operations for other resorts consisting of a single ski season, which should be evaluated by the reader. As the results of operations of ski resorts are highly seasonal, with the majority of revenue generated in the period from November through April, the results of operations for the 10 months ended October 31, 1996 and 1995 and the period from November 1, 1996 to December 2, 1996 are not representative of a pro rata year of operations. (a) Includes the financial results of Northstar for the entire period and of Sierra for the period beginning June 11, 1993, the date on which it was acquired by Fibreboard Corporation. (b) Includes the financial results of Northstar and Sierra for the entire period. (c) Includes the financial results of Northstar and Sierra for the entire period and of Bear Mountain for the period beginning October 23, 1995, the date on which it was acquired by Fibreboard Corporation. (d) Includes the financial results of Northstar, Sierra and Bear Mountain for the entire period. (e) Reflects the financial results of Waterville Valley and Mt. Cranmore from November 27, 1996, Northstar, Sierra and Bear Mountain from December 3, 1996, the Summit from January 15, 1997, and Grand Targhee from March 18, 1997, the respective dates of acquisition of each resort by the Company. (f) Reflects revenues from resort operations divided by skier days. (g) Non-cash cost of real estate sales represents the allocated portion of real estate development expenditures previously capitalized (including acquisition costs allocated to real estate development) which relate to current year real estate sales. (h) Represents preferred stock of a subsidiary of the Company which is subject to mandatory redemption requirements. 20 22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion and analysis below relates to (i) the historical financial statements and results of operations of the Company, the California Resorts, Waterville Valley, the Summit and Grand Targhee and (ii) 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 "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. Booth Creek wishes to caution the reader that certain factors could significantly affect Booth Creek's actual results, causing results to differ materially from those in any forward-looking statement. These factors include: regional and national economic conditions, weather conditions, natural disasters (such as earthquakes), industry competition, governmental regulation and risks associated with expansion, leased property and property used pursuant to United States Forest Service permits. 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. Bear Mountain experienced its worst early winter conditions in over 40 years during the 1995/96 ski season, with a lack of natural snowfall and warm weather which severely limited snowmaking. As a result, skier days were approximately 30% below the prior year's level. In addition, during the peak period of the 1996/97 ski season, the Lake Tahoe region experienced significant rainfall, flooding and mudslides. The inclement weather resulted in poor ski conditions at Northstar and Sierra and a major access highway to Sierra being closed for several weeks during the first quarter of the Company's fiscal year ended October 31, 1997. Furthermore, much of the poor weather occurred during the Christmas holiday period, a traditionally busy period at the Company's resorts. As a result, skier days and resort revenue at Sierra were adversely impacted. Certain of the Company's other resorts also experienced poor weather conditions during the year ended October 31, 1997, which resulted in a reduction in skier days, revenue and operating income. The Company's three most weather-sensitive resorts, Bear Mountain, Waterville Valley 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 112, 159, and 103 days, respectively, during each of the last six ski seasons. The Company's Northstar, Sierra, Summit and Grand Targhee resorts are less weather-sensitive based on their historical natural snowfall, averaging approximately 286, 470, 379, and 528 inches of snow, respectively, per year since 1991 through the 1996/97 ski season. As a result of their historic natural snowfall, their snowmaking capabilities are considerably less extensive than at Bear Mountain or the New Hampshire Resorts. 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. Management estimates that at Northstar and Sierra more than 80% of the 1996/97 ski season total skier days were attributable to residents of the San Francisco, Sacramento and Central California Valley regions. At Bear Mountain, more than 95% of the 1996/97 ski season total skier days were attributable to residents of the Los Angeles and San Diego metropolitan regions. At Waterville Valley and Mt. Cranmore, more than 79% of the 1996/97 ski season total skier days were attributable to residents of the Boston metropolitan area and southern New Hampshire. At the Summit, the Company estimates that more than 95% of the 1996/97 ski season total skier days were attributable to residents of the 21 23 Seattle/Tacoma metropolitan region. The Company's Grand Targhee resort attracts approximately 62% of its skiers from outside its local skiing population. The Company seeks to maximize revenues and operating income by managing the mix of skier days and revenue per skier day. These strategies are also designed to maximize resort cash flow. The strategy for each resort is based on the demographic profile of its market and the physical capacity of its mountain and facilities. The Company seeks to increase skier days by developing effective ticket pricing strategies and marketing programs to improve peak and off-peak volume. The Company seeks to improve revenue per skier day by effectively managing the price, quality and value of each of its ski-related services, including retail shops, ski rentals, ski lessons and food and beverage facilities. The Company also generates revenue from a variety of non-ski related services, such as golf, tennis, health clubs and conference centers, as well as from real estate and timber sales. The Company expects to increase skier days by offering a consistent, quality guest experience and developing effective target marketing programs. See Part I, Item 1. "Business -- Marketing and Sales." The Company's resorts have spent more than $30.0 million in capital expenditures during the last three years to upgrade chairlift capacity, expand terrain, improve rental lodging and retail facilities and increase snowmaking capabilities, all of which management believes are important in providing a consistent, quality guest experience. The Company believes it can selectively increase lift ticket prices and skier days to generate additional revenue and resort cash flow from other related services and activities in conjunction with the upgrading of its resort infrastructure and facilities. For example, Grand Targhee announced a $4 per lift ticket increase effective upon installation of two new lifts completed in January 1997. This resulted in a 4.2% increase in lift ticket revenue per skier visit in the 1996/97 ski season over the 1995/96 ski season. In addition, the Company's Northstar resort has been successful in increasing lift ticket revenues, other ski-related revenues and non-ski related revenues (excluding real estate and timber sales) by 35.7%, 45.9% and 22.7%, respectively, from the year ended December 31, 1992 to the year ended October 31, 1997. The Company believes that by extending its successful operating strategies it can significantly increase revenue per skier day at each of its resorts. In addition to revenues generated from skiing operations, the Company's resorts generate significant revenues 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. During the year ended October 31, 1997, approximately 49.6%, 40.5% and 9.9% of the Company's revenues were generated from lift ticket sales, other ski-related sales and non-ski-related sales (excluding real estate and timber sales), respectively. Moreover, real estate and timber sales at Northstar generated $3.7 million during the period from December 3, 1996 (the date the Company acquired Northstar) to October 31, 1997, accounting for 11.8% of Northstar's total revenue during such period. 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 seasonal factors. With the exception of certain management, marketing and maintenance personnel, all of the Company's employees are compensated on an hourly basis. Management believes a key element to maximizing profitability during the winter season is to closely monitor staffing requirements and to redirect or lay-off employees when skier volumes or seasonal needs dictate. In addition to financial performance, the advanced management information system currently in place at all of the Company's resorts provides detailed statistics regarding staffing utilization which is instrumental in adjusting personnel requirements. Management believes that, over time, the utilization of this system will yield significant labor cost savings. 22 24 RESULTS OF OPERATIONS OF THE COMPANY Historical Year Ended October 31, 1997 The Company was formed on October 8, 1996. During the year ended October 31, 1997, the Company made the following acquisitions, which are included in the results of operations of the Company from the respective purchase dates and accounted for using the purchase method:
RESORT ACQUISITION DATE ------ ---------------- Waterville Valley................................ November 27, 1996 Mt. Cranmore..................................... November 27, 1996 Northstar........................................ December 3, 1996 Sierra........................................... December 3, 1996 Bear Mountain.................................... December 3, 1996 The Summit....................................... January 15, 1997 Grand Targhee.................................... March 18, 1997
For the year ended October 31, 1997, revenues totaled approximately $71.8 million, approximately $31.2 million, or 43.4%, of which was generated by Northstar. Operating loss for the same period totaled approximately $1.0 million. Both revenues and operating income were negatively impacted by the poor weather conditions experienced by a number of the Company's resorts during the 1996/97 ski season. During the peak period of the 1996/97 ski season, the Lake Tahoe region experienced significant rainfall, flooding and mudslides. The inclement weather resulted in poor ski conditions at Northstar and Sierra and a major access highway to Sierra being closed for several weeks during the first quarter of the Company's fiscal year ended October 31, 1997. Furthermore, much of the poor weather occurred during the Christmas holiday period, a traditionally busy period at the Company's resorts. As a result, skier days and resort revenue at Sierra were adversely impacted. Certain of the Company's other resorts also experienced poor weather conditions during the year ended October 31, 1997, which resulted in a reduction in skier days, revenue and operating income. Operating loss is also net of approximately $11.7 million of depreciation, depletion and amortization expenses reflecting the stepped-up values of the recently acquired resorts. Interest expense is primarily comprised of interest on $90 million in bridge notes and $10 million in intercompany notes to the Company's parent (together, the "Bridge Financing Facilities"), which bore interest at approximately 11% per annum through March 18, 1997, and on $116 million aggregate principal amount of the Company's 12.5% Senior Notes due 2007 (the "Senior Notes"), which have borne interest at 12.5% per annum since March 18, 1997. Amortization of deferred financing costs relate primarily to fees associated with the Bridge Financing Facilities and the Senior Notes. Unamortized fees associated with the Bridge Financing Facilities at March 18, 1997, the date the Bridge Financing Facilities were repaid, totaled approximately $2.7 million and were written off and reflected as an extraordinary loss on the early retirement of debt in the consolidated statement of operations. The effective income tax rate for the year ended October 31, 1997 was 10.8%. The Company has recorded a tax benefit of $1.7 million primarily to reflect the benefit of operating losses generated during the period to the extent of net deferred tax liabilities recorded in purchase accounting. For financial reporting purposes, the remaining net deferred tax assets arising in the year ended October 31, 1997, which relate principally to the Company's net operating losses, have been fully offset by a valuation allowance. Pro Forma Year Ended October 31, 1997 as Compared to the Pro Forma Year Ended October 31, 1996 The following unaudited pro forma results of operations of the Company for the years ended October 31, 1997 and 1996 assume that all the resort acquisitions were made on November 1, 1995. These unaudited pro 23 25 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.
PRO FORMA PRO FORMA YEAR ENDED YEAR ENDED OCTOBER 31, 1996 OCTOBER 31, 1997 ---------------- ---------------- (IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Revenue: Resort Operations......................................... $ 77,471 $ 78,099 Real Estate and Other..................................... 4,657 3,975 -------- -------- 82,128 82,074 Operating Expenses: Resort Operations......................................... 63,529 70,983 Cost of Sales -- Real Estate and Other.................... 2,297 2,960 Depreciation, Depletion and Amortization.................... 13,197 13,413 -------- -------- Operating Income (Loss)..................................... 3,105 (5,282) Interest Expense (net)...................................... 15,686 16,370 -------- -------- Pre-tax Loss................................................ (12,581) (21,652) Income Tax Benefit.......................................... 1,548 180 -------- -------- Loss Before Minority Interest............................... (11,033) (21,472) Minority Interest........................................... (281) (281) -------- -------- Net Loss.................................................... $(11,314) $(21,753) ======== ======== OTHER DATA: EBITDA.................................................... $ 17,909 $ 10,501 Noncash Cost of Real Estate Sales......................... 1,607 2,370
Total pro forma revenue would have been $82.1 million for each of the years ended October 31, 1997 and 1996. Northstar, Bear Mountain and the Summit generated increased revenues in the 1997 period of 9.1%, 15.9%, and 10.6%, respectively, due primarily to skier day increases of 10.1%, 29.1% and 9.2%, respectively, from the comparable period of 1996. Skier day growth at Bear Mountain was partially offset by reduced ticket prices, primarily due to a greater number of young adult and child discounted tickets. Revenues for Sierra, Waterville Valley, Cranmore and Grand Targhee for the 1997 period decreased 20.6%, 8.1%, 5.0% and 10.3%, respectively, from the 1996 period. Lengthy road closures affecting Sierra and Grand Targhee contributed substantially to their declines in revenue. Waterville Valley and Cranmore experienced 10 days of rain during peak holiday periods which contributed significantly to their respective declines. Real estate revenues in the 1997 period declined $765,000 to $3.3 million, or 18.9%, from the 1996 period due to fewer lot sales in the 1997 period at Northstar. Pro forma resort operating expenses, excluding depreciation, depletion and amortization, for the year ended October 31, 1997 would have totaled $71.0 million, an increase of $7.5 million, or 11.7%, from the comparable period in 1996. The increase was primarily due to the Company's larger resorts (Northstar, Sierra, Bear Mountain and the Summit) being opened earlier in the 1996/97 ski season, which resulted in 87 additional total operating days for those resorts and higher operating expenses for the 1996/97 ski season as compared to the prior ski season. The early openings of the resorts were due to more favorable weather conditions at the start of the 1996/97 ski season in November and early December, and were intended to generate improved momentum into the peak holiday period. However, as described above, the Company's skier visits and revenues were negatively impacted by unfavorable weather conditions and road closures during the holiday and other peak periods of the 1996/97 ski season. In addition, Bear Mountain incurred an additional $300,000 in snowmaking costs in the 1997 period as compared to the 1996 period and several resorts 24 26 had substantial snow removal costs in the 1996/97 ski season due to heavy snowfall during certain parts of the season. Pro forma cost of sales -- real estate and other for the pro forma year ended October 31, 1997 totaled $3.0 million, an increase of $663,000 from the comparable period in 1996. This increase is due primarily to increased costs allocated to each parcel in the 1997 period as part of the purchase accounting at Northstar effective December 3, 1996. Pro forma depreciation, depletion and amortization for the pro forma year ended October 31, 1997 was $13.4 million. The increase of $216,000 over the 1996 period was due to depreciation expense on assets placed in service in the 1997 period. Net interest expense for the pro forma year ended October 31, 1997 totaled $16.4 million, an increase of $684,000 from the comparable period in 1996. The increase was due to interest expense on borrowings under the Senior Credit Facility recognized in the 1997 period. The income tax benefit for the pro forma year ended October 31, 1996 of $1.5 million reflects the benefit of operating losses to the extent of net deferred tax liabilities recorded in purchase accounting. RESULTS OF OPERATIONS OF CALIFORNIA RESORTS The Fibreboard Resort Group was acquired by Booth Creek effective December 3, 1996, and its results of operations have been included in the Company's consolidated results of operations since such date. The following review of the performance of the Fibreboard Resort Group is for the audited periods ended December 31, 1994 and 1995, the unaudited ten month period ended October 31, 1995 and the audited ten month period ended October 31, 1996. The following table summarizes Fibreboard Resort Group's historical results of operations as a percentage of revenue for the years ended December 31, 1995 and 1994, and for the ten month periods ended October 31, 1995 and 1996.
YEAR ENDED TEN MONTHS ENDED DECEMBER 31, OCTOBER 31, ----------------- ----------------- 1994 1995 1995 1996 ---- ---- ---- ---- STATEMENT OF OPERATIONS DATA: Net Revenues -- Lift Tickets..................................... 50.8% 44.7% 42.7% 45.0% -- Ski Related Resort............................... 38.5 35.1 34.0 34.0 -- Non-Ski Related Resort........................... 9.2 8.6 10.6 10.6 -- Real Estate and Timber........................... 1.5 11.6 12.7 10.4 ----- ----- ----- ----- Total net revenues............................. 100.0 100.0 100.0 100.0 Cost of Sales -- Resort Operations.................. 65.0 63.4 58.6 65.5 Cost of Sales -- Real Estate and Other.............. 0.7 4.4 4.8 5.2 Selling, General and Administrative Expense......... 13.4 13.1 12.0 12.7 Corporate Allocations and Management Fees........... 1.6 2.8 1.4 1.7 ----- ----- ----- ----- Operating Income.................................... 19.3 16.3 23.2 14.9 Interest (Income) Expense, Net...................... 1.6 1.8 0.9 2.9 ----- ----- ----- ----- Pre-tax Income...................................... 17.7 14.5 22.3 12.0 Income Taxes........................................ 7.2 5.8 9.0 4.9 ----- ----- ----- ----- Net Income.......................................... 10.5% 8.7% 13.3% 7.1% ===== ===== ===== ===== OTHER DATA: EBITDA.............................................. 27.7% 28.9% 35.3% 29.0%
Ten Months Ended October 31, 1996 as Compared to the Ten Months Ended October 31, 1995 The ski resort industry is highly seasonal, with operations typically commencing in November or December of each year, and closing in April or May. The exclusion of the months of November and 25 27 December from the 1996 and 1995 fiscal periods results in decreases in virtually all income statement captions when compared to full fiscal periods. Total revenue for the ten months ended October 31, 1996 was $41,117,000, an increase of $4,386,000 or 11.9% from the comparable period in 1995. This increase is attributable to the acquisition of Bear Mountain in October 1995, which accounted for $7,147,000 of additional revenue during the ten month period ended October 31, 1996. Partially offsetting this increase was a $2,390,000 decline in lift ticket and ski-related revenues at the Company's Northstar and Sierra resorts, primarily resulting from fewer skier days, and a $371,000 decline in real estate and timber sales, primarily resulting from fewer developmental real estate sales. Skier days and revenue per skier day were 706,075 and $52.16 for the ten months ended October 31, 1996, as compared to 626,500 and $51.19 for the comparable period in 1995. The increase in skier days is attributable to the acquisition of Bear Mountain in October 1995, which accounted for 174,984 of the additional skier days. Skier days at the Company's Northstar and Sierra resorts declined by 95,409 in the ten months ended October 31, 1996 as compared to the comparable period in the prior year due to particularly favorable ski conditions in the prior period. Cost of sales for resort operations for the ten months ended October 31, 1996 increased by $5,414,000, or 25.1%, from the comparable period in the prior year due to a $5,860,000 increase in costs resulting from the acquisition of Bear Mountain in October 1995, offset by slightly lower cost of sales for resort operations at Northstar and Sierra of approximately $500,000. Selling, general, administrative and other operating expenses (including management fees and corporate allocations) increased by $1,009,000, or 20.5%, in the ten months ended October 31, 1996 as compared to the comparable period in the prior year due to a $1,406,000 increase in costs resulting from the acquisition of Bear Mountain in October 1995, offset by slightly lower selling, general, administrative and other operating expenses at Northstar and Sierra. Interest expense, net for the ten months ended October 31, 1996 increased by $855,000 as compared to the same period in 1995 as a result of the advance made by Fibreboard Corporation to the Resort Group in October 1995 to finance the acquisition of Bear Mountain. The provision for income taxes for the ten months ended October 31, 1996 decreased by $1,290,000 as compared to the comparable period in 1995 due to the decrease in income subject to income tax. The effective income tax rate for the ten months ended October 31, 1996 was 41.1%, as compared to 40.5% for the same period in 1995. EBITDA for the ten months October 31, 1996 was $11,919,000, a decrease of $1,061,000, or 8.2%, from the comparable period in the prior year. EBITDA margin decreased from 35.3% during the ten months ended October 31, 1995 to 29.0% during the comparable 1996 period. Year Ended December 31, 1995 as Compared to the Year Ended December 31, 1994 Total revenue for 1995 was $45,036,000, an increase of $3,616,000, or 8.7%, from 1994. This increase is attributable to the completion and sale of residential lots at the Big Springs development at Northstar, which accounted for an increase in revenue in 1995 of $4,418,000. Partially offsetting this increase was a $802,000 decline in lift ticket and ski-related revenues, primarily as a result of fewer skier days. Skier days and revenue per skier day were 784,964 and $50.73 for 1995, as compared to 837,179 and $48.75 for 1994. The operating season is dependent on favorable snow conditions, and in 1995 the season did not open until mid-December due to unusually warm weather and low precipitation. Revenue per skier day increased in 1995 as a result of increased lift ticket prices. Costs of sales for resort operations for 1995 increased by $1,649,000, or 6.1%, from the prior year, primarily as a result of increased costs resulting from the acquisition of Bear Mountain. Selling, general, administrative and other operating expenses increased by $326,000, or 5.9%, from 1994 to 1995. This increase was due to the formation of the Fibreboard Resort Group, which was necessitated by the acquisition of Bear Mountain, which added resort operating personnel, and the expansion of management 26 28 training programs. Prior to this time, management at Northstar oversaw both Northstar and Sierra. Management fees allocated to the Fibreboard Group for 1995 increased by $592,000, or 90.4%, from 1994 due principally to the effects of a nonrecurring supplemental allocation of Fibreboard Corporation's corporate expenses to its various operating subsidiaries and divisions in 1995. Net interest expense increased by $155,000 over the prior year. This increase is due to an increase in intercompany interest of $488,000 charged to the California Resorts by Fibreboard Corporation, as Fibreboard Corporation did not charge intercompany interest in 1994. This increase was partially offset by a decrease in interest expense to third parties of $302,000, as the Company paid all of its outstanding debt to third parties during 1995, and an increase in interest income of $31,000. For 1995, the tax rate applied to the California Resorts was 40%, a decrease from the rate of 40.5% applied in 1994. EBITDA for 1995 was $13,002,000, an increase of $1,533,000, or 13.4%, from 1994. EBITDA margin increased from 27.7% in 1994 to 28.9% in 1995. RESULTS OF OPERATIONS OF WATERVILLE VALLEY The following review of the performance of Waterville Valley is for the audited fiscal periods ended October 31, 1995 and October 27, 1996. Waterville Valley was sold by S-K-I Limited to American Skiing Company effective June 30, 1996. Accordingly, for the financial statements covering periods subsequent to June 30, 1996, purchase price accounting was reflected. Therefore, the pre- and post-acquisition financial statements of Waterville Valley reflect different bases of accounting which can significantly impact depreciation, amortization, interest and related tax expenses. However, for purposes of the following discussion regarding fiscal 1996 and fiscal 1995 activity, the pre- and post-acquisition financial information has been combined to provide the reader with an indication of the trend of results. Such combined information is referred to herein as "Combined 1996" information. The following table summarizes Waterville Valley's historical results of operations as a percentage of revenue for the year ended October 31, 1995 and Combined 1996.
COMBINED 1996 1996 ---- -------- STATEMENT OF OPERATIONS DATA: Revenue..................................................... 100.0% 100.0% Cost of Sales............................................... 48.3 49.1 ----- ----- Gross Margin................................................ 51.7 50.9 Other Costs and Expenses.................................... 39.7 38.7 Depreciation and Amortization............................... 11.3 10.5 ----- ----- Income from Operations...................................... 0.7 1.7 Interest Expense............................................ 1.0 0.8 ----- ----- Income (Loss) Before Income Taxes........................... (0.3) 0.9 Income Tax Expense (Benefit)................................ (0.1) 3.9 ----- ----- Net Income............................................. (0.2)% (3.0)% ===== ===== OTHER DATA: EBITDA...................................................... 12.0% 12.2%
Year Ended October 27, 1996 as Compared to the Year Ended October 31, 1995 Combined 1996 revenue increased by $2,081,000, or 22%, over fiscal 1995 revenue of $9,653,000. The revenue increase was primarily due to more favorable weather conditions, including a significant increase in snowfall (203 inches in fiscal 1996 vs. 101 inches in fiscal 1995) which contributed to a 23.7% increase in skier days. In addition, fiscal 1995 revenue was negatively impacted by problems with the high-speed quad lift 27 29 which was non-operational for two and one-half weeks in December 1994. Skier days and revenue per skier day were 256,563 and $45.73 for 1996, as compared to 207,386 and $46.55 in 1995. Cost of sales as a percent of revenue increased slightly to 49.1% in the Combined 1996 fiscal period compared to 48.3% in fiscal 1995. Due to increased revenue volumes in fiscal 1996, the other costs and expenses and depreciation and amortization percentages of revenue decreased slightly in the Combined 1996 fiscal period as compared to 1995 due to the fixed nature of certain of these expenses. The tax provision for the Combined 1996 fiscal period is significantly higher than the prior year due to the inability in the post-acquisition period to recognize the tax benefits of the operating losses generated. EBITDA for the Combined 1996 period was $1,431,000, an increase of $272,000, or 23.5%, from 1995 EBITDA of $1,159,000. EBITDA margin increased from 12.0% in 1995 to 12.2% in 1996. RESULTS OF OPERATIONS OF THE SUMMIT AT SNOQUALMIE Ski Lifts, Inc. (the Summit) was acquired by Booth Creek effective January 15, 1997, and its results of operations have been included in the Company's consolidated results of operations since such date. The following review of the performance of Ski Lifts, Inc. is for the audited fiscal periods ended September 30, 1995 and 1996, the estimated unaudited three and one-half month period ended January 15, 1996 and the audited three and one-half month period ended January 15, 1997. The comparison of the three and one-half month period ended January 15, 1997 to the four month period ended January 31, 1996, as summarized in the historical financial statements, would significantly impact revenues, cost of sales, general, administrative and other expenses as the second half of January is a significant revenue producing period. Thus, as noted above, this discussion covers the two three and one-half month periods ended January 15, 1997 and 1996 based on audited results through January 15, 1997 and estimated unaudited results through January 15, 1996. The following table summarizes Ski Lifts' historical results of operations as a percentage of revenue for the years ended September 30, 1995 and 1996 and the three and one-half month periods ended January 15, 1996 and 1997.
THREE AND ONE-HALF YEAR ENDED MONTHS ENDED SEPTEMBER 30, JANUARY 15, ---------------- ------------------- 1995 1996 1996 1997 ---- ---- ---- ---- STATEMENT OF OPERATIONS DATA: Revenues.................................................. 100.0% 100.0% 100.0% 100.0% Operating Salaries, Wages and Other Employee Costs........ 48.0 48.6 54.7 51.3 General, Administrative and Other Operating Expenses...... 30.5 32.1 45.3 35.6 Other Operating Expenses.................................. 15.9 16.4 19.5 15.4 ----- ----- ----- ----- Gross Margin.............................................. 5.6 2.9 (19.5) (2.3) Other Costs and Expenses (Income), Net.................... 3.2 3.0 (0.2) 2.8 ----- ----- ----- ----- Income (Loss) from Operations............................. 2.4 (0.1) (19.3) (5.1) Income Tax Expense (Benefit).............................. (3.7) -- -- -- ----- ----- ----- ----- Net Income (Loss)......................................... 6.1% (0.1)% (19.3)% (5.1)% ===== ===== ===== ===== OTHER DATA: EBITDA.................................................... 15.3% 13.2% (2.4)% 5.6%
Three and One-Half Months Ended January 15, 1997 as Compared to the Three and One-Half Months Ended January 15, 1996 Ski Lifts, Inc. was acquired by Booth Creek effective January 15, 1997. The discussion below compares the results of operations of Ski Lifts, Inc. prior to its acquisition by Booth Creek and since its last completed 28 30 fiscal year to the comparable period in the prior year. The operating data presented are based on audited results through January 15, 1997 and estimated unaudited results through January 15, 1996. Total revenues for the 1997 period were $3,511,000, an increase of $890,000, or 34% from the 1996 period. The increase resulted from increased operating days and skier visits. Skier days and revenue per skier day were 167,708 and $20.93 for the 1997 period, as compared to 112,985 and $23.20 for 1996 period. There were 47 operating days through January 15, 1997 as compared to 33 operating days through January 15, 1996. The Summit's ski areas opened November 22, 1996 for the 1996/97 season as compared to December 9, 1995 for the 1995/96 season. Revenue per skier day was lower for the 1997 period as compared to the 1996 period as a result of the ski areas being closed for six days from December 26, 1996 through January 1, 1997 due to highway closures from avalanche danger and severe weather conditions. This six day closure was largely responsible for the decrease in revenue per skier day in the 1997 period as these were higher holiday priced days. Additionally, the early season days are priced at lower rates initially until all four ski areas comprising the Summit are in full operation. Due to the late start in the 1995/96 season, there were fewer days when the lower rates were in effect. Operating salaries, wages and other employee costs for the 1997 period increased by $368,000, or 25.7%, as compared to the 1996 period. The higher labor costs were due to the earlier start of the 1996/97 ski season as well as increased labor costs associated with additional snow grooming and removal required as a result of unusually heavy snowfall during late December and early January. General, administrative and other operating expenses for the 1997 period increased by $63,000, or 5.3%, as compared to the 1996 period. This increase was due, in part, to increased maintenance, gas, oil, diesel and electricity charges incurred as a result of the unusually large snowfall experienced at the areas during 1997, as discussed above. The remaining increase was a result of the increased number of operating days and skier visits in the 1997 period as compared to the 1996 period. Net interest expense for the 1997 period was approximately $113,000 as compared to approximately $110,000 for the 1996 period. EBITDA for the 1997 period was $197,000, an increase of $260,000 from the 1996 period. EBITDA margin increased from (2.4%) in the 1996 period to 5.6% in the 1997 period due to the increased number of operating days and skier visits in the 1997 period, which resulted in higher revenues. Year Ended September 30, 1996 as Compared to the Year Ended September 30, 1995 Total revenues for 1996 were $9,451,000, a decrease of $1,219,000, or 11%,from 1995, primarily due to a shorter operating season. Lift revenues, which comprised 65% of total revenue in 1996, declined by $922,000, or 13%, from 1995, while ski rental revenue decreased by 12%. For 1996, the operating ski season lasted only 117 days, as compared to 158 days for 1995, because of unfavorable weather conditions. Skier days and revenue per skier day were 455,240 and $20.76 for 1996, as compared to 515,487 and $20.69 for 1995. The operating season is dependent on favorable snow conditions, and in 1996 the season did not open until mid-December, as compared to mid-November in 1995, due to lack of snow, and after opening snow coverage was minimal, resulting in lower than average skier days in December. In addition, in February of 1996 there were unusual weather patterns which resulted in significantly fewer skier days than in the prior year. Snow conditions and the quantity of snow most directly impact the number of skier days, and therefore total revenue. Operating salaries, wages and other employee costs for 1996 were $4,595,000, a decrease of $525,000, or 10%, from 1995. The decrease resulted from the shorter operating season due to the later opening of the resort which was offset by a profit sharing contribution of $162,000 in 1996. The Company employs approximately 60 year-round employees and 1,000 seasonal employees. Thus, with a shorter operating season, employee costs decreased in proportion to overall lift revenues. As a result of the poor operating season in 1996, a large number of year-round employees were laid off for a period of four to ten weeks, whereas in 1995 the same group of employees were laid off for a two week period. 29 31 General, administrative and other operating expenses decreased by $218,000, or 6.6%, from 1995 to 1996. This decrease was primarily due an overall decrease in the number of operating days. Interest expense increased by $37,500 from 1995 to 1996, due primarily to higher average borrowings. For 1995, Ski Lifts, Inc. recognized a tax benefit of $408,000 for the elimination of certain deferred tax balances upon conversion to S Corporation status for federal income tax purposes. EBITDA for 1996 was $1,251,000, a decrease of $378,000, or 23.2%, from 1995. EBITDA margin decreased from 15.3% in 1995 to 13.2% in 1996. RESULTS OF OPERATIONS OF GRAND TARGHEE Grand Targhee Incorporated was acquired by the Company on March 18, 1997 and its results of operations have been included in the Company's consolidated results of operations since such date. The following review of the performance of Grand Targhee Incorporated is for the audited fiscal periods ended May 31, 1995 and 1996 and the nine and one-half month periods ended March 18, 1996 and 1997. The comparison of the nine and one-half month period ended March 18, 1997 to the ten month period ended March 31, 1996, as summarized in the historical financial statements, would significantly impact revenues, direct expenses, and other costs and expenses as the second half of March is a significant revenue producing period. Thus, as noted above, this discussion covers the two nine and one-half month periods ended March 18, 1997 and 1996 based on audited results through March 18, 1997 and estimated unaudited results through March 18, 1996. The following table summarizes Grand Targhee Incorporated's historical results of operations as a percentage of revenue for the years ended May 31, 1995 and 1996 and the nine and one-half month periods ended March 18, 1996 and 1997.
NINE AND ONE-HALF YEAR ENDED MONTHS ENDED MAY 31, MARCH 18, ------------------- ------------------- 1995 1996 1996 1997 ---- ---- ---- ---- STATEMENT OF OPERATIONS DATA: Revenues................................. 100.0% 100.0% 100.0% 100.0% Direct Expenses.......................... 55.1 56.4 53.1 65.7 ----- ----- ----- ----- Gross Margin............................. 44.9 43.6 46.9 34.3 Other Costs and Expenses................. 40.7 39.5 35.6 47.3 ----- ----- ----- ----- Income (Loss) Before Income Taxes........ 4.2 4.1 11.3 (13.0) Income Tax Expense (Benefit)............. 1.2 1.0 3.9 (2.4) ----- ----- ----- ----- Net Income (Loss)........................ 3.0% 3.1% 7.4% (10.6)% ===== ===== ===== ===== OTHER DATA: EBITDA................................. 15.7% 16.6% 20.8% 2.9%
Nine and One-Half Months Ended March 18, 1997 as Compared to the Nine and One-Half Months Ended March 18, 1996 Total revenues for the nine and one-half months ended March 18, 1997 were $5,639,000, a decrease of $914,000, or 14% as compared to the same period in 1996. Revenues from lift ticket and season pass sales, which comprised 32% of the 1997 period's total revenue, decreased $461,000 or 20% from the 1996 period. This decrease was due primarily to a 18.7% decrease in skier days. Actual 1997 period skier days were 94,898 as compared to 116,696 in the 1996 period. Skier days in the current period were significantly impacted by poor weather conditions which limited access to the resort, particularly during the Christmas holiday season, and delays in the completion of a new high-speed detachable quad lift which became operational on January 27, 1997. 30 32 The remaining decrease in revenues is attributable to lower revenues from food, beverage, retail merchandise and other guest services resulting from fewer skiers and lodging guests. Total revenue per skier increased to $59.42 in 1997 as compared to $56.16 in 1996. Direct expenses in the 1997 period were $3,706,000, or 65.7% of revenues, as compared to $3,479,000, or 53.1% of revenues, in the 1996 period. The increase in direct expenses as a percentage of revenue was primarily due to fewer skiers and the relatively high level of direct expenses that are fixed in nature. As a result, gross margin decreased from 46.9% in the 1996 period to 34.3% in the 1997 period. Other costs and expenses increased from $2,334,000 in the 1996 period to $2,669,000 in the 1997 period. This increase, in conjunction with declining revenues, caused other costs and expenses to increase as a percentage of revenues from 35.6% to 47.3%. The increase in other costs and expenses as a percent of revenue was due to fewer skiers and the fixed nature of these costs and expenses. Other costs and expenses included interest expense, which decreased $13,000 or 12% from the 1996 period due to lower debt levels, and $54,000 of land abandonment costs in the 1997 period related to the failed attempt to swap certain real estate. EBITDA for the 1997 period was $163,000, a decrease of $1,201,000 from $1,364,000 in the 1996 period. EBITDA margin was 2.9% in the 1997 period compared to 20.8% in the 1996 period. Year Ended May 31, 1996 as Compared to the Year Ended May 31, 1995 Total revenues for 1996 were $7,376,000, an increase of $614,000, or 9%, over 1995. Revenues from lift ticket and season pass sales, which comprised 36% of 1996 total revenues, increased $143,000, or 6%, over 1995. This increase was due to a 7% increase in lift ticket revenue per skier, offset by a 1% decrease in skier days. Actual 1996 skier days were 116,696 as compared to 117,772 skier days in 1995. Skier days were not significantly impacted by the length of the ski season, which was 148 days in 1996, 8 days shorter than the 156 days in 1995. The remaining increase in revenues is attributable to a higher level of spending by both skiers and lodging guests for food, beverage, retail merchandise and other guest services. Total revenue per skier (excluding lodging revenue) increased by 11% from $38.64 per skier in 1995 to $42.91 per skier in 1996. Total revenues per lodging guest (excluding lift ticket revenue) were $63.53, a 7.6% increase from 1995. The number of lodging guests in 1996 was 37,987, a 1% decrease from 1995. Increased spending by skiers and lodging guests is primarily due to new guest facilities at the resort, including a restaurant, liquor store, snowboard retail shop and spa. Direct expenses in 1996 were $4,159,000, or 56.4%, of revenues, as compared to 55.1% of revenues in 1995. The increase in direct expenses as a percentage of revenues is primarily due to an increase in direct labor costs resulting from the hiring of additional staff to operate new guest facilities and a change in the employee benefit package which increased the percentage of insurance benefits paid by the Company. As a result of these increases, gross margin decreased from 44.9% in 1995 to 43.6% in 1996. Other costs and expenses increased by $167,000 from $2,751,000 in 1995 to $2,918,000 in 1996 but decreased as a percentage of revenues from 40.7% in 1995 to 39.5% in 1996. The decrease as a percentage of revenues was generally due to management's efforts to control general and administrative marketing costs, a $32,000 reduction in lease expense related to employee housing and a $54,000 reduction in interest expense due primarily to lower average borrowings. Significant increases in other costs and expenses included $99,000 of costs related to an abandoned land exchange, a $43,000 loss on disposition of miscellaneous assets and a $43,000 write-off of the net book value of the Shoshone lift which was replaced in fiscal 1997. EBITDA for 1996 was $1,225,000, an increase of $159,000, or 14.9%, from 1995. EBITDA margin increased from 15.7% in 1995 to 16.6% in 1996. 31 33 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 $20.0 million during the term of such facility. In addition, the Company is required to repay all borrowings under the Senior Credit Facility on or before March 1 of each year and have no outstanding indebtedness thereunder during the two months thereafter. 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 October, to fund capital expenditures for lifts, trail work, grooming equipment and other on-mountain equipment and facilities and to build retail and other inventories prior to the start of the skiing season. The Company's capital expenditures for the year ended October 31, 1997 were approximately $9.5 million, including approximately $8.7 million for maintenance capital expenditures and approximately $800,000 relating to the construction of new lifts at the Summit and Waterville Valley. Management anticipates that annual capital expenditures in each of fiscal 1998 and 1999 will be approximately $7.0 million. Future capital expenditures include approximately $4.0 million in each of the next two years for resort maintenance and safety and $3.0 million for resort upgrades that management deems appropriate. 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 1999 totaled approximately $3.5 million at October 31, 1997. 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 these development efforts is not regarded by management as likely to adversely affect skier days and ski-related revenues or profitability. The 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 is significantly affected by its high leverage. As a result of its leveraged position, the Company has 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 increases 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. Management believes that the Company's cash flow from operations and borrowings available under the Senior Credit Facility will be sufficient to enable the Company to meet all of its cash operating and debt service requirements over the next twelve months. The Company believes that inflation has had little effect on its results of operations and any impact on costs has been largely offset by increased pricing. 32 34 The Company is currently in the process of evaluating its software and hardware for Year 2000 compliance. Although a final assessment has not been completed, the Company believes that the costs to be incurred will not be material to the overall presentation of the consolidated financial statements. 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary financial information that are required to be included pursuant to this Item 8 are listed in Item 14 of this Report under the caption "(a)1." and follow Item 14. The financial statements and supplementary financial information specifically referenced in such list are incorporated in this Item 8 by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 33 35 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES The following table sets forth information with respect to the directors, executive officers and other key employees of the Company and Booth Creek Ski Group, Inc., a Delaware corporation ("Parent"), of which the Company is a wholly-owned subsidiary.
NAME AGE POSITION ---- --- -------- George N. Gillett, Jr........................... 59 Chairman of the Board of Directors; Chief Executive Officer; Director of the Company and Parent Jeffrey J. Joyce................................ 36 Executive Vice President, Finance; Director of Parent Timothy M. Petrick.............................. Executive Vice President Nanci N. Northway............................... 43 Vice President, Treasurer, Chief Financial Officer and Secretary Timothy H. Beck................................. 47 Executive Vice President, Planning and President, Eastern Operations Julianne Maurer................................. 41 Corporate Director of Marketing and Sales Timothy Silva................................... 46 General Manager -- Northstar John A. Rice.................................... 42 General Manager -- Sierra Catherine M. Thero.............................. 34 General Manager -- Bear Mountain Thomas H. Day................................... 43 General Manager -- Waterville Valley Chris Thompson.................................. 50 General Manager -- The Summit Larry H. Williamson............................. 56 General Manager -- Grand Targhee
George N. Gillett, Jr. Mr. Gillett has been the Chairman of the Board of Directors of the Company since its formation in October 1996 and Chief Executive Officer since February 1997. Mr. Gillett served as Chairman from 1977 until September 1996 of Gillett Holdings, Inc. (which was renamed Vail Resorts, Inc. in 1996). Gillett Holdings, Inc. owned Packerland Packing Company, Inc. until its sale in 1994, the Vail ski resort since its acquisition in 1985 and various media properties, including a controlling interest in SCI Television, Inc. from 1987 until 1993. Since August 1994 he has served as Chairman of Packerland Packing Company, Inc., a meatpacking company based in Green Bay, Wisconsin. From October 1987 until May 1993, Mr. Gillett served as Chairman and Chief Executive Officer of SCI Television, Inc. and from May 1993 until May 1996 as President of New World Television, Inc. (renamed from SCI Television Inc. in 1993). Mr. Gillett filed a petition of voluntary bankruptcy under Chapter 7 of the United States Bankruptcy Code on August 13, 1992 and was discharged from bankruptcy on July 27, 1993. In addition, certain entities for which Mr. Gillett has served as an executive officer or director, including Gillett Holdings, Inc., SCI Television, Inc. and their respective subsidiaries, filed bankruptcy petitions, or had bankruptcy petitions filed against them, in 1991 and 1993 under Chapter 11 of the United States Bankruptcy Code. All of these entities have since been discharged from bankruptcy. Jeffrey J. Joyce. Mr. Joyce has held the position of Executive Vice President, Finance of the Company since October 1996. He also has served since August 1994 as a Vice President of Packerland Packing Company, Inc., which is indirectly controlled by George N. Gillett, Jr., Chairman of the Board of Directors and Chief Executive Officer of the Company. From July 1988 until July 1993, Mr. Joyce was employed by Gillett Holdings, Inc., an affiliate of George N. Gillett, Jr., in various financial management positions. Timothy M. Petrick. Mr. Petrick has held the position of Executive Vice President of the Company since May 1997. Prior to this time, he served as Vice President and General Manager of K2 North America since July 1992. 34 36 Nanci N. Northway. Ms. Northway has held the positions of Vice President, Treasurer, Chief Financial Officer and Secretary of the Company since December 1996. Prior to this time, she served as Assistant Controller and Treasurer of Trimont Land Company, Sierra-at-Tahoe, Inc. and Bear Mountain, Inc. from May 1983, July 1993 and October 1995, respectively, until December 1996. Timothy H. Beck. Mr. Beck has held the positions of Executive Vice President, Planning and President, Eastern Operations of the Company since July 1997. Prior to this time, he served as President of Sno-engineering, Inc. since January 1991. Julianne Maurer. Ms. Maurer has held the position of Corporate Director of Marketing and Sales of the Company since December 1996. Prior to this time, she served as Director of Marketing of the Fibreboard Resort Group as well as Director of Marketing for Northstar. Timothy Silva. Mr. Silva has been the General Manager of Northstar since January 1995. Prior to this time, he served as Director of Operations of Trimont Land Company, the owner and operator of Northstar, since February 1992. John A. Rice. Mr. Rice has been the General Manager of Sierra since July 1993. Prior to this time, he served as Vice President of Administration of Bear Mountain, Ltd. (the predecessor of Bear Mountain, Inc.) since July 1988. Catherine M. Thero. Ms. Thero has been the General Manager of Bear Mountain, since March 1996. Prior to this time, she served as a Senior Associate of Sno.engineering, Inc. since May 1995. From June 1989 until May 1995, Ms. Thero was the President of Resort Consulting Group. From May 1992 until January 1994, Ms. Thero was the Director of Projects at the Sunday River Ski Resort in Maine. Thomas H. Day. Mr. Day has been the General Manager of Waterville Valley since May 1997. Prior to this time, he served as Mountain Manager of Waterville Valley since 1986. Chris Thompson. Mr. Thompson became the General Manager of the Summit in February 1997. He has also served as Chief Operating Officer and Vice President of Ski Lifts, Inc., the owner and operator of the Summit, since 1994 and 1992, respectively. From 1987 to 1992, he served as General Manager of the Alpental ski resort at the Summit. Larry H. Williamson. Mr. Williamson became the General Manager of Grand Targhee in March 1997. Mr. Williamson has held the position of General Manager of Grand Targhee Incorporated, the owner and operator of Grand Targhee, since March 1996. Prior to this time, he served as Director of Mountain Operations of Grand Targhee since 1989. DIRECTORS All directors of Booth Creek and Parent hold office until the respective annual meeting of stockholders next following their election, or until their successors are elected and qualified. George N. Gillett, Jr. is the sole director of Booth Creek. In June 1997, pursuant to the Stockholders Agreement (as defined), (i) Dean C. Kehler and Gregg L. Engles, as the designees of John Hancock Mutual Life Insurance Company ("John Hancock"), and Jeffrey J. Joyce, as a designee of Booth Creek Partners Limited II, L.L.L.P. (the "Gillett Family Partnership"), became members of Parent's Board of Directors and (ii) George N. Gillett, Jr., as a designee of the Gillett Family Partnership, was re-appointed as Chairman of the Board of Directors of Parent. One additional nomination to Parent's Board of Directors remains to be made by the Gillett Family Partnership. See Part III, Item 13. "Certain Relationships and Related Transactions -- Stockholders Agreement." No directors of Booth Creek or Parent receives compensation for acting in such capacity. Since August 1985, Mr. Kehler has been a Managing Director of CIBC Wood Gundy Securities Corp., an affiliate of CIBC WG Argosy Merchant Fund 2, L.L.C. (the "CIBC Merchant Fund"), and has investment responsibilities with respect to the CIBC Merchant Fund. See Part III, Item 13. "Certain Relationships and Related Transactions -- The Financing Transactions" and "-- Stockholders Agreement." From February 1990 to August 1995, Mr. Kehler was a Managing Director of Argosy Group, L.P., an 35 37 investment banking firm. Mr. Engles has served as the Chairman of the Board and Chief Executive Officer of Suiza Foods Corporation since October 1994. He has also served as the Chairman of the Board and Chief Executive Officer of Reddy Ice Corporation since May 1988, Chairman of the Board of Suiza Holdings, L.P. since December 1993, and Chairman of the Board of Velda Farms since April 1994. ITEM 11. EXECUTIVE COMPENSATION COMPENSATION OF EXECUTIVE OFFICERS The following table sets forth the compensation paid by Booth Creek to (i) its Chairman of the Board and Chief Executive Officer and (ii) each of the three most highly compensated individuals who served as executive officers of the Company during fiscal 1997 and received salary and bonus in excess of $100,000 during such year (collectively, the "Named Executives"), for services rendered in all capacities to Booth Creek during the periods indicated. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ------------------------------------ OTHER ANNUAL ALL OTHER SALARY BONUS COMPENSATION COMPENSATION NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) --------------------------- ---- ------ ----- ------------ ------------ George N. Gillett, Jr..................... 1997 3,333(2) -- -- -- Chairman of the Board, Chief Executive Officer and Director(1) Timothy M. Petrick........................ 1997 87,950 30,625 -- 1,837(3) Executive Vice President Timothy Silva............................. 1997 92,551 17,500 -- 2,941(4) General Manager -- Northstar Nanci N. Northway......................... 1997 100,410 6,000 -- 3,181(5) Vice President, Treasurer, Chief Financial Officer and Secretary
- ------------------------- (1) Mr. Gillett is the sole shareholder, sole director and Chief Executive Officer of Booth Creek, Inc., which, pursuant to the Management Agreement (as defined), provides the Company with management services in exchange for an annual management fee. See Part III, Item 13. "Certain Relationships and Related Transactions -- Management Agreement with Booth Creek, Inc." (2) Mr. Gillett was compensated by the Company during January and February of 1997. (3) Consists of term life insurance premiums. (4) Consists of a 401(k) matching contribution of $2,891 and term life insurance premiums of $50. (5) Consists of a 401(k) matching contribution of $3,158 and term life insurance premiums of $23. 36 38 OPTIONS/SAR GRANTS IN FISCAL 1997 The following table sets forth certain information with respect to option grants made to the Named Executives for the fiscal year ended October 31, 1997.
POTENTIAL REALIZABLE VALUE AT ASSUMED NUMBER OF SECURITIES PERCENT OF TOTAL ANNUAL RATES OF STOCK UNDERLYING OPTIONS/SARS GRANTED TO PRICE APPRECIATION FOR OPTIONS/SARS EMPLOYEES IN EXERCISE EXPIRATION OPTION TERM NAME GRANTED FISCAL YEAR PRICE ($/SH) DATE 5% 10% ---- -------------------- ----------------------- ------------ ---------- ----------------------- Timothy M. Petrick(1)......... 100 100% $500 October 1, 2007 $31,400 $79,700
- ------------------------- (1) Represents option to purchase Class A Common Stock of Parent pursuant to that certain Stock Option Agreement dated as of October 1, 1997 by and between Parent and Mr. Petrick. See Part III, Item 11. "Executive Compensation -- Parent Stock Option Agreement with Timothy M. Petrick." AGGREGATED OPTION/SAR EXERCISES IN FISCAL YEAR 1997 AND 1997 FISCAL YEAR-END OPTION/SAR VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED SHARES OPTIONS/SARS AT VALUE OF UNEXERCISED IN-THE- ACQUIRED ON FISCAL YEAR-END, MONEY OPTIONS/SARS AT EXERCISE VALUE EXERCISABLE/UNEXERCISABLE FISCAL YEAR-END, EXERCISABLE/ NAME (#)(1) REALIZED ($) (#) UNEXERCISABLE ---- ----------- ------------ ------------------------- ----------------------------- Timothy M. Petrick... -- -- 20/80 $0/$0
- ------------------------- (1) No options were exercised during the fiscal year ended October 31, 1997. EMPLOYMENT AND OTHER AGREEMENTS The Company is a party to an agreement with Nanci N. Northway, Vice President, Treasurer, Chief Financial Officer and Secretary of the Company, pursuant to which Ms. Northway is entitled to a one-time payment of $100,000 within 90 days following an initial public offering of the Company's common stock or a change in control of the Company, in each case occurring while Ms. Northway is an employee of the Company. The Company is a party to an employment agreement with Timothy M. Petrick, Executive Vice President of the Company. Mr. Petrick's employment agreement commenced on May 5, 1997 and will expire on April 30, 2002, unless sooner terminated. Under such agreement, Mr. Petrick receives a base salary of $175,000 per annum, subject to certain increases as Mr. Petrick and the Company may agree. Mr. Petrick will also be entitled to receive a bonus following an initial public offering by the Company and, beginning with the Company's fiscal year 1998, an annual incentive bonus of up to 50% of his base salary based upon the Company's attainment of certain targeted financial, business and personal goals. Under the terms of his employment agreement, Mr. Petrick is eligible to participate in the health, disability and retirement plans offered to other executives of the Company. In addition, pursuant to his agreement, the Company provides Mr. Petrick with a $1,000,000 term life insurance policy, reimburses him for all reasonable and necessary expenses incurred by him in the discharge of his duties and indemnifies him to the maximum extent permitted by Delaware law. In the event that Mr. Petrick is required to relocate his residence due to a relocation of the Company's executive offices (as described in his agreement), the Company shall reimburse Mr. Petrick for certain costs related to such relocation. 37 39 Mr. Petrick's employment agreement may be terminated by the Company at any time, with or without cause, or upon his death or disability. In the event Mr. Petrick's employment agreement is terminated "without cause" or by Mr. Petrick for "good reason" (as described in his agreement), the Company will provide Mr. Petrick with salary continuation and continuation of health and disability insurance coverage for a period of 18 months or until Mr. Petrick is eligible for comparable benefits from another entity, whichever date is sooner. During the term of his employment and for a period of one year thereafter, Mr. Petrick will be subject to provisions prohibiting his competition with the Company, solicitation of certain of the Company's executives or diversion of the Company's customers. Mr. Petrick's employment agreement also contains provisions relating to non-disclosure of the Company's proprietary information. PARENT STOCK OPTION AGREEMENT WITH TIMOTHY M. PETRICK Parent is a party to that certain Stock Option Agreement, dated as of October 1, 1997 (the "Parent Stock Option Agreement"), with Timothy M. Petrick, Executive Vice President and Chief Operating Officer of the Company. Pursuant to such agreement, Mr. Petrick was granted an option, subject to vesting, to purchase from Parent 100 shares of Parent's Class A Common Stock at an exercise price of $500 per share, subject to adjustment under certain circumstances. Such option vested with respect to 20% of the related shares on October 1, 1997, and will vest with respect to an additional 20% of the related shares on each of the second, third, fourth and fifth anniversaries of such date. Upon the occurrence of certain events resulting in the termination of Mr. Petrick's employment (for example, Mr. Petrick's death, disability or for reasons other than for "cause" (as defined in the Parent Stock Option Agreement)) during a year in which vesting would have taken place, such vesting will occur on a monthly, pro rata basis. Mr. Petrick's option will become fully vested with respect to all of the related shares upon a "change of control" (as defined in the Parent Stock Option Agreement) or if his employment is terminated within 45 days following a "good reason" (as defined in the Parent Stock Option Agreement). Upon the termination of Mr. Pertick's employment, all of Mr. Petrick's unvested options will be cancelled and, depending on the reason for such termination, certain percentages of his vested options will be subject to cancellation, generally no later than 120 days following such termination. In addition, Mr. Petrick generally may not exercise his option after October 1, 2007. Pursuant to the Parent Stock Option Agreement, if Mr. Petrick's employment is terminated other than for "cause," he will have the right to require Parent to purchase any shares of stock issued or issuable pursuant to his option at the fair market value of such shares, as described therein. In addition, Parent will have the right following the termination of Mr. Petrick's employment for "cause" or his resignation without "good reason" to purchase all shares of stock acquired by him pursuant to an exercise of his option at the fair market value of such shares, as described in the Parent Stock Option Agreement. Any shares of stock issued pursuant to Mr. Petrick's option will be subject to the Stockholders Agreement (as defined). See Part III, Item 13. "Certain Relationships and Related Transactions -- Stockholders Agreement." For more information regarding the terms of the Parent Stock Option Agreement, reference is hereby made to the copy of such agreement which has been filed as an Exhibit to this Report. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Company's compensation policies are determined and executive officer compensation decisions are made by the Board of Directors. Mr. George N. Gillett, Jr. has been the sole director of the Company since its formation in October 1996. 38 40 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The Company is a wholly-owned subsidiary of Parent. The following table sets forth information concerning the beneficial ownership of Parent's Common Stock (including Class A Common Stock and Class B Common Stock) as of December 31, 1997 by (i) each person known to the Company to own beneficially more than 5% of the outstanding Common Stock of Parent, (ii) by each director and executive officer of the Company and (iii) all directors and executive officers of the Company as a group. Each share of Parent's Class B Common Stock is non-voting (except with respect to certain amendments to the certificate of incorporation and bylaws of Parent and as otherwise required by the General Corporation Law of the State of Delaware) and is convertible into one share of voting Class A Common Stock of Parent at any time, subject to applicable regulatory approvals. All shares are owned with sole voting and investment power, unless otherwise indicated.
PARENT'S CLASS B PARENT'S CLASS A COMMON STOCK COMMON STOCK BENEFICIALLY BENEFICIALLY OWNED OWNED ------------------- ---------------- BENEFICIAL OWNER SHARES % SHARES % ---------------- ------ - ------ - Booth Creek Partners Limited II, L.L.L.P.................. 3,630 100% 6755 Granite Creek Road Teton Village, Wyoming 83025 John Hancock Mutual Life Insurance Company................ 5,058(1) 58% 5,058(1) 85% John Hancock Place 200 Clarendon Street Boston, Massachusetts 02117 CIBC WG Argosy Merchant Fund 2, L.L.C..................... 912(2) 20% 912(2) 15% 425 Lexington Avenue, 3rd Floor New York, New York 10017 George N. Gillett, Jr..................................... 3,630(3) 100% Chairman of the Board of the Company Rose Gillett.............................................. 3,630(3) 100% 6755 Granite Creek Road Teton Village, Wyoming 83025 Jeffrey J. Joyce.......................................... 544.5(4) 15% Executive Vice President, Finance of the Company Timothy M. Petrick........................................ 20(5) * Executive Vice President and Chief Operating Officer of the Company Total Executive Officers and Directors as a Group......... 3,650(6) 100%
- ------------------------- * Less than 1%. (1) Comprised of 2,558 shares of Class B Common Stock of Parent and Warrants to purchase 2,500 shares of Class B Common Stock of Parent. Each share of Parent's Class B Common Stock is convertible into one share of Class A Common Stock of Parent at any time, subject to applicable regulatory approvals. Each Warrant may be exercised for one share of Parent's Class B Common Stock at an exercise price of $.01 per share. (2) Comprised of 512 shares of Class B Common Stock of Parent and Warrants to purchase 400 shares of Class B Common Stock of Parent. Each share of Parent's Class B Common Stock is convertible into one share of Class A Common Stock of Parent at any time, subject to applicable regulatory approvals. Each Warrant may be exercised for one share of Parent's Class B Common Stock at an exercise price of $.01 per share. (3) Booth Creek Partners Limited II, L.L.L.P. owns directly 3,630 shares of Class A Common Stock of Parent. George N. Gillett, Jr. is the managing general partner and Rose Gillett is a co-general partner of Booth Creek Partners Limited II, L.L.L.P. and each may be deemed to possess shared voting and/or investment power with respect to the interests held therein. Accordingly, the beneficial ownership of such 39 41 interests may be attributed to George N. Gillett, Jr. and Rose Gillett. Rose Gillett is the wife of George N. Gillett, Jr. (4) Represents shares of Class A Common Stock of Parent that Mr. Joyce has an option to purchase from Booth Creek Partners Limited II, L.L.L.P. (the "Option") pursuant to that certain Option Letter Agreement dated December 3, 1996. The Option is exercisable, in whole or in part, at any time on or prior to December 1, 2006 at an initial exercise price equal to $2,066.12 per share, which exercise price shall increase by $55.10 on December 1, 1997 and on each December 1 thereafter. The shares subject to the Option and the per share exercise price are subject to adjustment under certain circumstances, and the obligation of Booth Creek Partners Limited II, L.L.L.P. to sell shares of Class A Common Stock of Parent upon exercise of the Option is subject to compliance with applicable securities laws. (5) Represents shares of Class A Common Stock of Parent that Mr. Petrick has an option to purchase from Parent pursuant to that certain Stock Option Agreement, dated as of October 1, 1997, by and between Parent and Mr. Petrick. See Part III, Item 11. "Executive Compensation -- Parent Stock Option Agreement with Timothy M. Petrick." (6) Represents (i) 3,630 shares of Class A Common Stock of Parent owned by Booth Creek Partners Limited II, L.L.L.P., of which George N. Gillett, Jr. may be deemed to be the beneficial owner and (ii) 20 shares of Class A Common Stock of Parent that Timothy M. Petrick has an option to purchase from Parent pursuant to the option described in note (5) above. Jeffrey J. Joyce may be deemed to be the beneficial owner of 544.5 of the shares owned by Booth Creek Partners Limited II, L.L.L.P. pursuant to the Option described in note (4) above. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS THE FINANCING TRANSACTIONS Since its formation in October 1996, the Company has engaged in a series of related transactions for the purpose of raising capital to finance the acquisitions of its resorts. As part of these transactions, (i) in November and December 1996, the Gillett Family Partnership contributed an aggregate of $7.5 million to Parent in exchange for 3,630 shares of Class A Common Stock of Parent; (ii) on November 27, 1996, Parent entered into a Securities Purchase Agreement (the "Hancock Securities Purchase Agreement") with John Hancock pursuant to which John Hancock purchased for an aggregate consideration of $42.5 million (a) 2,558 shares of Parent's Class B Common Stock (the "Hancock Purchased Common Shares"), (b) warrants (the "Hancock Warrants") to purchase an additional 2,500 shares of Parent's Class B Common Stock (the "Hancock Underlying Shares") and (c) $35.0 million aggregate principal amount of Parent's notes, including the Hancock Option Notes (the "Hancock Parent Financing Debt"); (iii) on November 27, 1996, Parent entered into a Securities Purchase Agreement (the "CIBC Merchant Fund Securities Purchase Agreement" and, together with the Hancock Securities Purchase Agreement, the "Securities Purchase Agreements") with the CIBC Merchant Fund pursuant to which the CIBC Merchant Fund purchased for an aggregate consideration of $6.5 million (a) 512 shares of Parent's Class B Common Stock (the "CIBC Merchant Fund Purchased Common Shares" and, together with the Hancock Purchased Common Shares, the "Purchased Common Shares"), (b) warrants (the "CIBC Merchant Fund Warrants" and, together with the Hancock Warrants, the "Warrants") to purchase an additional 400 shares of Parent's Class B Common Stock (the "CIBC Merchant Fund Underlying Shares" and, together with the Hancock Underlying Shares, the "Underlying Shares") and (c) $5.0 million aggregate principal amount of Parent's notes (the "CIBC Merchant Fund Parent Financing Debt"); and (iv) in December 1996, using the proceeds of the foregoing, Parent made an equity contribution of $40.0 million and a loan of $10.0 million to the Company, which was used to consummate the acquisitions of certain of the Company's resorts (the foregoing transactions are collectively referred to herein as the "Financing Transactions"). The loan from Parent to the Company had terms identical to the Hancock Option Notes and was repaid in connection with the consummation of the Company's offering of its 12.5% Senior Notes in March 1997 (the "Note Offering"). In connection with the consummation of the Note Offering, the Hancock Option Notes were exchanged for notes of the Company with substantially identical terms and repaid with a portion of the proceeds of the 40 42 Note Offering. The remaining portion of the Hancock Parent Financing Debt and the CIBC Merchant Fund Parent Financing Debt (collectively, the "Parent Financing Debt") matures on November 27, 2008 and bears interest at 12% per annum, if paid in cash, or 14% per annum, if paid in kind, payable semi-annually on each May 27 and November 27 commencing on May 27, 1997. The Securities Purchase Agreements, which govern the Parent Financing Debt, contain financial covenants relating to the maintenance of ratios of (a) consolidated total debt to consolidated cash flow, (b) consolidated cash flow to consolidated fixed charges and (c) consolidated cash flow to consolidated interest charges. The Securities Purchase Agreements also contain restrictive covenants pertaining to the management and operation of Parent and its subsidiaries, including the Company. The covenants include, among others, significant limitations on discounts or sales of receivables, funded debt and current debt, dividends and other stock payments, redemption, retirement, purchase or acquisition of equity interests in Parent and its subsidiaries, transactions with affiliates, investments, liens, issuances of stock, asset sales, acquisitions, mergers, fundamental corporate changes, tax consolidation, modifications of certain documents and leases. The Securities Purchase Agreements further required that all of the issued and outstanding common stock of Booth Creek be pledged upon consummation of the Note Offering to secure the Parent Financing Debt and provide that Parent shall cause Booth Creek to pay cash dividends to Parent in the maximum amount permitted by law, subject to restrictions contained in the Company's debt agreements, in order to satisfy Parent's interest payment obligations under the Parent Financing Debt. The Securities Purchase Agreements provide for events of default customary in agreements of this type, including: (i) failure to make payments when due; (ii) breach of covenants; (iii) bankruptcy defaults; (iv) breach of representations or warranties in any material respect when made; (v) default by Parent or any of its subsidiaries under any agreement relating to debt for borrowed money in excess of $1.0 million in the aggregate; (vi) final judgments for the payment of money against Parent or any of its subsidiaries in excess of $1.0 million in the aggregate; (vii) ERISA defaults; (viii) any operative document ceasing to be in full force and effect; (ix) any enforcement of liens against Parent or any of its subsidiaries; and (x) a change of control of Parent. The Securities Purchase Agreements contain financial and operating covenants, events of default and other provisions customary for agreements of this type. The Warrants are exercisable, subject to certain conditions, at a per share price of $0.01 (as adjusted by certain anti-dilution provisions) at any time prior to November 27, 2008, on which date all unexercised Warrants will be deemed automatically exercised. The Securities Purchase Agreements provide that the holders of at least two-thirds of the Purchased Common Shares and the Underlying Shares will each be entitled to require Parent to register their shares under the Securities Act for resale to the public. The holders of Registrable Shares (as defined in the Securities Purchase Agreements) are also entitled to certain piggyback and other registration rights, subject in all cases to certain qualifications. STOCKHOLDERS AGREEMENT In connection with the consummation of the Financing Transactions, Parent, the Gillett Family Partnership, John Hancock and the CIBC Merchant Fund entered into a Stockholders Agreement dated November 27, 1996 (the "Stockholders Agreement"). Pursuant to the Stockholders Agreement, the Board of Directors of Parent shall consist of five directors, three of whom shall be designated by the Gillett Family Partnership and two of whom (the "Unaffiliated Directors") shall be designated by John Hancock. No transaction between Parent or any of its subsidiaries, including the Company, and George N. Gillett, Jr. or any of his affiliates may be approved by the Board of Directors of Parent unless such transaction is approved by all of the Unaffiliated Directors. Moreover, without the consent of John Hancock and the CIBC Merchant Fund (or their respective transferees) (collectively, the "Institutional Investors"), neither Parent nor any subsidiary of Parent, including the Company, may issue any equity securities except, in the case of Parent, for certain enumerated permitted issuances and, in the case of any subsidiary of Parent, issuances to Parent or to any wholly-owned subsidiary of Parent. With respect to issuance of equity securities of Parent requiring the approval of the Institutional Investors, the Institutional Investors also are entitled to certain preemptive rights. In addition, the Stockholders Agreement provides that neither Parent nor any of its subsidiaries, including the Company, may acquire any assets or business from any other person (other than inventory and equipment in 41 43 the ordinary course of business) without the consent of the Required Institutional Investors (as defined in the Stockholders Agreement). The Stockholders Agreement further provides that, subject to certain exceptions, the Gillett Family Partnership may not sell, assign, gift, pledge or otherwise transfer any equity securities of Parent beneficially owned by it (other than to an affiliate of the Gillett Family Partnership that becomes a party to the Stockholders Agreement) prior to November 27, 1999. In the event that at any time after such date, the Gillett Family Partnership shall not hold a majority of the outstanding Class A Common Stock of Parent as a result of the conversion of shares of Class B Common Stock into Class A Common Stock, the Stockholders Agreement requires that Parent grant to the Gillett Family Partnership registration rights with respect to its equity securities which are in all material respects the same as those provided to the Institutional Investors under the Securities Purchase Agreements. In addition to the foregoing, the Stockholders Agreement gives each party thereto certain co-sale rights and rights of first offer upon the sale or other transfer of any equity securities of Parent by any other party, and requires that, as a condition to the issuance or transfer of any equity securities of Parent to any third party (other than a person who acquires such securities pursuant to an effective registration statement under the Securities Act) that such person become a party to the Stockholders Agreement and agree to be bound by all the terms and conditions thereof. The provisions of the Stockholders Agreement relating to the composition of the Board of Directors of Parent terminate following any transfer or transfers of equity securities of Parent by the Gillett Family Partnership, John Hancock and the CIBC Merchant Fund (other than a transfer by any of them to any of their respective affiliates) if after giving effect to any such transfer or transfers the Gillett Family Partnership, John Hancock and the CIBC Merchant Fund have transferred in the aggregate 20% or more of the equity securities of Parent, as calculated in the Stockholders Agreement. The Stockholders Agreement shall terminate, and be of no force or effect, upon the consummation of a Qualified Public Offering (as defined in the Stockholders Agreement). In June 1997, pursuant to the Stockholders Agreement, (i) Dean C. Kehler and Gregg L. Engles, as the designees of John Hancock, and Jeffrey J. Joyce, as a designee of the Gillett Family Partnership, became members of Parent's Board of Directors and (ii) George N. Gillett, Jr., as a designee of the Gillett Family Partnership, was re-appointed as Chairman of the Board of Directors of Parent. One additional nomination to Parent's Board of Directors remains to be made by the Gillett Family Partnership. George N. Gillett, Jr., Chairman and Chief Executive Officer of the Company, is the managing general partner of the Gillett Family Partnership. See Part III, Item 10. "Directors and Executive Officers of the Registrant -- Directors." MANAGEMENT AGREEMENT WITH BOOTH CREEK, INC. Booth Creek, Inc. (the "Management Company") provides management services to the Company, the Parent and the Company's subsidiaries pursuant to the Management Agreement dated November 27, 1996 (the "Management Agreement") between the Company and the Management Company. The Management Company provides the Company, the Parent and the Company's subsidiaries with financial advice with respect to, among other matters, cash management, accounting and data processing systems and procedures, budgeting, equipment purchases, business forecasts, treasury functions and investor relations. The Management Company also provides general supervision and management advice concerning tax, legal and corporate finance matters, administration and operation, personnel matters, business insurance and the employment of consultants, contractors and agents. Under the terms of the Management Agreement, the Company provides customary indemnification, reimburses certain costs and pays the Management Company an annual management fee of $350,000 plus an operating bonus, not to exceed $400,000, equal to 2.5% of the excess of Consolidated EBITDA (as defined in the Securities Purchase Agreements) for such year over $25 million. The obligation of the Company to make payments under the Management Agreement is subject to the provisions of the Securities Purchase Agreements. In the year ended October 31, 1997, the Company accrued fees of $350,000 and certain expenses under the Management Agreement. Since the formation of the Company, the Management Company and certain of its affiliates have made advances and deposits, and have incurred fees and expenses, in connection with certain of the acquisitions of 42 44 the Company's resorts for which they were later reimbursed by the Company pursuant to the Management Agreement. Reimbursement amounts did not include any payment of interest. The Management Agreement will terminate automatically upon consummation of a sale of all or substantially all of the assets or stock of the Parent and its subsidiaries on a consolidated basis, and may be terminated earlier for certain cause by either the Company or the Management Company. George N. Gillett, Jr., Chairman and Chief Executive Officer of the Company is the sole shareholder, sole director and the Chief Executive Officer of the Management Company. 43 45 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT: 1. The financial statements listed on page F-1 are filed as part of this Report. 2. Financial Statement Schedules: All schedules are omitted because they are not applicable, not required or the information is included elsewhere in the Consolidated Financial Statements or Notes thereto. 3. List of Exhibits: *3.1 Certificate of Incorporation of Booth Creek Ski Holdings, Inc. *3.2 Bylaws of Booth Creek Ski Holdings, Inc. *3.3 Restated Articles of Incorporation of Trimont Land Company. *3.4 Bylaws of Trimont Land Company. *3.5 Certificate of Incorporation of Sierra-at-Tahoe, Inc. *3.6 Bylaws of Sierra-at-Tahoe, Inc. *3.7 Certificate of Incorporation of Bear Mountain, Inc. *3.8 Bylaws of Bear Mountain, Inc. *3.9 Certificate of Incorporation of Booth Creek Ski Acquisition Corp. *3.10 Bylaws of Booth Creek Ski Acquisition Corp. *3.11 Amended and Restated Certificate of Incorporation of Waterville Valley Ski Resort, Inc. *3.12 Bylaws of Waterville Valley Ski Resort, Inc. *3.13 Amended and Restated Certificate of Incorporation of Mount Cranmore Ski Resort, Inc. *3.14 Bylaws of Mount Cranmore Ski Resort, Inc. *3.15 Amended and Restated Articles of Incorporation of Ski Lifts, Inc. *3.16 Bylaws of Ski Lifts, Inc. *3.17 Certificate of Incorporation of Grand Targhee Incorporated. *3.18 Bylaws of Grand Targhee Incorporated. *3.19 Articles of Incorporation of B-V Corporation. *3.20 Bylaws of B-V Corporation. *3.21 Certificate of Incorporation of Targhee Company. *3.22 Bylaws of Targhee Company. *3.23 Certificate of Incorporation of Targhee Ski Corp. *3.24 Bylaws of Targhee Ski Corp. *4.1 Indenture dated as of March 18, 1997 by and among Booth Creek Ski Holdings, Inc., as Issuer, Trimont Land Company, Sierra-at-Tahoe, Inc., Bear Mountain, Inc., Waterville Valley Ski Resort, Inc., Mount Cranmore Ski Resort, Inc., Booth Creek Ski Acquisition Corp., Ski Lifts, Inc., Grand Targhee Incorporated, B-V Corporation, Targhee Company and Targhee Ski Corp., as Subsidiary Guarantors, and Marine Midland Bank, as trustee (including the form of 12 1/2% Senior Note due 2007 and the form of Guarantee). 44 46 *4.2 Supplemental Indenture No. 1 to Indenture dated as of April 25, 1997 by and among Booth Creek Ski Holdings, Inc., as Issuer, Trimont Land Company, Sierra-at-Tahoe, Inc., Bear Mountain, Inc., Waterville Valley Ski Resort, Inc., Mount Cranmore Ski Resort, Inc., Booth Creek Ski Acquisition Corp., Ski Lifts,Inc., Grand Targhee Incorporated, B-V Corporation, Targhee Company and Targhee Ski Corp., as Subsidiary Guarantors, and Marine Midland Bank, as trustee. *4.3 Registration Rights Agreement dated as of March 18, 1997 by and among Booth Creek Ski Holdings, Inc., as Issuer, Trimont Land Company, Sierra-at-Tahoe, Inc., Bear Mountain, Inc., Waterville Valley Ski Resort, Inc., Mount Cranmore Ski Resort, Inc., Booth Creek Ski Acquisition Corp., Ski Lifts, Inc., Grand Targhee Incorporated, B-V Corporation, Targhee Company and Targhee Ski Corp., as Subsidiary Guarantors, and CIBC Wood Gundy Securities Corp. *4.4 Securities Purchase Agreement dated as of March 13, 1997, by and among Booth Creek Ski Holdings, Inc., Trimont Land Company, Sierra-at-Tahoe, Inc., Bear Mountain, Inc., Waterville Valley Ski Resort, Inc., Mount Cranmore Ski Resort, Inc., Booth Creek Ski Acquisition Corp. and Ski Lifts, Inc. and CIBC Wood Gundy Securities Corp. *10.1 Amended and Restated Credit Agreement dated as of March 18, 1997 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 and The First National Bank of Boston. *10.2 Purchase and Sale Agreement dated as of August 30, 1996 by and between Waterville Valley Ski Area, Ltd., Cranmore, Inc., American Skiing Company and Booth Creek Ski Acquisition Corp. *10.3 Subordinated Promissory Note dated November 27, 1996 issued by Booth Creek Ski Acquisition Corp.,Waterville Valley Ski Resort, Inc. and Mount Cranmore Ski Resort, Inc. to American Skiing Company. *10.4 Stock Purchase and Indemnification Agreement dated as of November 26, 1996 among Booth Creek Ski Holdings, Inc., Fibreboard Corporation, Trimont Land Company, Sierra-at-Tahoe, Inc. and Bear Mountain, Inc. *10.5 Escrow Agreement dated December 3, 1996 by and among Fibreboard Corporation, Booth Creek Ski Holdings, Inc. and First Trust of California. *10.6 Purchase Agreement dated February 11, 1997 among Booth Creek Ski Holdings, Inc., Grand Targhee Incorporated, Moritz O. Bergmeyer and Carol Mann Bergmeyer. *10.7 Promissory Note dated February 11, 1997 issued by Grand Targhee Incorporated to Booth Creek Ski Holdings, Inc. *10.8 Stock Purchase Agreement dated as of February 21, 1997 by and between Booth Creek Ski Holdings, Inc., William W. Moffett, Jr., David R. Moffett, Laurie M. Padden, individually and as custodian for Christina Padden, Jennifer Padden and Mary M. Padden, Stephen R. Moffett, Katharine E. Moffett, Frances J. DeBruler, individually and as representative of the Estate of Jean S. DeBruler, Jr., deceased, and Peggy Westerlund, and David R. Moffett, as representative. *10.9 Preferred Stock Purchase Agreement dated as of February 21, 1997 by and between DRE, L.L.C., William W. Moffett, Jr., David R. Moffett, Laurie M. Padden, individually and as custodian for Christina Padden, Jennifer Padden and Mary M. Padden, Stephen R. Moffett, Katharine E. Moffett, Frances J. DeBruler, individually and as representative of the Estate of Jean S. DeBruler, Jr., deceased, and Peggy Westerlund and David R. Moffett, as representative. *10.10 Management Agreement dated as of November 27, 1996 by and between Booth Creek Ski Holdings, Inc. and Booth Creek, Inc. 45 47 *10.11 Letter Agreement dated December 3, 1996 between Booth Creek Ski Holdings, Inc. and Nanci N. Northway. *10.12 Ski Area Term Special Use Permit No. 4002/01 issued by the United States Forest Service to Waterville Valley Ski Resort, Inc. *10.13 Ski Area Term Special Use Permit No. 5123/01 issued by the United States Forest Service to Bear Mountain, Inc. *10.14 Ski Area Term Special Use Permit No. 4186/01 issued by the United States Forest Service to Sierra-at-Tahoe, Inc. *10.15 Ski Area Term Special Use Permit No. 4033/01 issued by the United States Forest Service to Grand Targhee Incorporated. *10.16 Ski Area Term Special Use Permit No. 4127/09 issued by the United States Forest Service to Ski Lifts, Inc. *10.17 Annual Special Use Permit Nos. 4127/19 & 4127/19 issued by the United States Forest Service to Ski Lifts, Inc. *10.18 Amendment No. 1 to Credit Agreement as amended and restated dated as of June 15, 1997 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 and BankBoston, N.A. **10.19 Amendment No. 2 to Credit Agreement as amended and restated dated as of July 30, 1997 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 and BankBoston, N.A. 10.20 Amendment No. 3 to Credit Agreement as amended and restated dated as of October 27, 1997 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 and BankBoston, N.A. 10.21 Employment Agreement dated May 5, 1997 by and between Booth Creek Ski Holdings, Inc. and Timothy M. Petrick. 10.22 Stock Option Agreement dated as of October 1, 1997 between Booth Creek Ski Group, Inc. and Timothy M. Petrick. 10.23 Waiver Agreement dated January 27, 1998 to Credit Agreement dated as of December 3, 1996, as amended and restated as of March 18, 1997, as further amended as of June 15, 1997, July 30, 1997 and October 27, 1997 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 and BankBoston, N.A. 10.24 Waiver Agreement dated January 28, 1998 to Credit Agreement dated as of December 3, 1996, as amended and restated as of March 18, 1997, as further amended as of June 15, 1997, July 30, 1997 and October 27, 1997 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 and BankBoston, N.A. *21.1 Subsidiaries of the Registrants. 27.1 Financial Data Schedule. 46 48 - ------------------------- * Filed with Registration Statement No. 333-26091 and incorporated herein by reference. ** Filed with the Company's Quarterly Report on Form 10-Q for the Quarterly Period Ended August 1, 1997 and incorporated herein by reference. (b) Reports on Form 8-K: None. (c) Exhibits: See (a)(3) above for a listing of Exhibits filed as a part of this Report. (d) Additional Financial Statement Schedules: None. SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT Neither an annual report covering the Registrant's last fiscal year nor proxy materials with respect to any annual or other meeting of security holders have been sent to security holders. 47 49 BOOTH CREEK SKI HOLDINGS, INC. ANNUAL REPORT ON FORM 10-K INDEX OF FINANCIAL STATEMENTS
PAGE ---- BOOTH CREEK SKI HOLDINGS, INC. Financial Statements -- October 31, 1997 and 1996 Report of Independent Auditors.............................. F-2 Consolidated Balance Sheets................................. F-3 Consolidated Statement of Operations........................ F-4 Consolidated Statement of Shareholder's Equity.............. F-5 Consolidated Statement of Cash Flows........................ F-6 Notes to Consolidated Financial Statements.................. F-7 THE RESORT GROUP OF FIBREBOARD CORPORATION Combined Financial Statements -- December 2, 1996 Report of Independent Auditors.............................. F-18 Combined Balance Sheet...................................... F-19 Combined Statement of Operations............................ F-20 Combined Statement of Cash Flows............................ F-21 Notes to Combined Financial Statements...................... F-22 Combined Financial Statements -- October 31, 1996 and October 31, 1995 (unaudited) and December 31, 1995 and 1994 Report of Independent Public Accountants.................... F-27 Combined Balance Sheets..................................... F-28 Combined Statements of Operations........................... F-29 Combined Statements of Cash Flows........................... F-30 Notes to Financial Statements............................... F-31 WATERVILLE VALLEY SKI AREA LTD. (A SUBSIDIARY OF AMERICAN SKIING COMPANY) Financial Statements -- November 26, 1996 and October 27, 1996 Report of Independent Auditors.............................. F-40 Balance Sheets.............................................. F-41 Statements of Operations and Accumulated Deficit............ F-42 Statements of Cash Flows.................................... F-43 Notes to Financial Statements............................... F-44 WATERVILLE VALLEY SKI AREA LTD. (A SUBSIDIARY OF S-K-I LIMITED) Financial Statements -- June 30, 1996 and October 29, 1995 Report of Independent Auditors.............................. F-50 Balance Sheets.............................................. F-51 Statements of Operations and Retained Earnings (Accumulated Deficit).................................................. F-52 Statements of Cash Flows.................................... F-53 Notes to Financial Statements............................... F-54 SKI LIFTS, INC. Financial Statements -- January 15, 1997 Report of Independent Auditors.............................. F-59 Balance Sheet............................................... F-60 Statement of Operations and Retained Earnings............... F-61 Statement of Cash Flows..................................... F-62 Notes to Financial Statements............................... F-63 Financial Statements -- September 30, 1996 and 1995 Report of Independent Accountants........................... F-68 Balance Sheets.............................................. F-69 Statements of Operations and Retained Earnings.............. F-70 Statements of Cash Flows.................................... F-71 Notes to Financial Statements............................... F-72 GRAND TARGHEE INCORPORATED Financial Statements -- March 18, 1997 Report of Independent Auditors.............................. F-78 Balance Sheet............................................... F-79 Statement of Operations and Retained Earnings............... F-80 Statement of Cash Flows..................................... F-81 Notes to Financial Statements............................... F-82 Financial Statements -- May 31, 1996 and 1995 Independent Auditors' Report................................ F-87 Balance Sheets.............................................. F-88 Statements of Operations.................................... F-89 Statements of Changes in Stockholder's Equity............... F-90 Statements of Cash Flows.................................... F-91 Notes to Financial Statements............................... F-92
F-1 50 REPORT OF INDEPENDENT AUDITORS Booth Creek Ski Holdings, Inc. We have audited the accompanying consolidated balance sheets of Booth Creek Ski Holdings, Inc. as of October 31, 1997 and 1996, and the related consolidated statements of operations, shareholder's equity, and cash flows for the year ended October 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Booth Creek Ski Holdings, Inc. at October 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for the year ended October 31, 1997 in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Sacramento, California January 16, 1998 F-2 51 BOOTH CREEK SKI HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
OCTOBER 31, ------------------ 1997 1996 ---- ---- ASSETS Current assets: Cash...................................................... $ 462 $-- Accounts receivable, net of allowance of $35.............. 1,528 -- Inventories............................................... 3,059 -- Prepaid expenses and other current assets................. 1,396 -- -------- --- Total current assets........................................ 6,445 -- Property and equipment, net................................. 123,154 -- Real estate held for development and sale................... 11,335 -- Deferred financing costs, net of accumulated amortization of $782...................................................... 6,229 -- Timber rights and other assets.............................. 7,402 -- Goodwill, net of accumulated amortization of $1,953......... 31,851 -- -------- --- Total assets................................................ $186,416 $-- ======== === LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities: Senior credit facility.................................... $ 15,000 $-- Current portion of long-term debt......................... 947 -- Accounts payable and accrued liabilities.................. 17,132 -- -------- --- Total current liabilities................................... 33,079 -- Long-term debt.............................................. 120,380 -- Other long-term liabilities................................. 425 -- Commitments and contingencies Preferred stock of subsidiary; 28,000 shares authorized, 25,000 shares issued and outstanding; liquidation preference and redemption value of $3,354 at October 31, 1997.......................................... 3,125 -- Shareholder's equity: Common stock, $.01 par value; 1,000 shares authorized, issued and outstanding................................. -- -- Additional paid-in capital................................ 46,500 2 Note receivable from shareholder.......................... -- (2) Accumulated deficit....................................... (17,093) -- -------- --- Total shareholder's equity.................................. 29,407 -- -------- --- Total liabilities and shareholder's equity.................. $186,416 $-- ======== ===
See accompanying notes. F-3 52 BOOTH CREEK SKI HOLDINGS, INC. CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED OCTOBER 31, 1997 (IN THOUSANDS) Revenue: Resort operations......................................... $ 68,136 Real estate and other..................................... 3,671 -------- Total revenue............................................... 71,807 Operating expenses: Cost of sales -- resort operations........................ 44,624 Cost of sales -- real estate and other.................... 2,799 Depreciation and depletion................................ 9,728 Amortization of goodwill.................................. 1,953 Selling, general and administrative expense............... 11,048 Management fees and corporate expenses.................... 2,671 -------- Total operating expenses.................................... 72,823 -------- Operating loss.............................................. (1,016) Other income (expense): Interest expense.......................................... (13,269) Amortization of deferred financing costs.................. (1,809) Interest and other income................................. 166 -------- Other income (expense), net............................... (14,912) -------- Loss before income taxes, minority interest and extraordinary item........................................ (15,928) Income tax benefit.......................................... 1,728 -------- Loss before minority interest and extraordinary item........ (14,200) Minority interest........................................... (229) -------- Loss before extraordinary item.............................. (14,429) Extraordinary loss on early retirement of debt.............. (2,664) -------- Net loss.................................................... $(17,093) ========
See accompanying notes. F-4 53 BOOTH CREEK SKI HOLDINGS, INC. CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY YEAR ENDED OCTOBER 31, 1997 (IN THOUSANDS)
NOTE COMMON STOCK ADDITIONAL RECEIVABLE ---------------- PAID-IN FROM ACCUMULATED SHARES AMOUNT CAPITAL SHAREHOLDER DEFICIT TOTAL ------ ------ ---------- ----------- ----------- ----- Initial capitalization and balance at October 31, 1996............... 1,000 $ -- $ 2 $(2) $ -- $ -- Payment received on shareholder note receivable........................ -- -- -- 2 -- 2 Capital contributions............... -- -- 46,498 -- -- 46,498 Net loss............................ -- -- -- -- (17,093) (17,093) ----- ---- ------- --- -------- -------- Balance at October 31, 1997......... 1,000 $ -- $46,500 $-- $(17,093) $ 29,407 ===== ==== ======= === ======== ========
See accompanying notes. F-5 54 BOOTH CREEK SKI HOLDINGS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS YEAR ENDED OCTOBER 31, 1997 (IN THOUSANDS) Cash flows from operating activities: Net loss.................................................... $ (17,093) Adjustment to reconcile net loss to net cash provided by operating activities: Depreciation and depletion................................ 9,728 Amortization of goodwill.................................. 1,953 Noncash cost of real estate sales......................... 2,237 Amortization of deferred financing costs.................. 1,809 Deferred income tax benefit............................... (1,548) Minority interest......................................... 229 Extraordinary loss on early retirement of debt............ 2,664 Changes in operating assets and liabilities: Accounts receivable.................................... (914) Inventories............................................ 1,115 Prepaid expenses and other current assets.............. 303 Accounts payable and accrued liabilities............... 1,003 Other long-term liabilities............................ 66 --------- Net cash provided by operating activities................... 1,552 Cash flows from investing activities: Acquisition of ski resorts, net of cash acquired.......... (142,028) Capital expenditures for property and equipment........... (9,459) Capital expenditures for real estate held for development and sale............................................... (72) Other assets.............................................. (1,126) --------- Net cash used in investing activities....................... (152,685) Cash flows from financing activities: Borrowings under senior credit facility................... 15,000 Proceeds of long-term debt................................ 216,000 Principal payments of long-term debt...................... (114,827) Deferred financing costs.................................. (10,703) Purchase of preferred stock of subsidiary................. (375) Payment received on shareholder note receivable........... 2 Capital contributions..................................... 46,498 --------- Net cash provided by financing activities................. 151,595 --------- Increase in cash.......................................... 462 Cash at beginning of period............................... -- --------- Cash at end of period..................................... $ 462 =========
See accompanying notes. F-6 55 BOOTH CREEK SKI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 1997 AND 1996 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" -- formerly Snoqualmie Pass) and Grand Targhee, as described more fully in Note 2. The consolidated financial statements include the accounts of Booth Creek and its subsidiaries (collectively referred to as the "Company"), all of which are wholly-owned except for Ski Lifts, Inc. (the owner and operator of the Summit) as discussed in Note 2. All significant intercompany transactions and balances have been eliminated. Booth Creek is a wholly-owned subsidiary of Booth Creek Ski Group, Inc. ("Parent"). REPORTING PERIODS The Company's reporting periods end on the Friday closest to the end of each month. BUSINESS AND PRINCIPAL MARKETS Northstar is a year-round destination resort including ski and golf facilities. Sierra is a day ski area. Both Northstar and Sierra are located near Lake Tahoe, California. Bear Mountain is a day ski area located approximately two hours from Los Angeles, California. Waterville Valley, a destination resort, and Mt. Cranmore, a day ski area, are located in New Hampshire. The Summit is located in Northwest Washington and is a day ski area. Grand Targhee is a destination ski resort located in Wyoming. Operations are highly seasonal at all locations with the majority of revenues realized during the ski season from late November through early April. The length of the ski season and the profitability of operations are significantly impacted by weather conditions. Although Northstar, Bear Mountain, Waterville Valley and Mt. Cranmore have snowmaking capacity to mitigate some of the effects of adverse weather conditions, abnormally warm weather or lack of adequate snowfall can materially affect revenues. Sierra, the Summit and Grand Targhee lack significant snowmaking capability but generally benefit from higher annual snowfall. Other operational risks and uncertainties that face the Company include competitive pressures affecting the number of skier visits and ticket prices; the success of marketing efforts to maintain and increase skier visits; the possibility of equipment failure; and continued access to water supplies for snowmaking. CASH Included in cash at October 31, 1997 is restricted cash of $344,000 relating to advance deposits and rental fees due to property owners for lodging and property rentals. F-7 56 BOOTH CREEK SKI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1. ORGANIZATION, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) INVENTORIES Inventories are valued at the lower of cost (first-in, first-out) or market. The components of inventories at October 31, 1997 are as follows:
(IN THOUSANDS) Retail products............................................. $2,560 Supplies.................................................... 314 Food and beverage........................................... 185 ------ $3,059 ======
PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is provided on the straight-line method based upon the estimated service lives, which are as follows: Land improvements........................................... 20 years Buildings and improvements.................................. 20 years Lift equipment.............................................. 15 years Other machinery and equipment............................... 3 to 15 years
REAL ESTATE ACTIVITIES The Company capitalizes as real estate held for development and sale the original acquisition cost (or appraised value in connection with purchase business combinations), direct construction and development costs, and other related costs. Property taxes, insurance and interest incurred on costs related to real estate under development are capitalized during periods in which activities necessary to get the property ready for its intended use are in progress. Land costs and other common costs incurred prior to construction are allocated to each land parcel benefited. Construction related costs are allocated to individual units in each development phase using the relative sales value method. Selling expenses are charged against income in the period incurred. Sales and profits on real estate sales are recognized using the full accrual method at the point that the Company's receivables from land sales are deemed collectible and the Company has no significant remaining obligations for construction or development. If such conditions are not met, the recognition of all or part of the sales and profit is postponed. LONG-LIVED ASSETS The Company evaluates potential impairment of long-lived assets and long-lived assets to be disposed of in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"). SFAS No. 121 establishes procedures for review of recoverability, and measurement of impairment if necessary, of long-lived assets, goodwill and certain identifiable intangibles held and used by an entity. SFAS No. 121 requires that those assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. SFAS No. 121 also requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less estimated selling costs. As of October 31, 1997, management believes that there has not been any impairment of the Company's long-lived assets or goodwill. F-8 57 BOOTH CREEK SKI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1. ORGANIZATION, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of amounts outstanding under the Company's Senior Credit Facility approximates book value, as the interest rate on such debt generally varies with changes in market interest rates. The fair value of the Company's Senior Notes was approximately $114 million at October 31, 1997, which is based on the market price of such debt. REVENUE RECOGNITION Revenues are generally recognized as services are provided and products are sold. Sales of season passes are initially deferred in unearned income and recognized ratably over the ski season. AMORTIZATION The excess of the purchase price over the fair values of the net assets acquired (goodwill) is being amortized using the straight-line method over a period of 15 years. Deferred financing costs are being amortized over the lives of the related obligations. ADVERTISING COSTS The cost of advertisements is expensed when the advertisement is initially released. The cost of professional services for advertisements, sales campaigns, promotion, and public relations is expensed when the services are rendered. The cost of brochures is expensed over the ski season. Advertising expenses for the year ended October 31, 1997 were $1,983,000. INCOME TAXES Deferred income taxes are provided for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company is included in the federal and state tax returns of Parent. The provision for federal and state income tax is computed as if the Company filed separate consolidated tax returns. 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. 2. ACQUISITIONS As described below, Booth Creek consummated the New Hampshire, California, Summit and Grand Targhee acquisitions prior to October 31, 1997. These acquisitions have been accounted for using the purchase method of accounting. The results of operations of the Waterville Valley, Mt. Cranmore, Northstar, Sierra, Bear Mountain, Summit and Grand Targhee resorts have been included in the accompanying statement of operations since the effective dates of such acquisitions. THE NEW HAMPSHIRE ACQUISITIONS On November 27, 1996, Booth Creek Ski Acquisition Corp., a wholly-owned subsidiary of Booth Creek, purchased the assets of the Waterville Valley and Mt. Cranmore resorts from subsidiaries of American Skiing Company ("ASC") for an aggregate purchase price of $17.5 million. The purchase price was paid with $14.75 F-9 58 BOOTH CREEK SKI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. ACQUISITIONS -- (CONTINUED) million in cash, before giving effect to normal working capital adjustments for current assets acquired and current liabilities assumed, and the $2.75 million ASC Seller Note (Note 5). THE CALIFORNIA ACQUISITIONS On December 3, 1996, Booth Creek purchased from Fibreboard Corporation all of the issued and outstanding capital stock of Trimont Land Company, which operates Northstar, Sierra-at-Tahoe, Inc., which operates Sierra, and Bear Mountain, Inc., which operates Bear Mountain. The aggregate purchase price was $121.5 million in cash, before giving effect to normal working capital adjustments for current assets acquired and current liabilities assumed. THE SUMMIT ACQUISITION Effective January 15, 1997, Booth Creek purchased all of the issued and outstanding common stock of Ski Lifts, Inc. ("Ski Lifts"), the owner and operator of the ski resort assets of the Summit (formerly Snoqualmie Pass), for an aggregate purchase price of approximately $14 million, which included the assumption of approximately $3.6 million of indebtedness, the issuance by Ski Lifts of the approximately $9.8 million Snoqualmie Seller Note (Note 5), and other obligations to the selling shareholders of approximately $600,000. In connection with the consummation of the Snoqualmie acquisition, Ski Lifts transferred approximately 71 acres of owned real estate held for development purposes and related buildings into a Delaware limited liability company (the "Real Estate LLC"), of which Ski Lifts is a member and 99% equity interest holder and Booth Creek is the other member and 1% equity interest holder. In addition, Ski Lifts granted the Real Estate LLC an option (the "Real Estate Option") to purchase an additional 14 acres of developmental real estate for nominal consideration. Ski Lifts also issued 28,000 shares of non-voting preferred stock (the "Ski Lifts Preferred Stock") to its prior owners having an aggregate liquidation preference equal to $3.5 million, the aggregate estimated fair market value of the real estate transferred to the Real Estate LLC and the real estate subject to the Real Estate Option. Concurrently with these transactions, the Real Estate LLC entered into an agreement to purchase (the "Preferred Stock Purchase Agreement") the Ski Lifts Preferred Stock, on a quarterly basis over the five years following the date of the Summit Acquisition, at a purchase price equal to the liquidation preference thereof plus accrued dividends to the date of purchase. Through October 31, 1997, the Company has paid the first three quarterly payments under the Preferred Stock Purchase Agreement aggregating $375,000. The Real Estate LLC's obligations under the Preferred Stock Purchase Agreement are secured by a first priority lien on the developmental real estate held by the Real Estate LLC and substantially all of its other assets. The Ski Lifts Preferred Stock provides for a 9% cumulative dividend and is redeemable at the option of Ski Lifts without premium. In addition, pursuant to the terms of the Ski Lifts Preferred Stock, the holders thereof have no redemption rights and are entitled to receive dividend payments only when and if declared by the board of directors of Ski Lifts. The amount of cumulative preferred dividends in arrears at October 31, 1997 was $229,000 and is included in other long-term liabilities in the accompanying consolidated balance sheet. THE GRAND TARGHEE ACQUISITION On March 18, 1997, Booth Creek acquired all the issued and outstanding capital stock of Grand Targhee Incorporated, the owner of the ski resort assets of Grand Targhee, for an aggregate purchase price of approximately $7.9 million plus contingent payments of up to $2 million based on the performance of Grand Targhee through the 1998/99 ski season and additional commissions based on the number of dwelling units developed at the resort through 2012. F-10 59 BOOTH CREEK SKI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. ACQUISITIONS -- (CONTINUED) SUMMARY OF PURCHASE PRICE ALLOCATIONS Summary information regarding the purchase price allocations to the assets acquired and liabilities assumed in each of the acquisitions described above is as follows:
NEW HAMPSHIRE CALIFORNIA SUMMIT GRAND TARGHEE ACQUISITIONS ACQUISITIONS ACQUISITION ACQUISITION ------------- ------------ ----------- ------------- (IN THOUSANDS) Net working capital........... $ (714) $ (5,206) $(5,822) $ (752) Property and equipment........ 17,500 86,078 9,148 8,837 Real estate and other long-term assets............ -- 15,608 4,189 26 Goodwill...................... 1,931 22,318 9,555 -- Long-term debt................ (3,172) (796) (9,880) (80) Deferred income taxes and other long-term liabilities................. -- -- (6,682) (58) ------- -------- ------- ------ $15,545 $118,002 $ 508 $7,973 ======= ======== ======= ======
PRO FORMA FINANCIAL INFORMATION The following table represents unaudited pro forma financial information which presents the Company's consolidated results of operations for the years ended October 31, 1997 and 1996 as if the acquisitions occurred on November 1, 1995.
1997 1996 ---- ---- (IN THOUSANDS) Statement of operations data: Revenues............................................... $ 82,074 $ 82,128 Income (loss) from operations.......................... $ (5,282) $ 3,105 Net loss............................................... $(21,753) $(11,314) Other data: EBITDA................................................. $ 10,501 $ 17,909 Noncash cost of real estate and other.................. $ 2,370 $ 1,607
EBITDA represents income from operations before depreciation and amortization expense and the noncash cost of real estate sales. The pro forma information does not purport to be indicative of results that actually would have occurred had the acquisitions been made on the date indicated or of results which may occur in the future. F-11 60 BOOTH CREEK SKI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. PROPERTY AND EQUIPMENT Property and equipment consist of the following at October 31, 1997:
(IN THOUSANDS) Land and improvements....................................... $ 28,746 Buildings and improvements.................................. 34,184 Lift equipment.............................................. 32,998 Other machinery and equipment............................... 29,008 Construction in progress.................................... 7,491 -------- 132,427 Less accumulated depreciation............................... 9,273 -------- $123,154 ========
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities consist of the following at October 31, 1997:
(IN THOUSANDS) Accounts payable............................................ $ 7,618 Accrued compensation and benefits........................... 1,575 Taxes other than income..................................... 545 Unearned income and deposits................................ 3,341 Interest.................................................... 2,027 Other....................................................... 2,026 ------- $17,132 =======
5. FINANCING ARRANGEMENTS SENIOR CREDIT FACILITY The following is a summary of certain provisions of the amended and restated Credit Agreement (the Senior Credit Facility) dated as of March 18, 1997 and amended on various dates, among Booth Creek, its subsidiaries, the financial institutions party thereto and BankBoston, N.A., as administrative agent (Agent). General -- The Senior Credit Facility provides for borrowing availability of up to $20 million. The Company is required to repay all borrowings under the Senior Credit Facility on or before March 1 of each year and have no outstanding indebtedness thereunder during the two months thereafter. Borrowings under the Senior Credit Facility are collectively referred to herein as the Loans. Total borrowings outstanding under the Senior Credit Facility at October 31, 1997 were $15 million. Interest -- For purposes of calculating interest, the Loans can be, at the election of the Company, Base Rate Loans or LIBOR Rate Loans or a combination thereof. Base Rate Loans bear interest at the sum of (a) a margin of between 0% and .5%, depending on the level of consolidated EBITDA of the Company and its subsidiaries (as determined pursuant to the Senior Credit Facility), plus (b) the higher of (i) the Agents base rate or (ii) the federal funds rate plus .5%. LIBOR Rate Loans bear interest at the LIBOR rate plus a margin of between 2% and 3%, depending on the level of consolidated EBITDA. The Senior Credit Facility also requires a commitment fee of .5% based on the unused borrowing base. As of October 31, 1997, the borrowings outstanding bear interest at 9% pursuant to the Base Rate Loans option. F-12 61 BOOTH CREEK SKI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. FINANCING ARRANGEMENTS -- (CONTINUED) Repayment -- Subject to the provisions of the Senior Credit Facility, the Company may, from time to time, borrow, repay and reborrow under the Senior Credit Facility. The entire unpaid balance under the Senior Credit Facility is due and payable on March 18, 1999. Security -- Borrowings under the Senior Credit Facility are secured by (i) a pledge of the Agent for the ratable benefit of the financial institutions party to the Senior Credit Facility of all of the capital stock of Booth Creeks principal subsidiaries and (ii) a grant of a security interest in substantially all of the consolidated assets of Booth Creek and its subsidiaries (excluding the Real Estate LLC). Covenants -- The Senior Credit Facility contains financial covenants relating to the maintenance of (i) ratios of (a) financing debt to consolidated cash flow, (b) adjusted consolidated cash flow to consolidated debt service and (c) consolidated cash flow to consolidated interest expense, (ii) consolidated net worth, and (iii) consolidated cash flow. The Senior Credit Facility also contains restrictive covenants pertaining to the management and operation of Booth Creek and its subsidiaries. The covenants include, among others, significant limitations on indebtedness, guarantees, mergers, acquisitions, fundamental corporate changes, capital expenditures, asset sales, leases, investments, loans and advances, liens, dividends and other stock payments, transactions with affiliates, optional payments and modification of debt instruments and issuances of stock. LONG-TERM DEBT Long-term debt consists of the following instruments at October 31, 1997, which are described below:
(IN THOUSANDS) Senior Notes................................................ $116,000 ASC Seller Note............................................. 2,500 Other debt.................................................. 2,827 -------- 121,327 Less current portion........................................ 947 -------- $120,380 ========
Senior Notes On March 18, 1997, the Company consummated an offering (the Offering) of $110 million in senior debt securities (the Senior Notes). An additional $6 million aggregate principal amount of Senior Notes were sold by the Company on April 25, 1997. The proceeds of the Offering, along with $6.5 million in additional equity contributions of Parent and available cash on hand, were used to i) repay $90 million in bridge notes bearing interest at approximately 11%, ii) repay the $9.8 million Snoqualmie Seller Note bearing interest at 5% per annum and certain other debt assumed in connection with the Summit acquisition, iii) repay obligations relating to a $10 million intercompany note payable to Parent, iv) acquire Grand Targhee and repay certain debt assumed in connection therewith, and v) pay certain fees and expenses associated with the Offering and the Senior Credit Facility. Existing deferred financing costs at March 18, 1997 of $2,664,000 relating principally to the bridge notes repaid, were charged off in connection with the early extinguishment of debt, and have been reflected as an extraordinary item in the accompanying statement of operations. The Senior Notes mature on March 15, 2007, and bear interest at 12.5% payable semiannually on each March 15 and September 15. 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 having either assets or shareholders equity in excess of $20,000 (the F-13 62 BOOTH CREEK SKI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. FINANCING ARRANGEMENTS -- (CONTINUED) 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. 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 Creeks only non-guarantor subsidiary described in Note 2, 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 non-guarantor subsidiary because management has determined that such information is not material to investors. On August 14, 1997, Booth Creek consummated its offer to exchange (the "Exchange Offer") up to $116 million aggregate principal amount of its Series B 12.5% Senior Notes due 2007, which have been registered under the Securities Act of 1933, as amended, for a like principal amount of its previously outstanding, unregistered 12.5% Senior Notes due 2007 (the "Rule 144A Notes"). The Exchange Offer expired on August 13, 1997, on which date 100% of the outstanding Rule 144A Notes had been received by the exchange agent for the Exchange Offer. ASC Seller Note As part of the purchase price for the acquisitions of Waterville Valley and Mt. Cranmore, Booth Creek Ski Acquisition Corp., a wholly-owned subsidiary of Booth Creek, and Waterville Valley Ski Resort, Inc. and Mount Cranmore Ski Resort, Inc., wholly-owned subsidiaries of Booth Creek Ski Acquisition Corp. and the respective owners of the assets of the Waterville Valley and Mt. Cranmore resorts, jointly and severally issued a promissory note to American Skiing Company in the aggregate principal amount of $2.75 million, of which $2.5 million was outstanding at October 31, 1997. The ASC Seller Note requires annual principal payments at an initial level of $100,000 per year beginning January 31, 1998 and increasing to $350,000 by January 31, 2003, with the remaining principal balance of $1,150,000 due on June 30, 2004. The ASC Seller Note bears interest at 12% per annum payable semi-annually on each June 30 and December 31. Other Debt Other debt of $2,827,000 at October 31, 1997 consists of various capital lease obligations, notes payables and improvement bond obligations. During the year ended October 31, 1997, the Company paid cash for interest costs of $11,243,000. F-14 63 BOOTH CREEK SKI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS The Company leases certain machinery, equipment and facilities under operating leases. Aggregate future minimum lease payments as of October 31, 1997 are as follows:
YEAR ENDING OCTOBER 31 ---------- (IN THOUSANDS) 1998........................................................ $2,036 1999........................................................ 1,201 2000........................................................ 429 2001........................................................ 326 2002........................................................ 162 Thereafter.................................................. 425 ------ $4,579 ======
Total rent expense for all operating leases amounted to $2,882,000 for the year ended October 31, 1997. In addition, the Company leases property from the U.S. Forest Service under Special Use Permits for all or certain portions of the operations of Sierra, Bear Mountain, Waterville Valley, the Summit and Grand Targhee. These leases are effective through 2008, 2020, 2034, 2032 and 2034, respectively. Lease payments are based on a percentage of revenues, and were $665,000 for the year ended October 31, 1997. OTHER COMMITMENTS Commitments for future capital expenditures through 1999 totaled approximately $3.5 million at October 31, 1997. In September 1997, the Company acquired a two year land purchase option for $500,000. The land purchase option permits the Company to acquire certain land for additional consideration of approximately $3.2 million. If the land purchase option is not exercised due to certain events, $250,000 of the option price is refundable. LITIGATION The nature of the ski industry includes the risk of skier injuries. Generally, the Company has insurance to cover potential claims; in some cases the amounts of the claims may be substantial. The Company is also involved in a number of other claims arising from its operations. Management, in consultation with legal counsel, believes resolution of these claims will not have a material adverse impact on the Company's consolidated financial condition or results of operations. PLEDGE OF STOCK The stock of the Company is pledged to secure $30 million of indebtedness of the Parent. F-15 64 BOOTH CREEK SKI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. INCOME TAXES The income tax benefit (provision) for the year ended October 31, 1997 consists of the following:
(IN THOUSANDS) Current: Federal................................................... $ 200 State..................................................... (20) ------ 180 ------ Deferred: Federal................................................... 1,442 State..................................................... 106 ------ 1,548 ------ $1,728 ======
The difference between the statutory federal income tax rate and the effective tax rate for the year ended October 31, 1997 is attributable to the following:
(IN THOUSANDS) Tax benefit computed at federal statutory rate of 35% of pre-tax loss.............................................. $ 5,575 Change in valuation allowance............................... (3,691) Other, net.................................................. (156) ------- $ 1,728 =======
As all of the income tax benefit for the year ended October 31, 1997 was attributable to the losses from continuing operations, none of the benefit was allocated to the extraordinary loss on early retirement of debt (Note 5). Accordingly, the extraordinary loss increased the Company's net operating losses by $2,664,000 and the valuation allowance by $972,000. At October 31, 1997, the Company has a net operating loss carryforward of approximately $16 million for federal income tax reporting purposes, which expires in 2012. Significant components of the Company's deferred tax assets and liabilities as of October 31, 1997 are as follows:
(IN THOUSANDS) Deferred tax assets: Accruals and reserves..................................... $ 754 Alternative minimum tax credit carryforwards.............. 130 Net operating loss carryforwards.......................... 5,909 ------- Total deferred tax assets.............................. 6,793 Deferred tax liabilities: Property and equipment.................................... (2,000) ------- Total deferred tax liabilities............................ (2,000) ------- Net deferred tax assets..................................... 4,793 Valuation allowance......................................... (4,793) ------- Net deferred tax assets reflected in the accompanying consolidated balance sheet................................ $ -- =======
Based on preliminary purchase price allocations for the Company's acquisitions of the resorts as described in Note 2, deferred tax liabilities of approximately $4.4 million were recorded in the opening balance sheets. F-16 65 BOOTH CREEK SKI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. INCOME TAXES -- (CONTINUED) This resulted in an expected income tax benefit rate of approximately 25%, which was used by the Company in preparing its financial statements through the third quarter of 1997. Final purchase allocations, primarily for the Summit acquisition, resulted in less value being assigned to fixed assets, more to goodwill and a corresponding reduction in the original deferred tax liabilities. Accordingly, the actual income tax benefit rate for the year ended October 31, 1997 was 10.8%, and was adjusted for in the fourth quarter on a catch-up basis as a change in estimate. 8. MANAGEMENT AGREEMENT AND RELATED PARTY TRANSACTIONS Booth Creek, Inc. (the "Management Company") provides management services to Booth Creek, the Parent and Booth Creek's subsidiaries pursuant to the Management Agreement dated November 27, 1996 (the "Management Agreement") between Booth Creek and the Management Company. The Management Company provides Booth Creek, the Parent and Booth Creeks subsidiaries with financial advice with respect to, among other matters, cash management, accounting and data processing systems and procedures, budgeting, equipment purchases, business forecasts, treasury functions and investor relations. The Management Company also provides general supervision and management advice concerning tax, legal and corporate finance matters, administration and operation, personnel matters, business insurance and the employment of consultants, contractors and agents. Under the terms of the Management Agreement, the Company provides customary indemnification, reimburses certain costs and pays the Management Company an annual management fee of $350,000 plus an operating bonus, not to exceed $400,000, equal to 2.5% of the excess of consolidated EBITDA (as defined in the Indenture) for such year over $25 million. The obligation of the Company to make payments under the Management Agreement is subject to restrictions under the Indenture and the Senior Credit Facility. Management fees during the year ended October 31, 1997 were $350,000. Since the formation of the Company, the Management Company and certain of its affiliates have made advances and deposits of approximately $1,400,000 through October 31, 1997, and have incurred expenses of approximately $1,000,000 through October 31, 1997, in connection with certain of the acquisitions. All of these costs were later reimbursed by the Company pursuant to the Management Agreement. At October 31, 1997, the Company had a receivable of $331,000 from Parent, which is included in other current assets in the accompanying consolidated balance sheet. 9. EMPLOYEE BENEFIT PLAN The Company maintains a defined contribution retirement plan (the Plan), qualified under Section 401 (k) of the Internal Revenue Code, for certain eligible employees. Pursuant to the Plan, eligible employees may contribute a portion of their compensation, subject to a maximum amount per year as specified by law. The Company provides a matching contribution based on specified percentages of amounts contributed by participants. The Company's contribution expense for the year ended October 31, 1997 was $215,000. F-17 66 REPORT OF INDEPENDENT AUDITORS Fibreboard Corporation We have audited the accompanying combined balance sheet of The Resort Group of Fibreboard Corporation (wholly-owned subsidiaries of Fibreboard Corporation) as of December 2, 1996, and the related combined statements of operations and cash flows for the period from November 1, 1996 to December 2, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Resort Group of Fibreboard Corporation at December 2, 1996, and the results of its operations and its cash flows for the period from November 1, 1996 to December 2, 1996, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Milwaukee, Wisconsin September 30, 1997 F-18 67 THE RESORT GROUP OF FIBREBOARD CORPORATION (WHOLLY-OWNED SUBSIDIARIES OF FIBREBOARD CORPORATION) COMBINED BALANCE SHEET DECEMBER 2, 1996 (DOLLAR AMOUNTS IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents................................. $ 2,232 Accounts receivable, net of allowance for doubtful accounts of $10........................................ 661 Current portion of notes receivable....................... 343 Inventories............................................... 2,910 Prepaid expenses.......................................... 987 Current portion of real estate held for resale............ 1,554 ------- Total current assets........................................ 8,687 Property and equipment: Land and improvements..................................... 26,491 Buildings................................................. 15,479 Machinery and equipment................................... 44,838 Construction in progress.................................. 3,557 ------- 90,365 Less accumulated depreciation............................. 26,461 ------- Property and equipment, net............................... 63,904 Timber rights, net of accumulated depletion of $16.......... 1,484 Notes receivable, net of current portion.................... 1,260 Real estate held for resale, net of current portion......... 726 Other assets................................................ 1,258 ------- Total assets................................................ $77,319 ======= LIABILITIES AND NET ASSETS Current liabilities: Accounts payable and accrued liabilities.................. $12,962 Intercompany payable to Fibreboard Corporation............ 39,829 ------- Total current liabilities................................... 52,791 Commitments and contingencies (Notes 8 and 9) Net assets.................................................. 24,528 ------- Total liabilities and net assets............................ $77,319 =======
See accompanying notes. F-19 68 THE RESORT GROUP OF FIBREBOARD CORPORATION (WHOLLY-OWNED SUBSIDIARIES OF FIBREBOARD CORPORATION) COMBINED STATEMENT OF OPERATIONS FOR THE PERIOD FROM NOVEMBER 1, 1996 TO DECEMBER 2, 1996 (DOLLAR AMOUNTS IN THOUSANDS) Revenue: Resort operations......................................... $ 1,395 Real estate and other..................................... 304 ------- Total revenue............................................... 1,699 Cost of sales: Resort operations......................................... 2,890 Real estate and other..................................... 161 ------- Total cost of sales......................................... 3,051 ------- Gross margin................................................ (1,352) Sales, general and administrative expense................... 1,766 Management fee.............................................. 70 ------- Operating loss.............................................. (3,188) Interest expense............................................ (3) Interest and other income................................... 14 Intercompany interest expense, net.......................... (217) ------- Loss before income taxes.................................... (3,394) Income tax benefit.......................................... 1,358 ------- Net loss.................................................... $(2,036) =======
See accompanying notes. F-20 69 THE RESORT GROUP OF FIBREBOARD CORPORATION (WHOLLY-OWNED SUBSIDIARIES OF FIBREBOARD CORPORATION) COMBINED STATEMENT OF CASH FLOWS FOR THE PERIOD FROM NOVEMBER 1, 1996 TO DECEMBER 2, 1996 (DOLLAR AMOUNTS IN THOUSANDS) Cash flows from operating activities: Net loss.................................................. $(2,036) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization.......................... 6 Noncash cost of real estate sales...................... 133 Net changes in operating assets and liabilities: Accounts receivable.................................. 138 Inventories.......................................... (804) Prepaid expenses..................................... (306) Accounts payable and accrued liabilities............. 8,638 ------- Net cash provided by operating activities................. 5,769 Cash flows from investing activities: Purchase of other assets.................................. (488) Capital expenditures -- property and equipment............ (5,587) Development expenditures -- real estate held for resale... (191) Principal payments received on notes receivable........... 115 ------- Net cash used in investing activities..................... (6,151) Cash flows from financing activities: Increase in intercompany payable to Fibreboard Corporation............................................ 1,115 ------- Net cash provided by financing activities................. 1,115 ------- Net increase in cash and cash equivalents................. 733 Cash and cash equivalents, beginning of period............ 1,499 ------- Cash and cash equivalents, end of period.................. $ 2,232 ======= Supplemental cash flow information: Cash paid for interest to third parties................ $ 53 ======= Noncash investing and financing activities: Exchange of old lift for new lift...................... $ 2,000 =======
See accompanying notes. F-21 70 THE RESORT GROUP OF FIBREBOARD CORPORATION (WHOLLY-OWNED SUBSIDIARIES OF FIBREBOARD CORPORATION) NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 2, 1996 1. ORGANIZATION BASIS OF PRESENTATION The Resort Group of Fibreboard Corporation (the "Resort Group") includes the following wholly-owned subsidiaries of Fibreboard Corporation, a Delaware corporation ("Fibreboard"): Trimont Land Company, d.b.a., Northstar-at-Tahoe ("Northstar"), Sierra-at-Tahoe, Inc. ("Sierra"), and Bear Mountain, Inc. ("Bear"). BUSINESS Northstar is a year-round destination resort including ski and golf facilities. Northstar also has real estate operations. Sierra is a day ski area. Both Northstar and Sierra are located near Lake Tahoe, California. Bear is a day ski area located approximately two hours from Los Angeles, California. Operations are highly seasonal at all locations with the majority of revenues realized during the ski season from late November through early April. The length of the ski season and the profitability of operations are significantly impacted by weather conditions. Although Northstar and Bear have snowmaking capacity to mitigate some of the effects of adverse weather conditions, abnormally warm weather or lack of adequate snowfall can materially affect revenues. Sierra lacks significant snowmaking capability but generally benefits from higher annual snowfall. Other operational risks and uncertainties that face the Resort Group include competitive pressures affecting the number of skier visits and ticket prices; the success of marketing efforts to maintain and increase skier visits; the possibility of equipment failure; and continued access to water supplies for snowmaking. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH AND CASH EQUIVALENTS The Resort Group participates in Fibreboard's centralized cash management system to minimize the amount of cash on deposit with banks and to maximize interest income. Cash includes cash on hand or in banks available for immediate disbursal. The Resort Group considers all highly-liquid investments with an original maturity of three months or less to be cash equivalents. Included in cash at December 2, 1996 is restricted cash of $526,000 relating to advance deposits and rental fees due to property owners for lodging and property rentals. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market. The components of inventories at December 2, 1996 are as follows (in thousands): Retail products............................................. $1,732 Supplies.................................................... 1,003 Food and beverage........................................... 175 ------ Total inventories........................................... $2,910 ======
PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is provided on the straight-line method based upon the estimated service lives of the property, ranging from 3 to 20 years. The Resort Group recognizes F-22 71 THE RESORT GROUP OF FIBREBOARD CORPORATION (WHOLLY-OWNED SUBSIDIARIES OF FIBREBOARD CORPORATION) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) depreciation expense on substantially all resort related assets over the operating ski season, which is presumed to be the months of December through March. Accordingly, depreciation expense of approximately $6,000 was recorded in the period from November 1, 1996 to December 2, 1996 and is not reflective of the Resort Group's annual depreciation charges. The Resort Group capitalizes interest on borrowed funds during construction periods. Capitalized interest is amortized over the lives of the related assets. Interest capitalized for the period from November 1, 1996 to December 2, 1996 was $80,000. ADVERTISING COSTS The cost of advertising is expensed when the advertisement is released. The cost of professional services for advertising, sales campaigns, promotions, and public relations is expensed when the services are rendered. The cost of brochures is expensed over the ski season. Advertising expenses were approximately $259,000 for the period from November 1, 1996 to December 2, 1996. INCOME TAXES The Resort Group accounts for income taxes under the liability method. Deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of the enacted tax laws. Deferred taxes primarily consist of the basis differences associated with property and equipment and certain liabilities as of December 2, 1996. The Resort Group is included in the federal and state consolidated tax returns of Fibreboard. The Resort Group computes its tax liability as if it had filed a separate tax return and accrues such amount to Fibreboard. Accordingly, all current and deferred tax balances, which are provided for in total at the statutory rate, are included in the intercompany payable to Fibreboard Corporation. The following table summarizes the differences between the statutory federal and the effective rate at December 2, 1996 (in thousands): Income taxes at statutory federal rate...................... $1,188 State taxes, net of federal tax benefit..................... 170 ------ Income tax benefit.......................................... $1,358 ======
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. REAL ESTATE OPERATIONS Revenues and profits on real estate sales at Northstar are recognized using the full accrual method at the point that the Resort Group's receivables from land sales are deemed collectible and the Resort Group has no significant remaining obligations for construction or development. If such conditions are not met, the recognition of all or part of the revenues and profit is postponed. F-23 72 THE RESORT GROUP OF FIBREBOARD CORPORATION (WHOLLY-OWNED SUBSIDIARIES OF FIBREBOARD CORPORATION) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 3. REAL ESTATE OPERATIONS -- (CONTINUED) Real estate held for resale includes the initial development expenditures (e.g., roads, sewage systems, engineering fees, and capitalized interest) for a new residential development at Northstar. The costs have been allocated to the individual lots based on the development phase in which the lot is located. The current portion of these costs relates to lots which the Resort Group expects to sell within one year. These costs are recognized as noncash cost of real estate sales upon the sale of the lot. Notes receivable relate to these real estate sales and equipment sales and consist of the following as of December 2, 1996 (in thousands): Secured notes receivable bearing interest at 9% to 10.5%; payments of interest and principal are due monthly and the notes mature between 1997 and 2011........................ $1,469 Notes receivable for sale of equipment; payable in full in April 1997................................................ 134 ------ 1,603 Less current portion........................................ 343 ------ Long-term notes receivable.................................. $1,260 ======
Future maturities of these notes are as follows (in thousands): 1996 (one month)............................................ $ 5 1997........................................................ 343 1998........................................................ 782 1999........................................................ 26 2000........................................................ 28 2001........................................................ 30 Thereafter.................................................. 389 ------ $1,603 ======
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities consist of the following at December 2, 1996 (in thousands): Accounts payable............................................ $ 8,585 Unearned income............................................. 2,020 Payroll related............................................. 1,501 Taxes other than income..................................... 622 Other....................................................... 234 ------- $12,962 =======
Unearned income relates primarily to season ski passes, coupon and ticket voucher sales and customer deposits. Revenue from season passes is recognized ratably over the ski season. 5. EMPLOYEE BENEFIT PLANS The Resort Group's employees are eligible to participate in a 401(k) plan sponsored by Fibreboard. The Resort Group contributed $35,000 as a result of these plans in the period from November 1, 1996 to December 2, 1996. Certain current and former Resort Group employees have vested benefits in Fibreboard's F-24 73 THE RESORT GROUP OF FIBREBOARD CORPORATION (WHOLLY-OWNED SUBSIDIARIES OF FIBREBOARD CORPORATION) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 5. EMPLOYEE BENEFIT PLANS -- (CONTINUED) defined benefit pension plan, which was frozen in 1993. All pension liabilities and expenses are funded directly by Fibreboard. 6. CREDIT FACILITY The Resort Group has a reducing revolving credit facility which provided for maximum borrowing of $34,043,940 at December 2, 1996. At December 2, 1996, no amounts were outstanding under the credit facility, which was subsequently terminated as a result of the sale of the Resort Group (Note 10). 7. INTERCOMPANY TRANSACTIONS The Resort Group is charged a management fee by Fibreboard based on services rendered by Fibreboard for the benefit of the Resort Group. These services primarily relate to legal, accounting, cash management, human resources, tax consultation and filings, management information systems (MIS), and overall corporate strategy and direction. The fee for the above services and others is based on a percentage of income, headcount, and estimated time spent by the legal and MIS staff on the Group's behalf. This fee was $70,000 for the period from November 1, 1996 to December 2, 1996. The Resort Group was charged interest of approximately $297,000, including $80,000 which was capitalized by the Resort Group (Note 2), by Fibreboard for the period from November 1, 1996 to December 2, 1996, based on outstanding intercompany amounts. All of the above transactions are accounted for through the intercompany payable to Fibreboard Corporation account, which totaled $39,829,335 at December 2, 1996. In addition, all excess cash is remitted to and checks are covered by Fibreboard. Allocations for payroll and related taxes, workers' compensation and income taxes are also accounted for through this account. 8. LITIGATION The nature of the ski industry includes the risk of skier injuries. The Resort Group is involved in a number of claims arising from its operations. Generally, the Resort Group has insurance to cover potential claims; in some cases the amounts of the claims may be substantial. Management, in consultation with legal counsel, believes resolution of these claims will not have a material adverse impact on the Resort Group's combined financial condition or results of operations. 9. COMMITMENTS The Resort Group leases certain machinery and equipment under operating leases. Remaining minimum lease payments for the balance of 1996 and the calendar years following are as follows (in thousands): 1996 (one month)............................................ $ 154 1997........................................................ 973 1998........................................................ 504 1999........................................................ 224 2000........................................................ 84 ------ $1,939 ======
F-25 74 THE RESORT GROUP OF FIBREBOARD CORPORATION (WHOLLY-OWNED SUBSIDIARIES OF FIBREBOARD CORPORATION) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 9. COMMITMENTS -- (CONTINUED) In addition, the Resort Group leases property from the U.S. Forest Service for Sierra and Bear. These leases are effective through 2008 and 2020, respectively. Lease payments are based on a percentage of revenues. Total rent expense for all operating leases amounted to $103,000 for the period from November 1, 1996 to December 2, 1996. 10. SUBSEQUENT EVENT On December 3, 1996, Booth Creek Ski Holdings, Inc. purchased from Fibreboard all of the issued and outstanding capital stock of the companies comprising the Resort Group. The aggregate purchase price was $121.5 million in cash, before giving effect to normal working capital adjustments for current assets acquired and current liabilities assumed. F-26 75 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Fibreboard Corporation and Mr. George N. Gillett, Jr.: We have audited the accompanying combined balance sheets of The Resort Group of Fibreboard Corporation (wholly-owned subsidiaries of Fibreboard Corporation, a Delaware corporation) as of October 31, 1996, December 31, 1995, and 1994, and the related combined statements of income, and cash flows for the ten months ended October 31, 1996, and each of the three years ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of The Resort Group of Fibreboard Corporation as of October 31, 1996, December 31, 1995, and 1994, and the results of its operations and its cash flows for the ten months ended October 31, 1996, and each of the three years ended December 31, 1995, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP San Francisco, California November 22, 1996 F-27 76 THE RESORT GROUP OF FIBREBOARD CORPORATION COMBINED BALANCE SHEETS AS OF OCTOBER 31, 1996, DECEMBER 31, 1995, AND 1994 (DOLLAR AMOUNTS IN THOUSANDS)
DECEMBER 31, OCTOBER 31, -------------------- 1996 1995 1994 ----------- ---- ---- ASSETS Current assets: Cash and cash equivalents................................. $ 1,499 $ 7,821 $ 3,319 Accounts receivable, net of allowance for doubtful accounts of $10, $12, and $11, respectively............ 799 853 537 Current portion of notes receivable....................... 350 78 24 Inventories............................................... 2,106 3,267 1,468 Prepaid expenses.......................................... 681 545 502 Current portion of real estate held for resale............ 1,416 1,105 208 -------- -------- -------- Total current assets................................... 6,851 13,669 6,058 -------- -------- -------- Property and equipment, at cost: Land and improvements..................................... 26,500 26,500 12,469 Buildings................................................. 15,309 14,914 10,907 Machinery and equipment................................... 38,415 38,923 31,820 Construction in progress.................................. 5,384 -- -- -------- -------- -------- 85,608 80,337 55,196 Less: Accumulated depreciation............................ (27,285) (23,261) (19,447) -------- -------- -------- Net property and equipment............................. 58,323 57,076 35,749 Timber rights, net of accumulated depletion of $16.......... 1,484 -- -- Notes receivable, net of current portion.................... 1,368 752 554 Real estate held for resale, net of current portion......... 806 1,162 303 Other assets................................................ 770 657 401 -------- -------- -------- Total assets........................................... $ 69,602 $ 73,316 $ 43,065 ======== ======== ======== LIABILITIES AND NET ASSETS Current liabilities: Current portion of long-term debt......................... $ -- $ -- $ 1,000 Accounts payable and accrued liabilities.................. 4,323 8,156 7,391 Intercompany payable to Fibreboard Corporation............ 38,715 41,493 4,222 -------- -------- -------- Total current liabilities.............................. 43,038 49,649 12,613 Long-term debt.............................................. -- -- 10,200 Other long-term liabilities................................. -- -- 500 -------- -------- -------- Total liabilities...................................... 43,038 49,649 23,313 Commitments (Note 11) Net assets................................................ 26,564 23,667 19,752 -------- -------- -------- Total liabilities and net assets.......................... $ 69,602 $ 73,316 $ 43,065 ======== ======== ========
The accompanying notes are an integral part of these financial statements. F-28 77 THE RESORT GROUP OF FIBREBOARD CORPORATION COMBINED STATEMENTS OF OPERATIONS FOR THE TEN MONTHS ENDED OCTOBER 31, 1996 AND 1995 AND THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993 (DOLLAR AMOUNTS IN THOUSANDS)
DECEMBER 31, OCTOBER 31, OCTOBER 31, --------------------------- 1996 1995 1995 1994 1993 ----------- ----------- ---- ---- ---- (UNAUDITED) Revenue: Resort.................................... $36,829 $32,072 $39,823 $40,810 $25,528 Real estate............................... 3,595 4,659 5,028 610 -- Timber.................................... 693 -- 185 -- -- ------- ------- ------- ------- ------- Total revenue........................ 41,117 36,731 45,036 41,420 25,528 ------- ------- ------- ------- ------- Cost of Sales: Resort.................................... 26,950 21,536 28,569 26,920 18,117 Real estate (including $1,461, $1,488, $1,618, $0, and $0, respectively, of non-cash cost of sales) (Note 3)....... 1,739 1,780 1,928 280 -- Timber.................................... 403 -- 61 -- -- ------- ------- ------- ------- ------- Total cost of sales.................. 29,092 23,316 30,558 27,200 18,117 ------- ------- ------- ------- ------- Gross margin......................... 12,025 13,415 14,478 14,220 7,411 Sales, General, and Administrative Expense................................... 5,220 4,399 5,871 5,545 4,579 Management Fee (Note 8)..................... 701 513 1,247 655 507 ------- ------- ------- ------- ------- Operating income..................... 6,104 8,503 7,360 8,020 2,325 Interest expense............................ 100 418 439 741 326 Interest and other income................... (350) (84) (106) (75) (140) Intercompany interest expense, net.......... 1,439 -- 488 -- -- ------- ------- ------- ------- ------- Income before income taxes........... 4,915 8,169 6,539 7,354 2,139 Provision for Income Taxes.................. 2,018 3,308 2,624 2,979 876 ------- ------- ------- ------- ------- Net income.................................. $ 2,897 $ 4,861 $ 3,915 $ 4,375 $ 1,263 ======= ======= ======= ======= =======
The accompanying notes are an integral part of these financial statements. F-29 78 THE RESORT GROUP OF FIBREBOARD CORPORATION COMBINED STATEMENTS OF CASH FLOWS FOR THE TEN MONTHS ENDED OCTOBER 31, 1996 AND 1995 AND THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993 (DOLLAR AMOUNTS IN THOUSANDS)
DECEMBER 31, OCTOBER 31, OCTOBER 31, ------------------------------- 1996 1995 1995 1994 1993 ----------- ----------- ---- ---- ---- (UNAUDITED) Cash flows from operating activities: Net income.............................. $ 2,897 $ 4,861 $ 3,915 $ 4,375 $ 1,263 Adjustments to reconcile to cash provided by operating activities -- Depreciation, amortization, and depletion.......................... 4,354 2,989 4,024 3,449 2,514 Non-cash cost of real estate sales (Note 3)........................... 1,461 1,488 1,618 -- -- Gain on sale of assets............... (147) (20) (342) (326) -- Changes in assets and liabilities -- Decrease (increase) in accounts receivable......................... 54 242 (286) (107) (161) Decrease (increase) in inventories... 1,161 (427) (1,427) (9) (308) (Increase) decrease in prepaid expenses........................... (136) (116) 56 106 (479) (Increase) decrease in notes receivable......................... (888) (150) (252) 116 66 (Decrease) increase in accounts payable and accrued liabilities.... (3,833) (1,361) 555 1,878 1,317 ------- -------- -------- ------- -------- Net cash provided by operating activities...................... 4,923 7,506 7,861 9,482 4,212 ------- -------- -------- ------- -------- Cash flows from investing activities: Non-cash assets of acquired operations........................... -- (20,604) (20,604) -- (13,054) Proceeds from property and equipment sales................................ 361 -- -- -- -- Development expenditures -- real estate held for resale...................... (1,297) (3,443) (3,374) (198) -- Capital expenditures -- property and equipment............................ (5,761) (3,786) (5,226) (6,199) (4,619) Capitalized interest.................... (157) -- -- -- (183) Acquisition of timber rights............ (1,500) -- -- -- -- (Increase) decrease in other assets..... (113) (488) (226) 110 (480) ------- -------- -------- ------- -------- Net cash used by investing activities...................... (8,467) (28,321) (29,430) (6,287) (18,336) ------- -------- -------- ------- -------- Cash flows from financing activities: New borrowings.......................... -- -- -- -- 15,000 Repayment of long-term debt............. -- (11,200) (11,200) (3,798) (24) (Decrease) increase in intercompany payable to Fibreboard Corporation.... (2,778) 29,259 37,271 1,134 (5,949) ------- -------- -------- ------- -------- Net cash (used) provided by financing activities............ (2,778) 18,059 26,071 (2,664) 9,027 ------- -------- -------- ------- -------- Net increase (decrease) in cash and cash equivalents............................. (6,322) (2,756) 4,502 531 (5,097) Cash and cash equivalents, beginning of year.................................... 7,821 3,319 3,319 2,788 7,885 ------- -------- -------- ------- -------- Cash and cash equivalents, end of year.... $ 1,499 $ 563 $ 7,821 $ 3,319 $ 2,788 ======= ======== ======== ======= ======== Supplemental cash flow information: Cash paid for interest to third parties.............................. $ 55 $ 590 $ 590 $ 810 $ 186 ======= ======== ======== ======= ========
The accompanying notes are an integral part of these financial statements. F-30 79 THE RESORT GROUP OF FIBREBOARD CORPORATION NOTES TO FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 1. ORGANIZATION BASIS OF PRESENTATION The Resort Group of Fibreboard Corporation (the Group) includes the following wholly-owned subsidiaries of Fibreboard Corporation, a Delaware corporation (Fibreboard): Trimont Land Company, d.b.a. Northstar-at-Tahoe (Northstar), Sierra-at-Tahoe, Inc. (Sierra), and Bear Mountain, Inc. (Bear), from the date of acquisition by Fibreboard. Although for presentation purposes the Group's fiscal years and months are on a calendar basis, these fiscal periods actually end on the last Saturday of the period. Fiscal year 1995 and 1993 each contained 52 weeks; fiscal year 1994 contained 53 weeks. The impact of the additional week in 1994 resulted in increased revenue and income as the additional week was a peak holiday week. BUSINESS Northstar is a year-round destination resort including ski and golf facilities. Northstar also has real estate operations. Sierra is a day ski area. Both Northstar and Sierra are located near Lake Tahoe, California. Bear is a day ski area located approximately two hours from Los Angeles, California. Operations are highly seasonal at all locations with more than 75% of revenues realized during the ski season from late November through early April. The length of the ski season and the profitability of operations are impacted by weather. Although Northstar and Bear have snowmaking capacity to mitigate some of the effects of adverse weather conditions, abnormally warm weather or lack of adequate snowfall can materially affect revenues. Sierra lacks significant snowmaking capability but generally benefits from higher annual snowfall. Depending on the weather and other factors, annual skier visits have varied from 300,000 to 500,000 at Northstar, 230,000 to 350,000 at Sierra and 230,000 to 360,000 at Bear over the last decade. In 1993 and 1994, Northstar's real estate activities consisted primarily of property management services for the homeowners at the resort. Beginning in 1995, the Group began also developing and selling residential lots. Other risks and uncertainties that face the resort group include competitive pressures affecting the number of skier visits and ticket prices; the success of marketing efforts to maintain and increase skier visits; the possibility of equipment failure; and continued access to water for snowmaking. On August 29, 1996, Fibreboard entered into a letter of intent to sell the assets of the Group to Booth Creek, Inc., for $121.5 million in cash. The transaction is expected to close in December 1996. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH AND CASH EQUIVALENTS The Group participates in Fibreboard's centralized cash management system to minimize the amount of cash on deposit with banks and to maximize interest income. Cash includes cash on hand or in banks available for immediate disbursal. The Group considers all highly-liquid investments with an original maturity of three months or less to be cash equivalents. F-31 80 THE RESORT GROUP OF FIBREBOARD CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) INVENTORIES Inventories are valued at the lower of cost (first-in, first-out) or market. The components of inventories are as follows:
DECEMBER 31, OCTOBER 31, --------------- 1996 1995 1994 ----------- ---- ---- Retail Products.................................... $1,186 $1,851 $ 756 Supplies........................................... 805 1,141 424 Food and Beverage.................................. 115 275 288 ------ ------ ------ Total inventories............................. $2,106 $3,267 $1,468 ====== ====== ======
PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is provided on the straight-line method based upon the estimated service lives of the property, ranging from 3 to 20 years. Annual depreciation on most property and equipment is recognized from December 1 to March 31, consistent with the ski season. Therefore, the accompanying statement of operations for the ten month period ended October 31, 1996 includes 75% of annual depreciation. Depreciation expense for the ten month period ended October 31, 1996 and the years ended December 31, 1995, 1994, and 1993 was $4,338, $4,024, $3,449, and $2,514, respectively. The Group capitalizes interest on borrowed funds during construction periods. Capitalized interest is amortized over the lives of the related assets. Interest capitalized in the ten month period ended October 31, 1996 and the years ended December 31, 1995, 1994, and 1993 was $64, $0, $0, and $183, respectively. ADVERTISING COSTS The cost of advertising is expensed when the advertisement is released. The cost of professional services for advertising, sales campaigns, promotion, and public relations is expensed when the services are rendered. The cost of brochures is expensed over the ski season. INCOME TAXES The Group accounts for income taxes according to the provisions of Statement of Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." SFAS No. 109 utilizes the liability method and deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of the enacted tax laws. Deferred taxes primarily consist of the basis differences associated with property and equipment and certain liabilities as of October 31, 1996 and December 31, 1995 and 1994. The Group is included in the federal and state consolidated tax returns of Fibreboard. The Group computes its tax liability as if it had filed a separate tax return and accrues such amount to Fibreboard. Accordingly, all current and deferred taxes, which are provided for in total at the statutory rate, are included in the intercompany payable to Fibreboard Corporation. F-32 81 THE RESORT GROUP OF FIBREBOARD CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) The following table summarizes the differences between the statutory federal and the effective rate:
DECEMBER 31, OCTOBER 31, ---------------------- 1996 1995 1994 1993 ----------- ---- ---- ---- Tax at statutory federal rate................ $1,721 $2,289 $2,574 $749 State taxes, net of federal tax benefit...... 297 395 445 129 Other........................................ -- (60) (40) (2) ------ ------ ------ ---- Tax provision................................ $2,018 $2,624 $2,979 $876 ====== ====== ====== ====
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS Certain reclassifications have been made to the prior year's financial statements to be consistent with the current year presentation. 3. REAL ESTATE OPERATIONS: Revenues and profits on the sales of real estate at Northstar are recognized in accordance with SFAS No. 66, "Accounting for the Sales of Real Estate." Real estate held for resale includes the initial development expenditures (e.g., roads, sewage systems, engineering fees, and capitalized interest) for a new residential development at Northstar. The costs have been allocated to the individual lots based on the development phase in which the lot is located. The current portion of these costs relates to lots which the Group expects to sell within one year. These costs are recognized as non-cash cost of sales upon the sale of the lot. Effective January 1, 1996, the Group capitalized interest applicable to real estate development. In the ten months ended October 31, 1996, approximately $119 was capitalized. Of that amount, $26 was applicable to lots sold in 1996. Such amount is reflected in cost of sales in the accompanying statement of operations. F-33 82 THE RESORT GROUP OF FIBREBOARD CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 3. REAL ESTATE OPERATIONS -- (CONTINUED) Notes receivable relate to these real estate sales and equipment sales and consist of the following as of October 31, 1996 and December 31, 1995 and 1994:
DECEMBER 31, OCTOBER 31, ------------ 1996 1995 1994 ----------- ---- ---- Secured notes receivable bearing interest at 7.75% to 10.5%; payments of interest and principal are due monthly and the notes mature between 1997 and 2011................................................ $1,584 $830 $578 Notes receivable for sale of equipment; payable in full in April 1997.................................. 134 -- -- ------ ---- ---- 1,718 830 578 Less: current portion................................. (350) (78) (24) ------ ---- ---- Long-term notes receivable............................ $1,368 $752 $554 ====== ==== ====
Future maturities of these notes are as follows: 1996 (two months)........................................... $ 11 1997........................................................ 454 1998........................................................ 784 1999........................................................ 29 2000........................................................ 32 2001........................................................ 34 Thereafter.................................................. 374 ------ $1,718 ======
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
DECEMBER 31, OCTOBER 31, --------------- 1996 1995 1994 ----------- ---- ---- Accounts payable.................................... $1,176 $3,396 $2,885 Payroll related..................................... 1,076 1,640 1,362 Taxes other than income............................. 945 647 541 Unearned income..................................... 880 2,177 2,153 Interest............................................ 50 5 155 Other............................................... 196 291 295 ------ ------ ------ $4,323 $8,156 $7,391 ====== ====== ======
Unearned income relates primarily to season ski passes and customer deposits. Revenue from season passes is recognized ratably over the ski season. 5. EMPLOYEE BENEFIT PLANS The Group's employees are eligible to participate in a 401(k) plan. The Group contributed $226, $288, $246, and $207 as a result of these plans in the ten month period ended October 31, 1996 and the years ended December 31, 1995, 1994, and 1993, respectively. Certain current and former group employees have vested F-34 83 THE RESORT GROUP OF FIBREBOARD CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 5. EMPLOYEE BENEFIT PLANS -- (CONTINUED) benefits in Fibreboard's defined benefit plan which was frozen in 1993. All pension liabilities and expenses are funded directly by Fibreboard. Certain Group officers and key employees participate in the Fibreboard stock option, rights, and long-term equity incentive plans. Stock options are generally granted at the then market value of Fibreboard stock. If the option price is less than the market price, compensation expense is recognized over the vesting period. Compensation related to restricted stock awards, rights, and incentive compensation is recognized over the related term of the award. 6. CREDIT FACILITY The Group's long-term debt consisted of the following as of December 31, 1994:
1994 ---- Reducing revolving credit facility, interest at LIBOR plus 1.0% to 1.375%, secured by the assets of the Group........ $ 6,700 Term loan, interest at prime plus 0.5%, secured by the assets of Northstar....................................... 4,500 ------- 11,200 Less current portion........................................ (1,000) ------- $10,200 =======
The group has a reducing revolving credit facility which provides for maximum borrowings of $34,686. Maximum availability reduces to $28,657 on April 30, 1997, $22,628 on April 30, 1998, and $16,600 on April 30, 1999, with any remaining outstanding amounts due on May 31, 2000. Borrowings against the line are secured by all of the stock and assets of the Group. As of October 31, 1996, no amounts were borrowed against this facility. The Company pays a fee of 0.375% of the unused amount; such fees were $81, $85, $33, and $9 for the ten months ended October 31, 1996, and each of the years ended December 31, 1995, 1994, and 1993, respectively, and are included in interest expense. The amount of credit available to the Group is reduced by $1,207 of letters of credit outstanding as of October 31, 1996. The Group's loan agreements contain various financial covenants, the most restrictive of which impose limitations on dividends and other distributions and require the maintenance of minimum levels of net worth and certain coverage ratios. As of September 30, 1996, the most recent reporting date for the bank, the Group was not in compliance with certain covenants. The Group obtained a waiver from the bank and was therefore able to draw on the line of credit through the next reporting date for the bank, December 31, 1996. At that time, the compliance with covenants will again be reviewed. 7. ACQUISITIONS SIERRA-AT-TAHOE In July 1993, the Group acquired the net assets of Sierra Ski Ranch for $13,054 in cash. The acquisition was accounted for as a purchase of assets. The ski area was subsequently renamed Sierra-at-Tahoe. BEAR MOUNTAIN In October 1995, the Group acquired the net assets of Bear for $20,604 in cash. The acquisition was accounted for as a purchase of assets. The Group's acquisition of Bear was financed by a loan from Fibreboard, F-35 84 THE RESORT GROUP OF FIBREBOARD CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 7. ACQUISITIONS -- (CONTINUED) which has been recorded at the Group level and is included in the intercompany payable balance as of October 31, 1996 and December 31, 1995. The table below presents the unaudited revenues and net income of the Group as if Sierra and Bear had been a member of the Group since January 1, 1994, and had been charged intercompany interest from that date.
YEARS ENDED DECEMBER 31, --------------------------- 1995 1994 1993 ---- ---- ---- Revenue: Resort........................................... $48,304 $56,891 $44,302 Real estate...................................... 5,028 610 -- Timber........................................... 185 -- -- ------- ------- ------- 53,517 57,501 44,302 ======= ======= ======= Net Income......................................... $ 3,672 $ 5,065 $ 1,737 ======= ======= =======
The pro forma information does not purport to be indicative of results that actually would have occurred had the acquisitions been made on the dates indicated or of results which may occur in the future. 8. INTERCOMPANY TRANSACTIONS: The Group is charged a management fee by Fibreboard based on services rendered at Fibreboard for the benefit of the Group. These services primarily relate to legal, accounting, cash management, human resources, tax consultation and filings, management information systems (MIS), and overall corporate strategy and direction. The fee for the above services and others is based on a percentage of income, headcount, and estimated time spent by the legal and MIS staff on the Group's behalf. This fee was $701, $1,247, $655, and $507, for the ten month period ended October 31, 1996 and the years ended December 31, 1995, 1994, and 1993, respectively. The Group was charged interest of $1,622, including $183 which was capitalized by the Group (Notes 2 and 3), and $488 by Fibreboard for the ten months ended October 31, 1996, and for the year ended December 31, 1995, respectively, based on outstanding intercompany amounts. In 1996, Fibreboard transferred timber rights of $1.5 million to the Group. All of the above transactions are accounted for through the Intercompany payable to Fibreboard Corporation account. In addition, all excess cash is remitted to and checks are covered by Fibreboard. Allocations for payroll, taxes, workers' compensation and income taxes are also accounted for through this account. The most significant activity, which occurred during 1995, related to the acquisition of Bear F-36 85 THE RESORT GROUP OF FIBREBOARD CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 8. INTERCOMPANY TRANSACTIONS -- (CONTINUED) Mountain ($20,604) which was funded by Fibreboard and the refinancing of separate Group debt ($11,200) by Fibreboard. Intercompany payable to Fibreboard Corporation Balance, December 31, 1994................................ $ 4,222 Bear Mountain Acquisition................................. 20,604 Debt Refinancing.......................................... 11,200 Other, net................................................ 5,467 ------- Balance, December 31, 1995................................ 41,493 Other, net................................................ (2,778) ------- Balance, October 31, 1996................................. $38,715 =======
9. LITIGATION: The nature of the ski industry includes the risk of skier injuries. Generally, the Group has insurance to cover potential claims; in some cases the amounts of the claims are very substantial. Also, a case involving a fatality in 1994 may subject the Group to punitive damages which are not included in the Group's insurance coverage. The Group is also involved in a number of other claims arising from its operations. Management, in consultation with legal counsel, believes resolution of these claims will not have a material adverse impact on its financial condition or results of operations. F-37 86 THE RESORT GROUP OF FIBREBOARD CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 10. BUSINESS SEGMENTS The Company operates is three business segments -- resorts, real estate, and timber. Data by segment is as follows:
OCTOBER 31, DECEMBER 31, ----------- --------------------------- 1996 1995 1994 1993 ---- ---- ---- ---- Revenue: Resort................................ $36,829 $39,823 $40,810 $25,528 Real estate........................... 3,595 5,028 610 -- Timber................................ 693 185 -- -- ------- ------- ------- ------- 41,117 45,036 41,420 25,528 ======= ======= ======= ======= Operating income: Resort................................ 5,805 7,002 6,084 2,325 Real estate........................... 116 116 116 -- Timber................................ -- -- -- -- ------- ------- ------- ------- 6,104 7,360 8,020 2,325 ======= ======= ======= ======= Depreciation, amortization, and depletion: Resort................................ 4,338 4,024 3,449 2,514 Real estate........................... -- -- -- -- Timber................................ 16 -- -- -- ------- ------- ------- ------- 4,354 4,024 3,449 2,514 ======= ======= ======= ======= Capital expenditures, exclusive of acquisitions: Resort................................ 5,761 5,226 6,199 4,619 Real estate........................... 1,297 3,374 198 -- Timber................................ 1,500 -- -- -- ------- ------- ------- ------- 8,558 8,600 6,397 4,619 ======= ======= ======= ======= Identifiable assets: Resorts............................... 58,323 57,076 35,749 Real estate........................... 3,806 3,097 1,089 Timber................................ 1,484 -- -- Corporate............................. 5,989 13,143 6,227 ------- ------- ------- $69,602 $73,316 $43,065 ======= ======= =======
11. COMMITMENTS: The Group leases certain machinery and equipment under operating leases. Minimum lease payments for the remainder of 1996 and the next five years are as follows: 1996 (two months)........................................... $ 307 1997........................................................ 973 1998........................................................ 504 1999........................................................ 224 2000........................................................ 84 2001........................................................ -- ------ $2,092 ======
F-38 87 THE RESORT GROUP OF FIBREBOARD CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 11. COMMITMENTS -- (CONTINUED) In addition, the Group leases property from the U.S. Forest Service for Sierra and Bear. These leases are effective through 2008 and 2020, respectively. Lease payments are based on a percentage of revenues. Total rent expense for all operating leases amounted to $1,842, $1,411, $1,216, and $550, in the ten months ended October 31, 1996 and the years ended December 31, 1995, 1994, and 1993, respectively. During 1996, the Group entered into a contract to replace certain lift equipment at Sierra. The total cost of the new equipment is approximately $8.4 million of which the Group will receive a vendor's credit for $2 million related to the equipment being replaced. As of October 31, 1996, the Group had incurred approximately $2.3 million toward this commitment. F-39 88 REPORT OF INDEPENDENT AUDITORS The Board of Directors Waterville Valley Ski Area Ltd. We have audited the accompanying balance sheets of Waterville Valley Ski Area Ltd. (the Company) as of November 26, 1996 and October 27, 1996, and the related statements of operations and accumulated deficit, and cash flows for the period from October 28, 1996 to November 26, 1996 and from July 1, 1996 to October 27, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Waterville Valley Ski Area Ltd. as of November 26, 1996 and October 27, 1996, and the results of its operations and its cash flows for the period from October 28, 1996 to November 26, 1996 and from July 1, 1996 to October 27, 1996, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Boston, Massachusetts September 30, 1997 F-40 89 WATERVILLE VALLEY SKI AREA LTD. BALANCE SHEETS
NOVEMBER 26, OCTOBER 27, 1996 1996 ------------ ----------- ASSETS Current assets: Cash...................................................... $ 173,974 $ 116,115 Accounts receivable, net of allowances of $43,811 at November 26, 1996 and $37,236 at October 27, 1996...... 367,725 320,972 Inventories............................................... 572,303 223,721 Prepaid expenses and other current assets................. 223,594 217,044 ----------- ----------- Total current assets........................................ 1,337,596 877,852 Property, plant and equipment, net.......................... 13,125,977 13,066,931 Goodwill, net............................................... 1,267,232 1,272,650 ----------- ----------- Total assets................................................ $15,730,805 $15,217,433 =========== =========== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable.......................................... $ 968,863 $ 432,180 Accrued expenses.......................................... 835,614 878,581 Advance ticket revenue.................................... 520,879 454,946 Due to affiliate.......................................... 989,610 557,220 Current portion of notes payable.......................... 21,300 21,300 Capital lease obligations................................. 106,256 106,256 ----------- ----------- Total current liabilities................................... 3,442,522 2,450,483 Notes payable, net of current portion....................... 150,235 150,754 Deferred income taxes....................................... 875,000 875,000 Stockholder's equity: Common stock, no par, 100 shares authorized, issued and outstanding............................................ 12,940,000 12,940,000 Accumulated deficit....................................... (1,676,952) (1,198,804) ----------- ----------- Total stockholder's equity.................................. 11,263,048 11,741,196 ----------- ----------- Total liabilities and stockholder's equity.................. $15,730,805 $15,217,433 =========== ===========
See accompanying notes. F-41 90 WATERVILLE VALLEY SKI AREA LTD. STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
PERIOD FROM PERIOD FROM OCTOBER 28, 1996 JULY 1, 1996 TO NOVEMBER 26, TO OCTOBER 27, 1996 1996 ---------------- -------------- Revenue: Resort services........................................... $ 69,764 $ 116,506 Consumer products......................................... 95,941 76,693 Rental and other income................................... 35,076 244,789 Conference center......................................... 150,951 516,716 ----------- ----------- 351,732 954,704 Cost of sales: Resort services........................................... 115,044 238,470 Consumer products......................................... 116,428 106,080 Rental and other expenses................................. 91,971 243,639 Conference center......................................... 82,291 344,559 ----------- ----------- 405,734 932,748 ----------- ----------- (54,002) 21,956 Expenses: Selling, general and administrative....................... 183,969 735,320 Utilities................................................. 124,696 216,090 Depreciation and amortization............................. 102,981 329,350 ----------- ----------- 411,646 1,280,760 ----------- ----------- Loss from operations........................................ (465,648) (1,258,804) Interest expense............................................ (12,500) (50,000) ----------- ----------- Loss before income tax benefit.............................. (478,148) (1,308,804) Income tax benefit.......................................... -- 110,000 ----------- ----------- Net loss.................................................... (478,148) (1,198,804) Accumulated deficit at beginning of period.................. (1,198,804) -- ----------- ----------- Accumulated deficit at end of period........................ $(1,676,952) $(1,198,804) =========== ===========
See accompanying notes. F-42 91 WATERVILLE VALLEY SKI AREA LTD. STATEMENTS OF CASH FLOWS
PERIOD FROM PERIOD FROM OCTOBER 28, 1996 JULY 1, 1996 TO NOVEMBER 26, TO OCTOBER 27, 1996 1996 ---------------- -------------- Operating activities: Net loss.................................................. $(478,148) $(1,198,804) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization........................ 102,981 329,350 Changes in operating assets and liabilities: Accounts receivable............................... (46,753) 27,380 Inventories....................................... (348,582) 33,507 Prepaid expenses and other current assets......... (6,550) (169,952) Accounts payable, accrued liabilities and advance revenue......................................... 559,649 900,507 --------- ----------- Net cash used in operating activities..................... (217,403) (78,012) Investing activity: Purchase of property, plant and equipment................. (156,609) (366,931) --------- ----------- Net cash used in investing activity....................... (156,609) (366,931) Financing activities: Due to affiliate.......................................... 432,390 407,314 Principal payments on long-term debt...................... (519) (5,379) --------- ----------- Net cash provided by financing activities................. 431,871 401,935 --------- ----------- Net increase (decrease) in cash........................... 57,859 (43,008) Cash at beginning of period............................... 116,115 159,123 --------- ----------- Cash at end of period..................................... $ 173,974 $ 116,115 ========= =========== State income taxes paid................................... $ -- $ 15,000 ========= ===========
See accompanying notes. F-43 92 WATERVILLE VALLEY SKI AREA LTD. NOTES TO FINANCIAL STATEMENTS NOVEMBER 26, 1996 1. BUSINESS ORGANIZATION Waterville Valley Ski Area Ltd. (the Company) is a wholly-owned subsidiary of S-K-I, which was acquired by American Skiing Company on June 30, 1996 (see Note 3). The Company owns and operates the Waterville Valley ski resort and conference center located in Waterville Valley, New Hampshire. The Company also operates a year-round base camp adventure center offering mountain bikers, cross country skiers and hikers access to 100 kilometers of trails in the White Mountains National Forest. Due to the seasonality of the Company's business and the nature of its operations, which require a significant level of fixed operating costs, operating results may be significantly affected by the level of revenues, which depend on, among other things, weather conditions. The seasonality also has a significant effect on the Company's working capital requirements during the year since operating losses are generally incurred from May through November. To the extent that cash flows from operations are not sufficient to meet its working capital requirements, the Company has been dependent on borrowings from its affiliates, principally S-K-I. As discussed in Note 12, Booth Creek Ski Holdings, Inc. purchased the business and net assets of the Waterville Valley ski resort and conference center effective November 27, 1996 and has represented that it has the ability and intent to fund operations for the foreseeable future until the Company is able to support its own operations. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES REVENUES Revenues from the sale of lift tickets, operation of the Resort's ski schools and repair shop and base camp adventure center have been included in the statements of operations in the caption Resort Services. Revenues from restaurants and retail shop sales have been included in the caption Consumer Products. Revenues from ski, locker and real estate rentals have been included in the caption Rental and Other Income. Revenues from use of the Company's conference center have been included in the caption Conference Center. Revenue is recognized at the time services are provided or products are sold. Sales of season and advance lift tickets prior to the beginning of the skiing season (approximately November 1) are deferred and recognized in Resort Services during the ski season, which generally commences in November and extends through April 1. INVENTORIES Inventories, which consist principally of food, beverage and retail merchandise, are valued at the lower of cost (first-in, first-out) or market. INCOME TAXES Deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company is a wholly-owned subsidiary of S-K-I, which files its federal tax return on a consolidated basis. However, the Company, for purposes of the accompanying financial statements, has recorded its tax benefit on a separate return basis. F-44 93 WATERVILLE VALLEY SKI AREA LTD. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost with depreciation being computed ratably on a monthly basis using the straight-line method over the useful lives of the related assets: Land and trail improvements................................. 20 years Buildings and improvements.................................. 20 years Machinery, snow making and other equipment.................. 3-6 years Lifts and lines............................................. 10-20 years
USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management of the Company to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reported in the balance sheet for cash, accounts receivable, accounts payable, accrued expenses and notes payable approximate their fair values. IMPAIRMENT OF LONG-LIVED ASSETS The Company accounts for impairment of long-lived assets based on Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of," which provides criteria for the recognition and measurement of impairment loss associated with long-lived assets. This standard has had no material impact on the Company's financial position or results of operations. GOODWILL Goodwill represents the excess of cost over the fair value of net assets of businesses acquired, which is amortized over 20 years. Accumulated amortization was $34,768 and $29,350 at November 26, 1996 and October 27, 1996, respectively. F-45 94 WATERVILLE VALLEY SKI AREA LTD. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 3. ACQUISITIONS On June 30, 1996, the capital stock of S-K-I was acquired by American Skiing Company, with S-K-I becoming the surviving company. The acquisition was accounted for under the purchase method of accounting. The allocated purchase price of the Company was as follows: ASSETS Current assets.............................................. $ 812,000 Property, plant and equipment............................... 13,000,000 Goodwill.................................................... 1,302,000 ----------- 15,114,000 LIABILITIES Current liabilities......................................... 1,143,000 Notes payable............................................... 156,000 Deferred income taxes....................................... 875,000 ----------- 2,174,000 ----------- $12,940,000 ===========
4. INVENTORIES Inventories consist of the following:
NOVEMBER 26, 1996 OCTOBER 27, 1996 ----------------- ---------------- Retail merchandise.............................. $487,540 $192,241 Food and beverage............................... 84,763 31,480 -------- -------- $572,303 $223,721 ======== ========
5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following:
NOVEMBER 26, 1996 OCTOBER 27, 1996 ----------------- ---------------- Land............................................ $ 610,000 $ 610,000 Land and trail improvements..................... 2,151,878 2,151,878 Buildings and improvements...................... 4,620,572 4,620,572 Machinery, snow making and other equipment...... 3,654,018 3,654,018 Lifts and lines................................. 1,630,000 1,630,000 Construction in progress........................ 857,072 700,463 ----------- ----------- 13,523,540 13,366,931 Less accumulated depreciation and amortization.................................. (397,563) (300,000) ----------- ----------- $13,125,977 $13,066,931 =========== ===========
F-46 95 WATERVILLE VALLEY SKI AREA LTD. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 6. ACCRUED EXPENSES Accrued expenses consist of the following:
NOVEMBER 26, 1996 OCTOBER 27, 1996 ----------------- ---------------- Accrued costs in connection with acquired business...................................... $200,000 $200,000 Accrued compensation............................ 4,274 55,135 Deposits........................................ 47,837 50,527 Accrued rentals................................. 95,772 90,082 Accrued utilities and other operating expenses...................................... 316,067 322,074 Unearned advertising revenue.................... 58,667 64,000 Accrued insurance............................... 112,997 96,763 -------- -------- $835,614 $878,581 ======== ========
For the one-month period ending November 26, 1996, no additional expenditures were paid by Waterville Valley Ski Area Ltd. in connection with the sale discussed in Note 12. 7. TRANSACTIONS WITH AFFILIATE S-K-I provides all cash management and working capital financing to the Company. S-K-I also provides certain insurance coverages and management services for which a corporate charge is allocated to the Company. The corporate charge covering management services, including staff salaries, payroll taxes, employee benefits and officers life insurance amounted to $41,668 for the period from October 28, 1996 to November 26, 1996, and $32,096 for the period from July 1, 1996 to October 27, 1996. The corporate charge included in insurance expense for insurance coverages, including liability and workers compensation amounted to $23,365 for the period from October 28, 1996 to November 26, 1996, and $25,333 for the period from July 1, 1996 to October 27, 1996. The corporate charge, due to the seasonality of the Company's business, fluctuates significantly on a month-to-month basis. Interest expense of $10,000 and $36,000 for the period from October 28, 1996 to November 26, 1996 and July 1, 1996 to October 27, 1996, respectively, of interest cost, net of interest income, charged to the Company from S-K-I related to the net amounts due to and from S-K-I based on average monthly balances. These amounts are included in interest expense. 8. NOTES PAYABLE Notes payable consists of the following
NOVEMBER 26, 1996 OCTOBER 27, 1996 ----------------- ---------------- Note payable -- Town of Waterville.............. $162,271 $162,271 Other notes payable............................. 9,264 9,783 -------- -------- 171,535 172,054 Less current portion............................ 21,300 21,300 -------- -------- $150,235 $150,754 ======== ========
These notes are unsecured and interest rates range from 7% to 14%. Interest paid on these notes approximated interest expense of $2,500 and $14,000 for the period from October 28, 1996 to November 26, 1996 and from July 1, 1996 to October 27, 1996, respectively. F-47 96 WATERVILLE VALLEY SKI AREA LTD. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 8. NOTES PAYABLE -- (CONTINUED) Aggregate annual maturities of long-term debt obligations as of November 26, 1996 are as follows: 1997........................................................ $ 21,300 1998........................................................ 15,615 1999........................................................ 15,615 2000........................................................ 15,615 2001........................................................ 15,615 Thereafter.................................................. 87,775 -------- $171,535 ========
9. LEASES AND PERMITS The Company operates certain portions of its skiing terrain under special use permits granted by the U.S. Forest Service. Amounts payable under these permits are measured based on percentages of revenues from certain activities. No fees were incurred under these permits for the period from October 28, 1996 to November 26, 1996 and for the period from July 1, 1996 to October 27, 1996. The Company is committed under operating leases for certain machinery and equipment which expire at various dates through 2001. Total rent expense under operating leases amounted to approximately $23,000 for the period from October 28, 1996 to November 26, 1996 and $86,000 for the period from July 1, 1996 to October 27, 1996. Future minimum rental payments under theses leases as of November 26, 1996 are as follows: Period ending October 31, 1997.............................. $244,838 1998.............................. 192,701 1999.............................. 178,859 2000.............................. 173,501 2001.............................. 78,000 -------- $867,899 ========
The Company leases certain machinery and equipment under agreements classified as capital leases. Assets capitalized under capital leases had a cost of $200,000 and accumulated amortization of $68,000 at November 26, 1996. Future minimum lease payments under capital leases are as follows: 1997........................................................ $185,652 Less amounts representing interest.......................... 79,396 -------- $106,256 ========
10. INCOME TAXES The income tax benefit of $110,000 for the period from July 1, 1996 to October 27, 1996 is based on the Company's recovery of its previously provided current federal taxes payable in 1995 and 1996. The Company includes currently payable and refundable income taxes in amounts due to an affiliate. The deferred tax liability of $875,000 is based on the excess of the financial statement basis of property, plant and equipment over the tax basis principally related to the difference between the fair market value of property, plant and equipment at June 30, 1996, the acquisition date described in Note 3, and the carryover tax basis. At November 26, 1996, the Company had approximately $1.7 million of net operating loss F-48 97 WATERVILLE VALLEY SKI AREA LTD. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 10. INCOME TAXES -- (CONTINUED) carryforwards which, due to the separate return basis of presentation and the sale of the net assets of the Company described in Note 12, will not be realized. Accordingly, no benefit has been recognized in the accompanying statements of operations. 11. MARKETING AGREEMENT Effective September 1, 1996, the Company entered into a one-year promotional program with Volvo Cars of North America (Volvo) to promote skiing and snowboarding in New England. The Company was provided the use of four Volvo station wagons and $40,000 in cash in exchange for designating Volvo as the official automobile of the Waterville ski area. The Company accounted for the transaction based upon the estimated fair value of the services and cash received of $64,000. This amount has been included as prepaid advertising in prepaid assets and as unearned advertising revenue included in accrued expenses. These amounts will be amortized to advertising expense and income, respectively, during the 1997 ski season. 12. SUBSEQUENT EVENT On November 27, 1996, the Company, along with another affiliated entity, was acquired by Booth Creek Ski Holdings, Inc. for $17,500,000, before giving effect to certain working capital adjustments. F-49 98 REPORT OF INDEPENDENT AUDITORS The Board of Directors Waterville Valley Ski Area Ltd. We have audited the accompanying balance sheets of Waterville Valley Ski Area Ltd. as of October 29, 1995 and June 30, 1996, and the related statements of operations and retained earnings (accumulated deficit), and cash flows for the year ended October 29, 1995 and the period from October 30, 1995 to June 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. Except as discussed in the following paragraph, we conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Waterville Valley Ski Area Ltd. as of October 29, 1995 and June 30, 1996, and the results of its operations and its cash flows for the year ended October 29, 1995 and the period from October 30, 1995 to June 30, 1996, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Boston, Massachusetts January 25, 1997 F-50 99 WATERVILLE VALLEY SKI AREA LTD. BALANCE SHEETS
OCTOBER 29, JUNE 30, 1995 1996 ----------- -------- ASSETS Current assets: Cash...................................................... $ 237,160 $ 159,123 Accounts receivable, net of allowance of $11,678 in 1995 and $9,352 in 1996 for doubtful accounts............... 544,767 348,352 Inventories............................................... 272,582 257,228 Prepaid expenses.......................................... 103,585 47,092 ----------- ----------- Total current assets........................................ 1,158,094 811,795 Property, plant and equipment, net.......................... 11,660,674 11,903,703 Deferred taxes.............................................. 11,000 -- ----------- ----------- Total assets................................................ $12,829,768 $12,715,498 =========== =========== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable.......................................... $ 607,172 $ 196,335 Accrued expenses.......................................... 262,393 467,946 Advance ticket revenue.................................... 484,605 919 Due to affiliate.......................................... 799,776 150,200 Current portion of notes payable.......................... 26,986 21,050 Capital lease obligations................................. -- 106,256 ----------- ----------- Total current liabilities................................... 2,180,932 942,706 Notes payable, net of current portion....................... 173,349 156,383 Deferred taxes.............................................. -- 379,000 Commitments and contingencies Stockholder's equity: Common stock, no par, 100 shares authorized, issued and outstanding............................................ 10,491,417 10,491,417 Retained earnings (accumulated deficit)................... (15,930) 745,992 ----------- ----------- Total stockholder's equity.................................. 10,475,487 11,237,409 ----------- ----------- Total liabilities and stockholder's equity.................. $12,829,768 $12,715,498 =========== ===========
See accompanying notes. F-51 100 WATERVILLE VALLEY SKI AREA LTD. STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (ACCUMULATED DEFICIT)
PERIOD FROM YEAR ENDED OCTOBER 30, OCTOBER 29, 1995 TO 1995 JUNE 30, 1996 ----------- ------------- Revenue: Resort services........................................... $5,528,249 $ 6,141,127 Consumer products......................................... 1,278,170 2,607,329 Rental and other income................................... 1,501,038 1,509,125 Conference center......................................... 1,345,349 521,146 ---------- ----------- 9,652,806 10,778,727 Cost of sales: Resort services........................................... 2,140,755 2,006,867 Consumer products......................................... 720,780 1,854,198 Rental and other expenses................................. 945,950 491,251 Conference center......................................... 857,169 476,037 ---------- ----------- 4,664,654 4,828,353 ---------- ----------- 4,988,152 5,950,374 Expenses: Selling, general and administrative....................... 2,754,344 2,329,963 Utilities................................................. 753,287 962,209 Insurance................................................. 321,459 297,357 Depreciation and amortization............................. 1,090,992 900,408 ---------- ----------- 4,920,082 4,489,937 ---------- ----------- Income from operations...................................... 68,070 1,460,437 Interest expense............................................ (95,000) (50,000) ---------- ----------- Income (loss) before income taxes........................... (26,930) 1,410,437 Income taxes (benefit)...................................... (11,000) 565,000 ---------- ----------- Net income (loss)........................................... (15,930) 845,437 Accumulated deficit, beginning of period.................... -- (15,930) Dividends declared.......................................... -- (83,515) ---------- ----------- Retained earnings (accumulated deficit), end of period...... $ (15,930) $ 745,992 ========== ===========
See accompanying notes. F-52 101 WATERVILLE VALLEY SKI AREA LTD. STATEMENTS OF CASH FLOWS
PERIOD FROM YEAR ENDED OCTOBER 30, OCTOBER 29, 1995 TO 1995 JUNE 30, 1996 ----------- ------------- Operating activities Net income (loss)......................................... $ (15,930) $ 845,437 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization.......................... 1,090,992 900,408 Deferred taxes......................................... (11,000) 390,000 Changes in operating assets and liabilities: Accounts receivable.................................. (544,767) 196,415 Inventories.......................................... (222,140) 15,354 Prepaid expenses..................................... (103,585) 56,493 Advance ticket revenue............................... (182,558) (483,686) Accounts payable and accrued expenses................ 758,271 (205,284) ----------- ---------- Net cash provided by operating activities................. 769,283 1,715,137 Investing activities Purchase of property, plant and equipment................. (1,248,814) (808,513) ----------- ---------- Net cash used in investing activities..................... (1,248,814) (808,513) Financing activities Principal payments on notes payable and capital leases.... (85,085) (251,570) Due to affiliate.......................................... 799,776 (649,576) Dividends paid............................................ -- (83,515) ----------- ---------- Net cash provided by (used in) financing activities....... 714,691 (984,661) ----------- ---------- Net increase (decrease) in cash............................. 235,160 (78,037) Cash at beginning of period................................. 2,000 237,160 ----------- ---------- Cash at end of period....................................... $ 237,160 $ 159,123 =========== ========== State income taxes paid..................................... $ 35,000 ========== Non-cash investing activities: Equipment acquired under lease obligations................ $ 334,924 ==========
See accompanying notes. F-53 102 WATERVILLE VALLEY SKI AREA LTD. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1996 1. BUSINESS Waterville Valley Ski Area Ltd. (the Company), a wholly-owned subsidiary of S-K-I Ltd., owns and operates the Waterville Valley ski resort and conference center located in Waterville Valley, New Hampshire. The Company also operates a year-round base camp adventure center offering mountain bikers, cross country skiers and hikers access to 100 kilometers of trails in the White Mountains National Forest. Due to the seasonality of the Company's business and the nature of its operations, which require a significant level of fixed operating costs, operating results may be significantly affected by the level of revenues which depend on, among other things, weather conditions. The seasonality also has a significant effect on the Company's working capital requirements during the year, since operating losses are generally incurred from May through October. To the extent cash flows from operations are not sufficient to meet its working capital requirements, the Company is dependent on borrowings from its affiliates, principally S-K-I Ltd. and its successor (see Note 11), which have represented that they have the ability and intent to fund the Company's operations for the foreseeable future or until the Company is able to support its own operations. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES REVENUES Revenues from the sale of lift tickets, ski schools and repair shop have been included in the statement of operations in the caption Resort Services. Revenues from restaurants and retail shop sales have been included in the caption Consumer Products. Revenues from ski, locker and real estate rentals have been included in the caption Rental and Other Income. Revenues from use of the Company's convention center have been included in the caption Convention Center. Revenue is recognized at the time services are provided or products are sold. Sales of season and advance lift tickets prior to the beginning of the skiing season (November 1) are deferred and recognized in Resort Services during the skiing season, which generally commences in November and extends through April. INVENTORIES Inventories, which consist principally of food, beverage and retail merchandise, are valued at the lower of cost (first-in, first-out) or market. INCOME TAXES The Company determines its provision for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which requires that the liability method be used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company is a wholly-owned subsidiary of S-K-I Ltd., which files its federal return on a consolidated basis using a tax year end of July 31. However, for purposes of the accompanying financial statements, the Company has recorded its tax provision on a separate-return basis. F-54 103 WATERVILLE VALLEY SKI AREA LTD. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost with depreciation being computed ratably on a monthly basis using the straight-line method over the useful lives of the related assets: Land and trail improvements................................. 20 years Buildings and improvements.................................. 20 years Machinery, snow making and other equipment.................. 3-6 years Lifts and lines............................................. 10-20 years
USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management of the Company to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reported in the balance sheet for cash, accounts receivable and notes payable approximate their fair values. ACCOUNTING PRONOUNCEMENT In March 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of", which establishes criteria for the recognition and measurement of impairment loss associated with long-lived assets. The Company adopted this standard effective October 30, 1995 and its adoption did not have a material impact on the Company's financial position or results of operations. 3. INVENTORIES Inventories consist of the following:
OCTOBER 29, JUNE 30, 1995 1996 ----------- -------- Retail merchandise....................................... $241,102 $224,715 Food and beverage........................................ 31,480 32,513 -------- -------- $272,582 $257,228 ======== ========
F-55 104 WATERVILLE VALLEY SKI AREA LTD. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following:
OCTOBER 29, JUNE 30, 1995 1996 ----------- -------- Land................................................ $ 576,719 $ 576,719 Land and trail improvements......................... 2,802,998 2,820,209 Buildings and improvements.......................... 3,742,613 3,895,776 Machinery, snow making and other equipment.......... 3,137,919 4,025,896 Lifts and lines..................................... 2,058,242 2,108,471 Construction in progress............................ 377,444 363,691 ----------- ----------- 12,695,935 13,790,762 Less accumulated depreciation and amortization...... 1,035,261 1,887,059 ----------- ----------- $11,660,674 $11,903,703 =========== ===========
5. ACCRUED EXPENSES Accrued expenses consist of the following:
OCTOBER 29, JUNE 30, 1995 1996 ----------- -------- Accrued compensation..................................... $ 44,531 $ 49,762 Deposits................................................. 54,627 52,532 Accrued rentals.......................................... 31,826 95,864 Accrued utilities and other operating.................... 66,683 78,486 Accrued insurance........................................ 64,726 191,302 -------- -------- $262,393 $467,946 ======== ========
6. TRANSACTIONS WITH AFFILIATES S-K-I Ltd. provides all cash management and working capital financing to the Company. S-K-I Ltd. also provides certain insurance coverages and management services for which a corporate charge is allocated to the Company. The corporate charge covering management services, including staff salaries, payroll taxes, employee benefits, officers life insurance and professional fees amounted to $227,783 in fiscal 1995 and $554,892 for the period from October 30, 1995 to June 30, 1996. The corporate charge included in insurance expense for insurance coverages, including liability and workers compensation amounted to $226,357 in fiscal 1995 and $261,459 for the period from October 30, 1995 to June 30, 1996. Interest expense of $48,000 in fiscal 1995 and $31,000 for the period from October 30, 1995 to June 30, 1996 represents interest cost, net of interest income, charged to the Company related to the net amounts due to and from S-K-I Ltd. based on average monthly balances. These amounts are included in interest expense. F-56 105 WATERVILLE VALLEY SKI AREA LTD. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 7. NOTES PAYABLE Notes payable consists of the following:
OCTOBER 29, JUNE 30, 1995 1996 ----------- -------- Note payable -- Town of Waterville....................... $176,145 $163,502 Other.................................................... 24,190 13,931 -------- -------- 200,335 177,433 Less current portion..................................... 26,986 21,050 -------- -------- $173,349 $156,383 ======== ========
These notes are unsecured and interest rates range from 7% to 14%. Interest paid on these notes approximated interest expense of $47,000 and $19,000 in fiscal 1995 and for the period from October 30, 1995 to June 30, 1996, respectively. Aggregate annual maturities of long-term debt obligations as of June 30, 1996 are as follows: 1997........................................................ $ 21,050 1998........................................................ 21,605 1999........................................................ 15,615 2000........................................................ 15,615 2001........................................................ 15,615 Thereafter.................................................. 87,933 -------- $177,433 ========
8. LEASES AND PERMITS The Company operates certain portions of its skiing terrain under special use permits granted by the U.S. Forest Service. Amounts payable under these permits are measured based on percentages of revenues from certain activities. Fees for these permits amounted to $145,422 in fiscal 1995 and $165,214 for the period from October 30, 1995 to June 30, 1996 and are included in cost of resort services. The Company is committed under operating leases for certain machinery and equipment which expire at various dates through 2001. Total rent expense under operating leases for the year ended October 29, 1995 and the period from October 30, 1995 to June 30, 1996 were $235,000 and $213,000, respectively. Future minimum rental payments under these leases as of June 30, 1996 are as follows: 1997........................................................ $258,944 1998........................................................ 215,489 1999........................................................ 173,894 2000........................................................ 163,894 2001........................................................ 163,894 -------- $976,115 ========
The Company leases certain machinery and equipment under agreements classified as capital leases. Assets capitalized under capital leases had a cost of $334,924 and accumulated amortization of $136,184 at F-57 106 WATERVILLE VALLEY SKI AREA LTD. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 8. LEASES AND PERMITS -- (CONTINUED) June 30, 1996. Future minimum lease payments which are made in installments during the ski season are as follows: 1997........................................................ $185,652 Less amounts representing interest.......................... 79,396 -------- $106,256 ========
9. INCOME TAXES The provisions (benefit) for income taxes consisted of the following:
PERIOD FROM YEAR ENDED OCTOBER 30, OCTOBER 25, 1995 TO 1995 JUNE 30, 1996 ----------- ------------- Current: Federal.............................................. $110,000 State................................................ 65,000 -------- 175,000 Deferred: Federal.............................................. $ (9,000) 295,000 State................................................ (2,000) 95,000 -------- -------- (11,000) 390,000 -------- -------- $(11,000) $565,000 ======== ========
Income taxes currently payable are included in amounts due to an affiliate. The tax effects of temporary differences that give rise to significant portions of net deferred tax assets and liabilities are presented below:
OCTOBER 29, 1995 JUNE 30, 1996 ----------- ------------- Deferred tax assets: Net operating loss carryforward..................... $ 219,000 Deferred tax liabilities: Depreciation........................................ (208,000) $(379,000) --------- --------- Net deferred tax assets (liabilities)................. $ 11,000 $(379,000) ========= =========
At October 29, 1995, the Company had a federal net operating loss carryforward of approximately $547,000, available to reduce future taxable income, which was fully utilized in the period from October 30, 1995 to June 30, 1996. 10. SUBSEQUENT EVENT On July 1, 1996, the capital stock of S-K-I Ltd. was acquired by American Skiing Company with S-K-I Ltd. becoming the surviving company. S-K-I Ltd. continued to own and operate Waterville Valley Ski Area Ltd. until November 27, 1996, at which date the business and net assets of the Waterville Valley ski resort and conference center were acquired by Booth Creek Ski Holdings, Inc. F-58 107 REPORT OF INDEPENDENT AUDITORS The Board of Directors Ski Lifts, Inc. We have audited the accompanying balance sheet of Ski Lifts, Inc. as of January 15, 1997, and the related statements of operations and retained earnings and cash flows for the period from October 1, 1996 to January 15, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Ski Lifts, Inc. at January 15, 1997, and the results of its operations and its cash flows for the period from October 1, 1996 to January 15, 1997, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Milwaukee, Wisconsin May 15, 1997 F-59 108 SKI LIFTS, INC. BALANCE SHEET JANUARY 15, 1997 ASSETS Current assets: Cash...................................................... $ 215,367 Accounts receivable....................................... 85,921 Inventories............................................... 278,134 ---------- Total current assets........................................ 579,422 Property and equipment, net................................. 8,799,044 Other assets................................................ 570,726 ---------- Total assets................................................ $9,949,192 ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Borrowings under line of credit........................... $2,095,000 Current portion of long-term debt......................... 109,593 Notes payable to affiliate................................ 1,305,205 Unearned revenue.......................................... 1,354,817 Accounts payable.......................................... 1,097,643 Accrued liabilities....................................... 582,650 Insurance claims.......................................... 248,137 ---------- Total current liabilities................................... 6,793,045 Long-term debt.............................................. 59,581 Deferred income taxes....................................... 28,120 Commitments and contingencies Shareholders' equity: Common stock (1,000 shares authorized, issued and outstanding, no par value)............................. 36,720 Retained earnings......................................... 3,031,726 ---------- Total shareholders' equity.................................. 3,068,446 ---------- Total liabilities and shareholders' equity.................. $9,949,192 ==========
See accompanying notes. F-60 109 SKI LIFTS, INC. STATEMENT OF OPERATIONS AND RETAINED EARNINGS PERIOD FROM OCTOBER 1, 1996 TO JANUARY 15, 1997 Revenues: Lifts..................................................... $2,268,458 Ski rentals............................................... 322,580 Ski school lessons........................................ 66,518 Service and other sales................................... 123,489 Building lease income..................................... 38,488 Restaurant sales.......................................... 459,798 Beer, wine and liquor..................................... 126,862 Ski shop.................................................. 104,500 ---------- Total revenues.............................................. 3,510,693 Costs and expenses: Operating salaries, wages and other employee costs........ 1,799,765 General, administrative and other operating expenses...... 1,250,208 Depreciation and amortization............................. 277,478 Cost of restaurant, liquor and ski shop sales............. 263,900 ---------- Total costs and expenses.................................... 3,591,351 ---------- Operating loss.............................................. (80,658) Other income (expense): Interest income........................................... 5,917 Interest expense.......................................... (118,839) Gain on sale of equipment................................. 8,165 Other..................................................... 4,927 ---------- (99,830) ---------- Net loss.................................................... (180,488) Retained earnings: Beginning of period....................................... 3,267,355 Shareholder distributions................................. (55,141) ---------- End of period............................................. $3,031,726 ==========
See accompanying notes. F-61 110 SKI LIFTS, INC. STATEMENT OF CASH FLOWS PERIOD FROM OCTOBER 1, 1996 TO JANUARY 15, 1997 Operating activities: Net loss.................................................. $ (180,488) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization.......................... 277,478 Other.................................................. 30,840 Changes in: Accounts receivable.................................. (8,040) Inventories.......................................... (69,514) Prepaid expenses and other........................... 44,272 Unearned revenue..................................... 1,203,254 Accounts payable..................................... 789,043 Accrued liabilities.................................. 348,226 Insurance claims..................................... 56,511 ----------- Net cash provided by operating activities................. 2,491,582 Investing activities: Purchases of property and equipment....................... (379,269) Proceeds from sale of equipment........................... 8,001 ----------- Net cash used in investing activities..................... (371,268) Financing activities: Line of credit borrowings and repayments, net............. (1,405,000) Additions to long-term debt............................... 150,000 Payments on long-term debt and capital leases............. (679,771) Distributions to shareholders............................. (55,141) ----------- Net cash used in financing activities..................... (1,989,912) ----------- Net increase in cash...................................... 130,402 Cash at beginning of period............................... 84,965 ----------- Cash at end of period..................................... $ 215,367 ===========
See accompanying notes. F-62 111 SKI LIFTS, INC. NOTES TO FINANCIAL STATEMENTS JANUARY 15, 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Ski Lifts, Inc. (the "Company") operates alpine and cross-country ski resorts at Snoqualmie Summit, Ski Acres, Alpental and Hyak in the western Cascade mountains of Washington State. INVENTORIES Inventories include ski accessories, food and liquor and are stated at the lower of cost or market, determined on a first-in, first-out basis. PROPERTY AND EQUIPMENT Property and equipment is recorded at cost. Depreciation is computed using the straight-line method over estimated useful lives as follows:
CATEGORY YEARS -------- ----- Buildings and land improvements............................. 15 - 40 Lifts, tows and hill lighting............................... 5 - 30 Vehicles and equipment...................................... 4 - 15
Gains or losses are recognized in the year of retirement or disposition. Expenditures for additions and betterments are capitalized and expenditures for maintenance are charged to expense as incurred. LIFT REVENUE AND UNEARNED REVENUE The Company records lift ticket revenue from season pass and scrip sales during the ski season in which the passes and scrip are used. Unearned revenue is recorded for unused season passes, coupons, scrip and other similar items. INCOME TAXES Effective October 1, 1994, the Company elected to be treated as an S Corporation for federal income tax purposes. Accordingly, the income tax consequences of the Company's operations are the responsibility of the Company's shareholders. The S Corporation rules provide that a tax is payable by the Company if assets acquired on or before September 30, 1994, are sold or disposed of prior to October 1, 2004. This tax is payable on the resultant gains to the extent of the excess of the fair market value of the assets over their tax bases on September 30, 1994. Accordingly, the Company continues to record a deferred income tax liability (approximately $28,000 at January 15, 1997) on its balance sheet with respect to assets for which sale or disposition may result in built-in gains taxes. 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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates and assumptions. F-63 112 SKI LIFTS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 2. PROPERTY AND EQUIPMENT Property and equipment consist of the following at January 15, 1997: Land and land improvements.................................. $ 2,913,165 Buildings................................................... 6,166,183 Lifts, tows and hill lighting............................... 4,244,025 Vehicles and equipment...................................... 5,330,429 Construction in process..................................... 719,917 ----------- 19,373,719 Less accumulated depreciation and amortization.............. 10,574,675 ----------- Property and equipment, net................................. $ 8,799,044 ===========
3. SELF-INSURANCE DEPOSIT The Company is self insured for workers' compensation injuries (see Note 10). Amounts required to be held in trust as a security deposit by the Washington Department of Labor and Industries totaled $360,000 at January 15, 1997 (included in "Other Assets"). This deposit may be adjusted annually. The deposit was invested in a certificate of deposit which bore interest at 5.42% at January 15, 1997. 4. INVESTMENT IN REAL ESTATE PARTNERSHIP On March 15, 1991, the Company formed a general partnership with certain other partners (who are shareholders and officers of the Company) to purchase a building. The Company paid $75,000 for its 25% share as a general partner. The Company is allocated operating profits and losses in proportion to its partnership interest, which were not significant for the period from October 1, 1996 to January 15, 1997. The Company's investment at January 15, 1997 totaled $1,719. The Company and a stockholder of the Company have provided a $250,000 subordinated line of credit to the partnership with interest payable monthly at 9%. At January 15, 1997, there were no amounts outstanding under this agreement. The Company leases a portion of the building for its headquarters under the terms described in Note 8. 5. INVESTMENTS The Company holds 15,880 shares of common stock of Arlberg Holding Company ("Arlberg"), with a carrying value of $75,327 at January 15, 1997. This investment is carried at cost. In addition, the Company purchased $50,000 of convertible debentures of Arlberg during 1993. These debentures, which bear interest at 9%, mature on June 30, 2000, and are convertible, under certain conditions, into common stock of Arlberg. A stockholder of the Company serves as a director of Arlberg. 6. FINANCIAL ARRANGEMENTS LINE OF CREDIT ARRANGEMENT At January 15, 1997, the Company had a $3,500,000 revolving line of credit agreement with a bank, which expires on April 1, 1998. Borrowings under the agreement, which are payable on demand and are collateralized by substantially all assets except real estate, bear interest at the bank's prime rate plus .75% (9.0% at January 15, 1997). Amounts outstanding under this agreement were $2,095,000 at January 15, 1997. F-64 113 SKI LIFTS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 6. FINANCIAL ARRANGEMENTS -- (CONTINUED) LONG-TERM DEBT Long-term debt consists of the following at January 15, 1997: Note payable with monthly payments of $7,393 including interest at 8.25%, collateralized by certain equipment, due May 1998.............................................. $113,115 Capitalized lease obligation................................ 56,059 -------- 169,174 Less current portion........................................ 109,593 -------- Long-term debt.............................................. $ 59,581 ========
The Company has a revolving term loan agreement which permitted borrowings of up to $2,132,000 at January 15, 1997. No amounts were outstanding under this arrangement at January 15, 1997. Interest paid during the period from October 1, 1996 to January 15, 1997 was approximately $109,500. 7. RELATED PARTY TRANSACTIONS The Company borrows money for operating purposes from W.W. Moffett, Inc., which is an affiliated company through common stockholders. The advances from W.W. Moffett, Inc. totaled $1,305,205 at January 15, 1997, bear interest at 5.93%, are subordinated to the line of credit and long-term debt described in Note 6, and are due on demand. Interest expense on these advances for the period from October 1, 1996 to January 15, 1997 was approximately $22,500. 8. SPECIAL USE PERMITS AND PROPERTY LEASES The Company operates on approximately 3,821 acres of land of which 1,864 acres are covered by a Special Use Permit issued by the United States Forest Service. This permit expires December 31, 2032 and is generally renewable. Special Use Permit fees are based on a percentage revenues. Total Special Use Permit fees for the period from October 1, 1996 to January 15, 1997 were approximately $84,000. The remaining 1,957 acres are owned by the Company or leased from a private company. The lease payments are based primarily on skier visits. Total lease expense for the period from October 1, 1996 through January 15, 1997 was $3,500. The Company leases its office space from a partnership in which the Company is a general partner (see Note 4). This lease expires on March 31, 2006. Rental expense relating to this agreement was approximately $31,000 for the period from October 1, 1996 to January 15, 1997. F-65 114 SKI LIFTS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 8. SPECIAL USE PERMITS AND PROPERTY LEASES -- (CONTINUED) At January 15, 1997, future minimum lease payments under noncancelable operating leases are as follows:
YEAR ENDING JANUARY 15, - ----------- 1998...................................................... $109,000 1999...................................................... 109,000 2000...................................................... 109,000 2001...................................................... 109,000 2002...................................................... 109,000 Thereafter................................................ 454,000 -------- $999,000 ========
9. EMPLOYEE BENEFIT PLANS The Ski Lifts, Inc. Profit Sharing Retirement Plan (the "Plan") provides for both a 401(k) defined contribution plan and a unilateral profit sharing plan for all employees who have worked over 1,000 hours, are over 21 years of age and met certain other requirements. For the period from October 1, 1996 to January 15, 1997, the Company contributed approximately $20,000 under the defined contribution provisions of the Plan. No contributions were accrued under the unilateral profit sharing plan for the period from October 1, 1996 to January 15, 1997. 10. CONTINGENCIES The Company is party to various claims arising in the normal course of business related to alleged injuries which, in the opinion of management, will not have a material effect on the Company's business. The Company's insurance limits its risk of loss on such claims to the amounts of the deductible under the related insurance policies. At January 15, 1997, approximately $164,500 was accrued related to such claims (primarily deductible amounts). The Company is self-insured with the State of Washington for workers' compensation (see Note 3). Provision is made in the financial statements for the estimated cost of claims. The accrued liability at January 15, 1997 was approximately $83,600. 11. SUBSEQUENT EVENTS Effective January 15, 1997, Booth Creek Ski Holdings, Inc. ("Booth Creek") purchased all of the issued and outstanding common stock of the Company for an aggregate purchase price of approximately $14.0 million, which included the assumption of approximately $3.6 million of indebtedness, the issuance by the Company of a note in the amount of approximately $9.8 million to the selling shareholders, and other obligations to the selling shareholders of approximately $600,000. In connection with the consummation of the acquisition, the Company transferred approximately 71 acres of owned real estate held for development purposes into a Delaware limited liability company (the "Real Estate LLC"), of which the Company is a member and 99% equity interest holder and Booth Creek is the other member and 1% equity interest holder. In addition, the Company granted the Real Estate LLC an option (the "Real Estate Option") to purchase an additional 14 acres of developmental real estate for nominal consideration. The Company also issued 28,000 shares of non-voting preferred stock (the "Preferred Stock") to its prior owners having an aggregate liquidation preference equal to $3.5 million, the aggregate estimated F-66 115 SKI LIFTS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 11. SUBSEQUENT EVENTS -- (CONTINUED) fair market value of the real estate transferred to the Real Estate LLC and the real estate subject to the Real Estate Option. Concurrently with these transactions, the Real Estate LLC entered into an agreement to purchase (the "Preferred Stock Purchase Agreement") the Preferred Stock, on a quarterly basis over the five years following the date of the acquisition, at a purchase price equal to the liquidation preference thereof plus accrued dividends to the date of purchase. Booth Creek advanced the first three quarterly installments under the Preferred Stock Purchase Agreement at or prior to March 18, 1997. The Real Estate LLC's obligations under the Preferred Stock Purchase Agreement are secured by a first priority lien on the developmental real estate held by the Real Estate LLC and substantially all of its other assets. The Preferred Stock provides for a 9% cumulative dividend and is redeemable at the option of the Company without premium. In addition, pursuant to the terms of the Preferred Stock, the holders thereof have no redemption rights and are entitled to receive dividend payments only when and if declared by the board of directors of the Company. On February 21, 1997, the Company retired the then-existing balance under its $3,500,000 revolving line of credit agreement (Note 6) using funds provided by Booth Creek. Concurrently therewith, the Company also terminated its $3,500,000 revolving line of credit agreement and $2,132,000 revolving term loan agreement. On March 18, 1997, the Company retired the balance outstanding pursuant to the W.W. Moffett, Inc. note payable (Note 7) using funds provided by Booth Creek. F-67 116 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors Ski Lifts, Inc. We have audited the accompanying balance sheets of Ski Lifts, Inc. as of September 30, 1996 and 1995, and the related statements of operations and retained earnings and cash flows for each of the three years in the period ended September 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Ski Lifts, Inc. as of September 30, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 1996 in conformity with generally accepted accounting principles. As discussed in Note 13 to the financial statements, in December 1996, the stockholders of the Company reached an agreement in principle to sell the stock of the Company to a third party. As reported in Note 8 to the financial statements, Ski Lifts, Inc. changed its method of accounting for income taxes effective October 1, 1993. COOPERS & LYBRAND L.L.P. Seattle, Washington December 9, 1996, except for Note 13 to the financial statements as to which the date is December 19, 1996 F-68 117 SKI LIFTS, INC. BALANCE SHEETS SEPTEMBER 30, 1996 AND 1995
1996 1995 ---- ---- ASSETS Current assets: Cash and cash equivalents................................. $ 84,965 $ 92,607 Receivables............................................... 77,881 170,596 Inventories............................................... 208,620 211,401 Prepaid expenses and other................................ 44,272 42,832 ---------- ---------- Total current assets................................... 415,738 517,436 ---------- ---------- Property and equipment, net................................. 8,697,089 8,278,770 ---------- ---------- Other assets: Self insurance deposit.................................... 360,000 360,000 Investments, at cost...................................... 125,327 243,685 Equity in real estate partnership......................... 3,771 5,674 Other..................................................... 120,633 128,898 ---------- ---------- 609,731 738,257 ---------- ---------- Total assets........................................... $9,722,558 $9,534,463 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Borrowings under line of credit........................... $3,500,000 $3,395,000 Current portion of long-term debt......................... 80,115 73,708 Obligation under capital lease............................ 27,215 25,038 Notes payable to affiliate................................ 1,305,205 1,313,178 Unearned revenue.......................................... 151,563 121,212 Accounts payable and other................................ 308,600 490,048 Accrued interest, wages and business taxes................ 234,424 77,510 Insurance claims.......................................... 191,626 284,351 ---------- ---------- Total current liabilities.............................. 5,798,748 5,780,045 Long-term debt, less current portion........................ 553,956 139,071 Obligation under capital lease, less current portion........ 37,659 64,873 Deferred income taxes....................................... 28,120 28,120 ---------- ---------- Total liabilities...................................... 6,418,483 6,012,109 ---------- ---------- Commitments and contingencies Stockholders' equity: Common stock (1,000 shares authorized and outstanding, no par value)............................................. 36,720 36,720 Retained earnings......................................... 3,267,355 3,485,634 ---------- ---------- Total stockholders' equity............................. 3,304,075 3,522,354 ---------- ---------- Total liabilities and stockholders' equity............. $9,722,558 $9,534,463 ========== ==========
The accompanying notes are an integral part of the financial statements. F-69 118 SKI LIFTS, INC. STATEMENTS OF OPERATIONS AND RETAINED EARNINGS FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
1996 1995 1994 ---- ---- ---- Revenues: Lifts.............................................. $6,155,890 $ 7,077,779 $ 6,606,408 Ski rentals........................................ 934,708 1,057,518 1,094,285 Ski school lessons................................. 250,345 246,040 223,575 Service and other sales............................ 230,042 250,867 229,980 Building lease income.............................. 173,727 202,733 210,412 Restaurant sales................................... 1,117,254 1,216,973 1,210,660 Beer, wine and liquor.............................. 349,605 380,214 404,313 Ski shop........................................... 239,521 237,587 261,024 ---------- ----------- ----------- Total revenues.................................. 9,451,092 10,669,711 10,240,657 ---------- ----------- ----------- Costs and expenses: Operating salaries, wages and other employee costs........................................... 4,594,629 5,119,558 4,803,428 General, administrative and other operating expenses........................................ 3,035,147 3,252,677 3,007,780 Depreciation and amortization...................... 976,578 1,032,579 963,843 Cost of restaurant, liquor and ski shop sales...... 570,138 668,278 652,289 ---------- ----------- ----------- Total costs and expenses........................ 9,176,492 10,073,092 9,427,340 ---------- ----------- ----------- Operating income................................ 274,600 596,619 813,317 ---------- ----------- ----------- Other income (expense): Interest income.................................... 30,732 22,348 19,591 Interest expense................................... (327,178) (289,657) (304,428) Loss on abandonment of capitalized construction costs........................................... -- (107,155) -- Gain (loss) on sales of equipment.................. (48,268) 928 21,957 Miscellaneous, net................................. 58,301 31,099 29,821 ---------- ----------- ----------- (286,413) (342,437) (233,059) ---------- ----------- ----------- Income (loss) before income taxes and cumulative effect of accounting change................... (11,813) 254,182 580,258 ---------- ----------- ----------- Income taxes: Current............................................ -- (10,551) (161,726) Deferred........................................... -- 408,285 (35,718) ---------- ----------- ----------- Total income tax expense (benefit).............. -- 397,734 (197,444) ---------- ----------- ----------- Net income (loss) before cumulative effect of accounting change.................................. (11,813) 651,916 382,814 Cumulative effect of change in method of accounting for income taxes................................... -- -- (171,023) ---------- ----------- ----------- Net income (loss).................................. (11,813) 651,916 211,791 Retained earnings: Beginning of year.................................. 3,485,634 2,833,718 2,621,927 Stockholder distributions.......................... (206,466) -- -- ---------- ----------- ----------- End of year........................................ $3,267,355 $ 3,485,634 $ 2,833,718 ========== =========== ===========
The accompanying notes are an integral part of the financial statements. F-70 119 SKI LIFTS, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
1996 1995 1994 ---- ---- ---- Operating activities: Net income (loss).................................... $ (11,813) $ 651,916 $ 211,791 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization................... 976,578 1,032,579 963,843 Deferred Federal income taxes................... -- (408,285) 206,741 (Gain) loss on sale of equipment................ 48,268 2,209 (12,778) Loss on abandonment of capitalized construction costs........................................ -- 107,155 -- Gain on sale of investment...................... (18,890) -- -- Other........................................... 10,168 (22,629) 10,276 Changes in: Receivables.................................. 92,715 (98,163) 46,481 Inventories.................................. 2,781 (101,398) (28,708) Prepaid expenses and other................... (1,440) (104,785) (570) Income taxes receivable...................... -- 23,042 197,388 Self-insurance deposit....................... -- (35,000) -- Unearned revenue............................. 30,351 (34,764) (58,640) Accounts payable and other................... (181,448) 194,743 (51,730) Accrued interest, wages and taxes............ 156,914 (9,008) (270,500) Insurance claims............................. (92,725) (11,869) 44,851 ----------- ----------- ---------- Net cash provided by operating activities.............................. 1,011,459 1,185,743 1,258,445 ----------- ----------- ---------- Investing activities: Purchases of property and equipment.................. (1,465,647) (1,158,802) (346,290) Proceeds from sale of equipment...................... 22,482 7,711 12,778 Proceeds from sale of investment..................... 137,248 -- -- Purchases of investment.............................. -- (84,096) (13,386) Other................................................ -- -- 17,957 ----------- ----------- ---------- Net cash used in investing activities...... (1,305,917) (1,235,187) (328,941) ----------- ----------- ---------- Financing activities: Line of credit borrowings and repayments, net........ 105,000 1,113,624 (374,924) Additions to long-term debt.......................... 2,650,000 410,000 86,053 Payments on long-term debt and capital leases........ (2,253,745) (1,457,704) (556,886) Payments on notes payable to affiliate............... (7,973) (14,465) (11,236) Distributions to stockholders........................ (206,466) -- -- ----------- ----------- ---------- Net cash provided by (used in) financing activities.............................. 286,816 51,455 (856,993) ----------- ----------- ---------- Net increase (decrease) in cash and cash equivalents... (7,642) 2,011 72,511 Cash and cash equivalents: Beginning of year.................................... 92,607 90,596 18,085 ----------- ----------- ---------- End of year.......................................... $ 84,965 $ 92,607 $ 90,596 =========== =========== ========== - --------------------------------------------------------------------------------------------------- Supplemental information: Cash paid for: Interest, net of amounts capitalized.............. $ 301,359 $ 299,196 $ 383,402 Income taxes...................................... $ -- $ 74,723 $ 114,538
The accompanying notes are an integral part of the financial statements. F-71 120 SKI LIFTS, INC. NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: DESCRIPTION OF BUSINESS Ski Lifts, Inc. (the "Company"), operates alpine and cross-country ski resorts at Snoqualmie Summit, Ski Acres, Alpental and Hyak in the western Cascade mountains of Washington State. PROPERTY AND EQUIPMENT Property and equipment is recorded at cost. Construction in progress consists of costs incurred related to the construction of various buildings at the ski resorts including interest costs of $30,000 in 1996. Depreciation is computed using the straight-line method over estimated useful lives as follows:
DESCRIPTION YEARS ----------- ----- Buildings and land improvements............................. 15 - 40 Lifts, tows and hill lighting............................... 5 - 30 Vehicles and equipment...................................... 4 - 15
Gains or losses are recognized in the year of retirement or disposition. Expenditures for additions and betterments are capitalized and expenditures for maintenance are charged to expense as incurred. INVENTORIES Inventories include ski accessories, food and liquor and are stated at the lower of first-in, first-out cost or market. EQUITY IN REAL ESTATE PARTNERSHIP The investment in real estate partnership is accounted for using the equity method. LIFT REVENUE AND UNEARNED REVENUE The Company records lift ticket revenue from season pass and scrip sales during the ski season in which passes and scrip are used. Unearned revenue is recorded for unused season passes, coupons, scrip and other items. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments purchased with an initial maturity of three months or less to be cash equivalents. 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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates and assumptions. FAIR VALUE OF FINANCIAL INSTRUMENTS Financial instruments consist of the Company's line of credit and long-term debt. Information about the fair value of these financial instruments is included in Note 6. F-72 121 SKI LIFTS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 2. PROPERTY AND EQUIPMENT: Property and equipment at September 30 consists of:
1996 1995 ---- ---- Land and land improvements........................ $ 2,913,165 $ 2,893,603 Buildings......................................... 6,166,183 5,267,535 Lifts, tows and hill lighting..................... 4,244,025 4,262,588 Vehicles and equipment............................ 6,192,877 6,036,959 Construction in process........................... 626,788 652,092 ------------ ------------ 20,143,038 19,112,777 Less accumulated depreciation and amortization.... (11,445,949) (10,834,007) ------------ ------------ Property and equipment, net..................... $ 8,697,089 $ 8,278,770 ============ ============
During 1994, equipment with a cost of $129,000 was acquired pursuant to a capital lease. Accumulated amortization on this equipment totaled $73,100 and $47,300 at September 30, 1996 and 1995, respectively. 3. SELF-INSURANCE DEPOSIT: The Company is self insured for worker's compensation (see Note 12). Amounts required to be held in trust as a security deposit by the Department of Labor and Industries totaled $360,000 at September 30, 1996 and 1995. This deposit may be adjusted annually. The deposit was invested in a certificate of deposit which bore interest at 5.42% and 6.00% at September 30, 1996 and 1995, respectively. 4. EQUITY IN REAL ESTATE PARTNERSHIP: On March 15, 1991, the Company formed a general partnership with certain other partners (who are stockholders and officers of the Company) to purchase a building. The Company paid $75,000 for its 25% general partner's interest. The Company is allocated operating profits and losses in proportion to its partnership interest (profits of $5,598, $5,720 and $8,030 in 1996, 1995 and 1994, respectively, are included in miscellaneous income in the Statements of Operations). The Company and a stockholder of the Company have provided a $250,000 subordinated line of credit to the partnership with interest payable monthly at 9%. At September 30, 1996 and 1995 the Company had no amount outstanding under this agreement. The Company leases a portion of the building for its headquarters under the terms described in Note 11. 5. INVESTMENTS: During 1990, the Company paid $100,000 for an investment in 2,223 shares of Class E preferred stock of Arlberg Holding Company, ("Arlberg") an insurance corporation owned by various ski resorts. In December, 1995 these shares were redeemed by Arlberg resulting in a gain of $18,890 for the year ended September 30, 1996. The Company also holds 17,033 shares of common stock of Arlberg with a cost of $75,327 and $50,000 of convertible debentures of Arlberg at September 30, 1996 and 1995. These debentures, which bear interest at 9%, mature on June 30, 2000, and are convertible, under certain conditions, into common stock. A stockholder of the Company serves as a director of Arlberg. F-73 122 SKI LIFTS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 6. LINE OF CREDIT AND LONG-TERM DEBT: At September 30, 1996, the Company had a $3,500,000 revolving line of credit agreement with a bank expiring on April 1, 1998. Borrowings under the agreement, which are payable on demand and are collateralized by substantially all assets except real estate, bear interest at the bank's prime rate plus .75% (9.0% and 9.5% at September 30, 1996 and 1995, respectively). Long-term debt consists of the following at September 30:
1996 1995 ---- ---- Note payable with monthly payments of $7,393 including interest at 8.25%, collateralized by certain equipment, due May, 1998............................................. $139,071 $212,779 Revolving loan facility with maximum borrowings of $2,132,000; maximum borrowings reduced by $164,000 annually; interest payable monthly at prime plus 1.15%, (9.4% and 9.9% at September 30, 1996 and 1995, respectively), collateralized by personal and real property; total unpaid principal and interest is due September, 2004........................................... 495,000 -- -------- -------- 634,071 212,779 Less current portion........................................ (80,115) (73,708) -------- -------- $553,956 $139,071 ======== ========
The aggregate amount of scheduled principal payments on the above notes as of September 30 are as follows: 1997........................................................ $ 80,115 1998........................................................ 58,956 Thereafter (2004)........................................... 495,000 -------- $634,071 ========
The carrying amounts reported in the balance sheet approximate fair values based upon interest rates that are currently available to the Company for issuance of similar debt with similar terms and maturities. The Company's debt agreements limit capital expenditures, and require that the Company meet certain financial ratios including maintenance of minimum tangible net worth and a minimum debt to net worth ratio. As of September 30, 1996 and 1995, the Company had obtained a waiver of rights from creditors with respect to occurrences of noncompliance with these provisions. 7. RELATED PARTY TRANSACTIONS: The Company borrows money for operating purposes from W. W. Moffett, Inc., which is an affiliated company through common stockholders. The notes payable from W. W. Moffett, Inc. totaled $1,305,205 and $1,313,178 at September 30, 1996 and 1995, respectively, bear interest at 5.93% and 5.84%, respectively, are subordinated to the line of credit and long-term debt, and are due on demand. Interest expense on these notes payable for 1996, 1995 and 1994 was approximately $76,000, $77,000 and $48,000, respectively. F-74 123 SKI LIFTS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 8. INCOME TAXES: As of October 1, 1994, an election to be taxed as an S Corporation under Section 1362 of the Internal Revenue Code became effective. This Section provides that, in lieu of corporate income taxes, the stockholders pay taxes on the Company's taxable income. Effective October 1, 1993, the Company adopted the liability method of accounting for income taxes under Financial Accounting Standards Board Statement No. 109, Accounting for Income Taxes ("Statement No. 109"), and the cumulative effect of this change is reported in the 1994 statement of operations. Under Statement No. 109, the differences between the tax bases of assets and liabilities and their financial statement amounts are reflected as deferred income taxes using enacted tax rates. Deferred Federal income taxes are provided for temporary differences which result principally from use of accelerated depreciation methods for certain assets, and from reporting certain other items in different periods for financial reporting and Federal income tax purposes. In addition, the S Corporation rules provide that a tax be payable by the Company if assets acquired on or before September 30, 1994, are sold or disposed of prior to October 1, 2004. This tax is payable on the resultant gains to the extent of the excess of the fair market value of the assets over their tax bases on September 30, 1994. Accordingly, the Company continues to record deferred taxes on its balance sheet with respect to assets for which sale or disposition may result in built-in gain taxes. The S Corporation election resulted in recognition of a deferred tax benefit of $408,285 in the 1995 statements of operations and retained earnings. Total gross deferred tax liabilities at September 30, 1996 and 1995 were approximately $28,000. At September 30, 1996 and 1995, the Company has alternative minimum tax credits of approximately $150,000 which can be utilized against regular taxes. 9. SPECIAL USE PERMITS AND PROPERTY LEASES: The Company operates on approximately 3,821 acres of land of which 1,864 acres are covered by a Special Use Permit issued by the United States Department of Agriculture's Forest Service (the "Forest Service"). This permit expires December 31, 2032 and is generally renewable. Special Use Permit fees are based on revenues for 1996 and are based on fixed assets and revenues for 1995 and 1994. Total Special Use Permit fees for 1996, 1995 and 1994 were approximately $120,000, $188,600 and $180,300, respectively. The remaining 1,957 acres are owned by the Company or leased from a private company. The lease payments are based primarily on skier visits. Total lease expense for 1996, 1995 and 1994 was $8,810, $7,096 and $10,316, respectively. 10. EMPLOYEE BENEFIT PLANS: The Ski Lifts, Inc. Profit Sharing Retirement Plan (the "Plan") provides for both a 401(k) defined contribution plan and a unilateral profit sharing plan for all employees who have worked over 1,000 hours and are over 21 years of age. During 1996, 1995 and 1994, the Company contributed $56,887, $55,810 and $51,499, respectively, under the defined contribution provisions of the Plan. The Company has accrued discretionary contributions as of September 30, 1996 of approximately $162,000 under the unilateral profit sharing provisions of the Plan. F-75 124 SKI LIFTS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 11. LEASE COMMITMENTS AND SUBLEASE AGREEMENTS: The Company leases its office space from a partnership in which the Company is a general partner (see Note 4). On November 1, 1995, this lease was amended to extend the expiration date to March 31, 2006. Rental expense approximated $105,000, $90,000 and $90,000 in 1996, 1995 and 1994, respectively. A portion of the office space is subleased to third parties under six to thirty-six month noncancelable operating leases. Sublease income received in 1996, 1995 and 1994 was $68,210, $59,667 and $55,913, respectively. At September 30, 1996, future minimum lease payments and income under noncancelable operating subleases are as follows:
RENT SUBLEASE NET PAYMENTS PAYMENTS PAYMENTS -------- -------- -------- 1997.......................................... $ 108,908 $14,375 $ 94,533 1998.......................................... 108,908 -- 108,908 1999.......................................... 108,908 -- 108,908 2000.......................................... 108,908 -- 108,908 2001.......................................... 108,908 -- 108,908 2002 and thereafter........................... 490,084 -- 490,084 ---------- ------- ---------- $1,034,624 $14,375 $1,020,249 ========== ======= ==========
In addition, the Company leases snow grooming and maintenance equipment under a capital lease. The following is a schedule of future minimum lease payments under capital leases together with the present value of net minimum lease payments as of September 30, 1996: FOR THE FISCAL YEARS: 1997...................................................... $ 31,610 1998...................................................... 31,610 1999...................................................... 7,903 -------- Net minimum lease payments................................ 71,123 Less amount representing interest......................... (6,249) -------- Present value of net minimum lease payments............... 64,874 Less current portion...................................... (27,215) -------- Long-term obligation...................................... $ 37,659 ========
12. CONTINGENCIES: The Company is party to various claims arising in the normal course of business related to alleged injuries which, in the opinion of management, will not have a material effect on the Company's business. The Company's insurance limits its risk of loss on such claims to the amounts of the deductible under the related insurance policies. At September 30, 1996 and 1995, $142,124 and $240,240, respectively, were accrued related to such claims (primarily deductible amounts). The Company is self-insured with the State of Washington for workers' compensation (see Note 3). Provision is made in the financial statements for the estimated cost of claims. The accrued liability at September 30, 1996 and 1995 was $49,502 and $44,111, respectively. F-76 125 SKI LIFTS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 12. CONTINGENCIES -- (CONTINUED): The Company is currently undergoing an examination by the Forest Service for fiscal years 1991 through 1995 in connection with the Company's use of land under a special use permit. Although the Company has not yet received the final report, the Forest Service has indicated that the assessment will be approximately $100,000. This amount has been accrued for at September 30, 1996, however, the Company intends to vigorously challenge the proposed assessment of additional use fees. 13. SUBSEQUENT EVENT: In December 1996, the stockholders of the Company reached an agreement in principle to sell the stock of the Company to a third party. The proposed transaction is expected to be completed in January 1997. F-77 126 REPORT OF INDEPENDENT AUDITORS The Board of Directors Grand Targhee Incorporated We have audited the accompanying balance sheet of Grand Targhee Incorporated as of March 18, 1997, and the related statements of operations and retained earnings and cash flows for the period from June 1, 1996 to March 18, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Grand Targhee Incorporated at March 18, 1997, and the results of its operations and its cash flows for the period from June 1, 1996 to March 18, 1997, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Milwaukee, Wisconsin June 27, 1997 F-78 127 GRAND TARGHEE INCORPORATED BALANCE SHEET MARCH 18, 1997 ASSETS Current assets: Cash...................................................... $ 256,109 Receivables from related parties.......................... 84,010 Accounts receivable....................................... 97,276 Inventories............................................... 382,700 Refundable income taxes................................... 122,472 Prepaid expenses and other current assets................. 125,667 ----------- Total current assets................................... 1,068,234 Property and equipment: Buildings and land improvements........................... 5,343,463 Ski lifts................................................. 3,549,776 Furniture, fixtures and equipment......................... 2,210,888 Machinery................................................. 1,145,924 Construction in progress.................................. 68,188 ----------- 12,318,239 Less accumulated depreciation and amortization............ 4,567,811 ----------- 7,750,428 Other assets................................................ 25,610 ----------- Total assets........................................... $ 8,844,272 =========== LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities: Accounts payable.......................................... $ 394,160 Accrued liabilities....................................... 711,538 Advanced deposits and unearned revenue.................... 293,545 Line of credit............................................ 450,000 Lift construction obligations............................. 1,695,626 Current portion of long-term debt......................... 913,580 ----------- Total current liabilities.............................. 4,458,449 Long-term debt.............................................. 1,467,011 Deferred income taxes....................................... 113,661 Commitments Shareholder's equity: Common stock, $.01 par value; 600,000 shares authorized, 450,000 shares issued and outstanding.................. 4,500 Capital in excess of par value............................ 1,887,942 Retained earnings......................................... 912,709 ----------- Total shareholder's equity............................. 2,805,151 ----------- Total liabilities and shareholder's equity............. $ 8,844,272 ===========
See accompanying notes. F-79 128 GRAND TARGHEE INCORPORATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS PERIOD FROM JUNE 1, 1996 TO MARCH 18, 1997 Revenue..................................................... $5,639,224 Direct expenses: Labor, taxes and benefits................................. 1,945,416 Cost of goods sold........................................ 685,613 Other direct costs........................................ 1,074,616 ---------- 3,705,645 ---------- Gross margin................................................ 1,933,579 ---------- Operating costs and expenses: General and administrative................................ 726,808 Marketing................................................. 477,636 Insurance................................................. 189,769 Forest service lease and other leased property............ 82,551 Property maintenance...................................... 294,222 Loss on disposal of ski lifts............................. 217,488 Depreciation and amortization............................. 533,954 ---------- 2,522,428 ---------- Loss from operations........................................ (588,849) Other expense: Interest expense.......................................... 92,439 Abandonment of land swap costs............................ 53,669 ---------- Loss before income tax benefit.............................. (734,957) Income tax benefit.......................................... 138,811 ---------- Net loss.................................................... (596,146) Retained earnings: Beginning of period....................................... 1,508,855 ---------- End of period............................................. $ 912,709 ==========
See accompanying notes. F-80 129 GRAND TARGHEE INCORPORATED STATEMENT OF CASH FLOWS PERIOD FROM JUNE 1, 1996 TO MARCH 18, 1997 Cash flows from operations: Net loss.................................................. $ (596,146) Adjustment from net loss to net cash provided by operating activities: Depreciation and amortization.......................... 533,954 Loss on disposal of ski lifts.......................... 217,488 Deferred income tax benefit............................ (16,339) Changes in operating assets and liabilities: Receivables from related parties..................... (39,965) Accounts receivable.................................. (72,234) Inventories.......................................... (84,180) Income taxes......................................... (141,472) Prepaid expenses and other current assets............ 9,641 Accounts payable..................................... 228,331 Accrued liabilities.................................. 441,133 Advanced deposits and unearned revenue............... 145,678 ----------- Net cash provided by operating activities................. 625,889 ----------- Cash flows from investing activities: Purchase of property and equipment........................ (1,430,048) ----------- Net cash used in investing activities..................... (1,430,048) ----------- Cash flows from financing activities: Proceeds from line of credit.............................. 515,500 Payments on line of credit................................ (400,000) Proceeds from long-term borrowings........................ 1,397,966 Principal payments on long-term borrowings................ (494,409) ----------- Net cash provided by financing activities................. 1,019,057 ----------- Net increase in cash...................................... 214,898 Cash at beginning of period............................... 41,211 ----------- Cash at end of period..................................... $ 256,109 ===========
See accompanying notes. F-81 130 GRAND TARGHEE INCORPORATED NOTES TO FINANCIAL STATEMENTS MARCH 18, 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES HISTORY OF ORGANIZATION In October 1992, in connection with a tax-free reorganization pursuant to Section 368(a)(1)(F) of the Internal Revenue Code of 1986, as amended, Big Valley Corporation, a Wyoming corporation, merged with Grand Targhee Incorporated (the "Company"), a Delaware corporation. The Company was formed just prior to the merger and had no prior operations. Prior to this merger, Big Valley Corporation operated the Grand Targhee Ski and Summer Resort (the "Resort"). As part of the merger agreement, the outstanding stock of Big Valley Corporation was exchanged for 450,000 shares of common stock of the Company. The purpose of this merger was to establish Delaware as the State of domicile and to change the name of the corporation. BUSINESS ACTIVITIES The Company operates the Resort, which is located in Alta, Wyoming. The Resort offers downhill skiing and related activities such as cross-country skiing, ski lessons and other winter and summer activities. In addition, the Company operates lodging facilities, restaurants and retail shops. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out method. PROPERTY AND EQUIPMENT Property and equipment is recorded at cost. The cost of buildings, improvements and equipment is depreciated on the straight-line method over the following estimated useful lives:
YEARS ----- Buildings and land improvements............................. 3 - 30 Ski lifts................................................... 11 - 30 Furniture, fixtures and equipment........................... 3 - 10 Machinery................................................... 3 - 10
REVENUE RECOGNITION Revenues are generally recognized as services are provided and products are sold. Sales of season passes are initially deferred in unearned revenue and recognized over the ski season. INCOME TAXES The liability method is used to account for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles require 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. F-82 131 GRAND TARGHEE INCORPORATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 2. INVENTORIES Inventories at March 18, 1997 are as follows: Retail goods................................................ $312,859 Restaurant -- food and supplies............................. 17,086 Operating supplies.......................................... 52,755 -------- $382,700 ========
3. LINE OF CREDIT The Company has a line of credit in the amount of $850,000 with a bank which is subject to renewal annually in April. As of March 18, 1997, $450,000 was outstanding under this agreement. The line of credit is secured under a general blanket collateral agreement which includes a security interest in the Company's stock, buildings, inventories, equipment, furnishings, the Forest Service lease and receivables. Additionally, the line of credit is personally guaranteed by the shareholder and an officer of the Company. Interest is at 2% above a bank's prime rate (10.25% at March 18, 1997). Interest payments are due monthly. The outstanding balance is due on April 30, 1997. 4. LONG-TERM DEBT Long-term debt at March 18, 1997 consists of the following: Notes payable to the Farmers Home Administration, payable in annual installments of $53,214 including interest at 5%, with the unpaid balance due August 1999; collateralized by buildings and equipment................................... $ 161,438 Note payable to a bank, due in monthly installments of $18,571 in the months of December through April of each fiscal year through April 30, 2003; interest payments are due monthly at a bank's prime rate plus 2% (10.25% at March 18, 1997); collateralized by substantially all of the Company's assets...................................... 599,515 Unsecured non-interest bearing obligation to a related party..................................................... 400,000 Notes payable (including accrued interest) and lease obligations to a related party............................ 412,652 Unsecured non-interest bearing obligation to a third party..................................................... 655,000 Other notes payable and capital lease obligations........... 151,986 ---------- 2,380,591 Less current portion........................................ 913,580 ---------- $1,467,011 ==========
F-83 132 GRAND TARGHEE INCORPORATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 4. LONG-TERM DEBT -- (CONTINUED) Maturities of long-term debt are as follows:
PERIOD ENDED MARCH 18, - ------------ 1998...................................................... $ 913,580 1999...................................................... 161,679 2000...................................................... 171,741 2001...................................................... 92,857 2002...................................................... 92,857 Thereafter................................................ 135,225 Obligations to related parties with no stated maturity dates.................................................. 812,652 ---------- $2,380,591 ==========
Interest paid for the period ended March 18, 1997 was approximately $154,000. 5. RELATED PARTY TRANSACTIONS Transactions with related parties not disclosed elsewhere herein are as follows:
MARCH 18, 1997 --------- Accounts receivable: Moritz Bergmeyer -- shareholder........................... $35,822 Targhee Institute......................................... 27,615 High Mountain Travel...................................... 10,998 Other..................................................... 9,575 ------- $84,010 =======
The receivable from Moritz Bergmeyer is non-interest bearing and is due on demand. The remaining related party accounts are non-interest bearing and result from operating activities. Targhee Institute was formed with the assistance of the Company as a not-for-profit entity. Targhee Institute's purpose is to provide educational programs on science, nature, and cultural related topics. The Company received approximately $107,000 during the period ended March 18, 1997 from Targhee Institute for room, board, and site fees related to its educational and cultural programs. High Mountain Travel is a for-profit travel agency formed by the shareholder to provide bus transportation to the ski resort area. The Company accrued commissions totaling approximately $29,000 to High Mountain Travel for the period ended March 18, 1997. 6. INCOME TAXES The income tax benefit for the period from June 1, 1996 to March 18, 1997 consists of a federal current benefit of $122,472 and a federal deferred benefit of $16,339. At March 18, 1997, the Company's deferred tax balances relate principally to differences in the book and tax bases of property and equipment. In addition, the Company has Alternative Minimum Tax ("AMT") credits of approximately $138,000 at March 18, 1997, which have been fully offset by a valuation reserve. The amount of unused AMT credits increased by $83,000 during the period ended March 18, 1997 due to the effects of carrying back current period tax losses to prior tax return periods in which AMT credits had been F-84 133 GRAND TARGHEE INCORPORATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 6. INCOME TAXES -- (CONTINUED) previously utilized. The effects of reserving for these arising AMT credits is the principal difference between the income tax benefit of $138,811 for the period ended March 18, 1997 and the amount that would be derived by applying the statutory federal income tax rate to the Company's loss before income taxes. 7. COMMITMENTS AND CONTINGENCIES FOREST SERVICE LEASE The Company has an agreement with the United States Department of Agriculture whereby the Forest Service has granted the Company a permit for use at the Resort. The special use permit, which expires on December 31, 2034, covers approximately 2,400 acres for the purposes of constructing, operating and maintaining a ski and summer resort including food service, retail sales and other facilities. A further reissuance of the National Forest special use permit may be granted provided the holder shall comply with the then existing laws and regulations governing the occupancy and use of National Forest lands. The fee for this use is based on a graduated fee rate system based generally on the level of sales. This fee was approximately $83,000 for the period from June 1, 1996 to March 18, 1997. The Company is required to have minimum public liability and bodily injury insurance in force. All installations and improvements made on the property must be in compliance with the terms of the permit. The Resort is subject to inspection by the Forest Service and must be maintained to meet applicable safety standards. The Company may sublease the use of land and improvements covered under the permit and the operation of concessions and facilities upon prior written notice to the Forest Service. LEASE WITH RELATED PARTY The Company has a sublease with its shareholder extending through May 2000, allowing the shareholder the right to use and occupy a portion of the Forest Service lease. The lease agreement requires lease payments of $1,000 per year. The Company has a five year lease with the stockholder extending through May 2000, allowing the Company the use of the Teewinot Lodge, located on the subleased property described above. The lease agreement calls for annual payments of $60,000 payable in equal monthly installments of $5,000. The Company is to maintain the premises and pay insurance and taxes thereon. During the period from June 1, 1996 to March 18, 1997, rent expense under this lease was $47,500. 8. LIFT CONSTRUCTION ACTIVITIES During the period ended March 18, 1997, the Company constructed two new ski lifts at a cost of approximately $3,313,000 and placed them in operation for the 1996-1997 ski season. As a result, two existing lifts were removed from operations and are expected to be disposed of. During the period from June 1, 1996 to March 18, 1997, the Company has recorded a loss of $217,488 for the remaining net book value and expected disposal costs of the old lifts. Interest capitalized related to the construction of these lifts totaled $62,000 for the period ended March 18, 1997. The Company financed approximately $1,696,000 of the lift construction using vendor financing. F-85 134 GRAND TARGHEE INCORPORATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 9. SUBSEQUENT EVENT On March 18, 1997, Booth Creek Ski Holdings, Inc. acquired all the issued and outstanding capital stock of the Company for an aggregate purchase price of approximately $8.1 million plus contingent payments of up to $2.0 million based on the performance of Grand Targhee through the 1998-1999 ski season and additional commissions based on the number of dwelling units developed at the resort through 2012. F-86 135 INDEPENDENT AUDITORS' REPORT Board of Directors Grand Targhee Incorporated Alta, Wyoming We have audited the accompanying balance sheets of Grand Targhee Incorporated as of May 31, 1996 and 1995 and the related statements of operations, changes in stockholder's equity and cash flows for the years ended May 31, 1996, 1995 and 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Grand Targhee Incorporated as of May 31, 1996 and 1995, and the results of its operations and its cash flows for the years ended May 31, 1996, 1995 and 1994 in conformity with generally accepted accounting principles. FELDHAKE & ASSOCIATES, P.C. Englewood, Colorado June 20, 1996, except for Note 11 for which the date is January 27, 1997 F-87 136 GRAND TARGHEE INCORPORATED BALANCE SHEETS
MAY 31, ------------------------ 1996 1995 ---- ---- ASSETS Current assets: Cash...................................................... $ 41,211 $ 63,677 Receivables from related parties.......................... 44,045 23,923 Trade accounts receivable................................. 25,042 21,863 Inventories............................................... 298,520 276,963 Prepaid expenses.......................................... 135,308 100,705 ---------- ---------- Total current assets................................... 544,126 487,131 ---------- ---------- Property and equipment, at cost: Buildings and improvements................................ 5,119,403 5,067,537 Ski lift facilities....................................... 927,851 949,120 Snow cats and hill grooming equipment..................... 574,361 573,423 Furniture and fixtures.................................... 959,008 888,465 Land improvements......................................... 222,021 222,021 Other equipment........................................... 1,312,395 1,219,995 Transportation equipment.................................. 183,454 160,454 Construction in process................................... 67,439 64,037 ---------- ---------- 9,365,932 9,145,052 Less accumulated depreciation and amortization............ 4,674,236 4,125,060 ---------- ---------- 4,691,696 5,019,992 ---------- ---------- Other assets: Deposits -- ski lifts..................................... 684,500 100,000 Other..................................................... 25,610 63,482 ---------- ---------- 710,110 163,482 ---------- ---------- Total assets........................................... $5,945,932 $5,670,605 ========== ========== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable.......................................... $ 165,829 $ 111,470 Accrued liabilities....................................... 270,405 411,104 Advanced deposits......................................... 147,867 179,956 Income taxes currently payable............................ 19,000 107,000 Line of credit with bank.................................. 334,500 300,000 Current portion of notes payable.......................... 219,274 288,906 Current portion of obligations under capital leases....... 59,821 69,571 ---------- ---------- Total current liabilities.............................. 1,216,696 1,468,007 ---------- ---------- Long term debt: Notes payable............................................. 725,439 358,388 Obligations under capital leases.......................... 56,284 26,747 Due to related parties.................................... 416,216 460,618 ---------- ---------- 1,197,939 845,753 ---------- ---------- Deferred income taxes....................................... 130,000 182,000 ---------- ---------- Stockholder's equity: Common stock, $.01 par value Authorized -- 600,000 shares Issued and outstanding -- 450,000 shares............... 4,500 4,500 Capital in excess of par value............................ 1,887,942 1,887,942 Retained earnings......................................... 1,508,855 1,282,403 ---------- ---------- Total stockholder's equity............................. 3,401,297 3,174,845 ---------- ---------- Total liabilities and stockholder's equity............. $5,945,932 $5,670,605 ========== ==========
The accompanying notes are an integral part of the financial statements. F-88 137 GRAND TARGHEE INCORPORATED STATEMENTS OF OPERATIONS
YEAR ENDED MAY 31, -------------------------------------- 1996 1995 1994 ---- ---- ---- Revenue: Sales.................................................. $7,364,363 $6,736,459 $6,241,285 Concessions............................................ 11,896 25,350 44,089 ---------- ---------- ---------- 7,376,259 6,761,809 6,285,374 ---------- ---------- ---------- Direct expenses: Labor, taxes and benefits.............................. 2,245,472 1,915,790 1,764,753 Cost of goods sold..................................... 982,957 912,930 843,431 Other direct costs..................................... 930,238 899,083 852,193 ---------- ---------- ---------- 4,158,667 3,727,803 3,460,377 ---------- ---------- ---------- Gross margin............................................. 3,217,592 3,034,006 2,824,997 ---------- ---------- ---------- Operating costs and expenses: General and administrative............................. 892,745 876,697 801,207 Marketing.............................................. 482,854 475,848 342,266 Insurance.............................................. 218,362 198,424 199,987 Forest service lease................................... 171,436 164,015 154,194 Other leased property.................................. 66,100 104,750 102,000 Property maintenance................................... 210,415 194,653 179,382 Depreciation and amortization.......................... 583,282 576,802 566,397 Impairment of long-lived assets........................ 42,619 -- -- ---------- ---------- ---------- 2,667,813 2,591,189 2,345,433 ---------- ---------- ---------- Income from operations................................... 549,779 442,817 479,564 ---------- ---------- ---------- Other income (expenses): Abandonment of land exchange costs..................... (99,259) -- -- Gain (loss) on disposition of assets................... (42,799) 9,732 (1,000) Interest income........................................ 9,595 2,206 1,872 Interest expense....................................... (117,864) (171,812) (204,604) ---------- ---------- ---------- (250,327) (159,874) (203,732) ---------- ---------- ---------- Income before income taxes............................... 299,452 282,943 275,832 Income tax expense....................................... 73,000 79,098 113,371 ---------- ---------- ---------- Net income............................................... $ 226,452 $ 203,845 $ 162,461 ========== ========== ==========
The accompanying notes are an integral part of the financial statements. F-89 138 GRAND TARGHEE INCORPORATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY YEARS ENDED MAY 31, 1996, 1995 AND 1994
CAPITAL IN EXCESS TOTAL COMMON OF PAR RETAINED STOCKHOLDER'S STOCK VALUE EARNINGS EQUITY ------ --------- -------- ------------- Balance at June 1, 1993................................... $4,500 $1,887,942 $ 916,097 $2,808,539 Net income....................................... -- -- 162,461 162,461 ------ ---------- ---------- ---------- Balance at May 31, 1994................................... 4,500 1,887,942 1,078,558 2,971,000 Net income....................................... -- -- 203,845 203,845 ------ ---------- ---------- ---------- Balance at May 31, 1995................................... 4,500 1,887,942 1,282,403 3,174,845 Net income....................................... -- -- 226,452 226,452 ------ ---------- ---------- ---------- Balance at May 31, 1996................................... $4,500 $1,887,942 $1,508,855 $3,401,297 ====== ========== ========== ==========
The accompanying notes are an integral part of the financial statements. F-90 139 GRAND TARGHEE INCORPORATED STATEMENTS OF CASH FLOWS
YEAR ENDED MAY 31, ------------------------------------ 1996 1995 1994 ---- ---- ---- Cash flows from operating activities: Net income.............................................. $ 226,452 $ 203,845 $ 162,461 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................ 632,935 622,739 618,597 Impairment of long-lived asset....................... 42,619 -- -- Loss (gain) on disposal of assets.................... 42,799 (9,732) 1,000 Changes in assets and liabilities: Trade receivables.................................. (3,179) 17,900 (31,264) Inventory.......................................... (21,557) (5,295) (34,535) Prepaid expenses................................... (34,603) (10,442) (20,213) Net deferred taxes................................. (52,000) (28,000) 17,373 Accounts payable and accrued liabilities........... (189,428) 252,326 (82,766) Due to/from related parties........................ 23,003 (27,112) 9,776 --------- ---------- --------- 667,041 1,016,229 640,429 --------- ---------- --------- Cash flows from investing activities: Proceeds from sale of fixed assets...................... 1,000 20,650 -- Purchase of property and equipment...................... (236,454) (472,527) (169,665) Deposits and other assets............................... 2,002 (10,944) (22,463) Related party receivable................................ (30,000) -- -- --------- ---------- --------- (263,452) (462,821) (192,128) --------- ---------- --------- Cash flows from financing activities: Borrowing on new notes.................................. 400,000 276,537 4,590 Borrowings from related parties......................... -- -- 188,100 Payments on debt to related parties..................... (77,915) -- -- Net borrowing on line of credit......................... (300,000) (152,547) (199,955) Payments on long-term debt and capital lease obligations.......................................... (448,140) (650,790) (662,255) --------- ---------- --------- (426,055) (526,800) (669,520) --------- ---------- --------- Net increase (decrease) in cash........................... (22,466) 26,608 (221,219) Cash at beginning year.................................... 63,677 37,069 258,288 --------- ---------- --------- Cash at end of year....................................... $ 41,211 $ 63,677 $ 37,069 ========= ========== =========
The accompanying notes are an integral part of the financial statements. F-91 140 GRAND TARGHEE INCORPORATED NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This summary of significant accounting policies of Grand Targhee Incorporated (the Company) is presented to assist in understanding the Company's financial statements. The financial statements and notes are representations of the Company's management, which is responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles and have been consistently applied. HISTORY OF ORGANIZATION In October 1992, in connection with a tax-free reorganization pursuant to Section 368 (a)(1)(F) of the Internal Revenue Code of 1986, as amended, Big Valley Corporation, a Wyoming corporation, merged with Grand Targhee Incorporated, a Delaware corporation. Grand Targhee Incorporated was formed just prior to the merger and had no prior operations. Prior to this merger, Big Valley Corporation operated the Grand Targhee Resort. As part of the merger agreement, the outstanding stock of Big Valley Corporation common stock was exchanged for 450,000 shares of common stock of Grand Targhee Incorporated. The purpose of this merger was to establish Delaware as the State of domicile and change the name of the corporation. BUSINESS ACTIVITIES The Company operates the Grand Targhee Ski and Summer Resort (the Resort). The Resort offers downhill skiing and related activities such as cross-country skiing, ski lessons and other winter and summer activities. In addition, the Company operates lodging facilities, restaurants and retail shops. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out method. DEPRECIATION The cost of buildings, improvements and equipment is depreciated over the lesser of the length of the lease with the Forest Service or the estimated useful lives of the assets. Depreciation is computed on the straight-line method over the following estimated useful lives:
YEARS ----- Buildings and improvements.................................. 12 - 30 Ski lift facilities......................................... 11 - 30 Snow cats and hill grooming equipment....................... 5 Furniture and fixtures...................................... 5 - 7 Land improvements........................................... 3 - 30 Ski rental equipment........................................ 3 Other equipment............................................. 3 - 10 Transportation equipment.................................... 3 - 7
CASH FLOWS For purposes of the statement of cash flows, the Company considers short-term cash investments with a maturity of three months or less as cash. The Company considers the line of credit with the bank to be short-term and presents transactions net for purposes of the statement of cash flows. Interest paid for the years ended May 31, 1996, 1995 and 1994 was $187,424, $158,469 and $233,795, respectively. F-92 141 GRAND TARGHEE INCORPORATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) The Company acquired certain equipment totaling $132,364 and $47,698 through capital leases and purchase contracts during the years ended May 31, 1996 and 1995. respectively. The Company made deposits on the new chair lifts (Note 8) through advances of $334,500 from its line of credit and $250,000 from its term loan during the year ended May 31, 1996. These advances were non-cash transactions for the Company and therefore are not presented in the statements of cash flows. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles require management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results could differ from those estimates. RECLASSIFICATION Certain reclassifications have been made to the 1994 and 1995 financial statements in order to conform to the 1996 presentation. 2. INVENTORIES Inventories are as follows:
MAY 31, -------------------- 1996 1995 ---- ---- Retail goods............................................. $250,688 $248,941 Lounge -- beverage and supplies.......................... 6,792 9,923 Restaurant -- food and supplies.......................... 28,910 14,843 Sundries................................................. 12,130 3,256 -------- -------- $298,520 $276,963 ======== ========
3. LINE OF CREDIT The Company has a line of credit in the amount of $850,000 with a bank which is subject to renewal annually in April. As of May 31, 1996 the company has an outstanding balance of $334,500. This line of credit is secured under a general blanket collateral agreement which includes a security interest in the Company's stock, buildings, inventory, equipment, furnishings, the forest service lease and receivables. Additionally, this line of credit is personally guaranteed by the stockholder and an officer of the Company. Interest is at 2% above Chase Manhattan Bank's prime rate. Interest only payments are due monthly beginning on April 30, 1996. Monthly principal payments of the lesser of $200,000 or the entire principal balance then outstanding are due December 1996 through March 1997 with remaining balance due April 30, 1997. F-93 142 GRAND TARGHEE INCORPORATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 4. LONG-TERM DEBT
MAY 31, -------------------- 1996 1995 ---- ---- Notes payable to the Farmers Home Administration, payable in annual installments of $53,214 including interest at 5%, balance due August, 1999, collateralized by buildings and equipment................................................. $202,715 $243,743 Note payable to a bank, payable in five monthly principal payments of $12,500 each year, December through April, plus monthly interest payments at 3% above the bank's index rate, due December 15, 1998, collateralized by virtually all assets of the Company. ..................... -- 189,518 Note payable to a bank, payable in five monthly installments equal to one thirty-fifth of the principal balance of the note, December through April, plus monthly interest payments at prime plus 2% as published by Chase Manhattan Bank, due April 30, 2003, collateralized by virtually all assets of the company, this loan is cross-collateralized with the bank line of credit, see Note 3. ................ 650,000 -- Equipment purchase contract, payable in four monthly installments of $1,381 each year, January through April, including interest at 7.9% due April 1998, collateralized by certain equipment...................................... 9,983 -- Notes payable -- individuals(1)............................. -- 100,000 Note payable to a related party, payable in monthly installments of $2,046, including interest at 10.48%, balance due August 1, 1997, unsecured..................... 28,645 49,033 Notes payable with interest ranging from 9% to 10%, due January 26, 1997, guaranteed by the stockholder and an officer of the Company, unsecured......................... 53,370 50,000 Short-term note payable with interest at a rate of 3.5%, guaranteed by the stockholder and an officer of the Company, unsecured........................................ -- 15,000 -------- -------- 944,713 647,294 Less current portion........................................ 219,274 288,906 -------- -------- $725,439 $358,388 ======== ========
- ------------------------- (1) Notes payable -- individuals represent notes to individuals in the amounts ranging from $10,000 to $25,000, at an interest rate of 13% due within 60 days of the date the note holder demands payment. Maturities of long-term debt are as follows:
YEAR ENDED MAY 31, ---------- 1997........................................................ $216,721 1998........................................................ 149,302 1999........................................................ 157,184 2000........................................................ 142,934 2001........................................................ 92,857 Thereafter.................................................. 185,715 -------- $944,713 ========
F-94 143 GRAND TARGHEE INCORPORATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 5. RELATED PARTY TRANSACTIONS Transactions with related parties are as follows:
MAY 31, ------------------- 1996 1995 ---- ---- CURRENT RECEIVABLE (PAYABLE): High Mountain Travel................................... $ -- $ 154 Grand Teton Furniture Company.......................... -- (39,250) Targhee Institute...................................... 14,045 23,769 Moritz Bergmeyer....................................... 30,000 -- ------- -------- 44,045 (15,327) Portion included in accounts payable..................... -- 39,250 ------- -------- $44,045 $ 23,923 ======= ========
The receivable from Moritz Bergmeyer is non-interest bearing and is due on demand. The remaining related party accounts are non-interest bearing and result from operating activities. LONG-TERM PAYABLE: Notes payable and accrued interest..................... $154,609 $212,136 Leases payable......................................... 261,607 248,482 -------- -------- $416,216 $460,618 ======== ========
Targhee Institute was formed with the assistance of the Company as a not-for-profit entity. Targhee Institute's purpose is to provide educational programs on science, nature, and cultural related topics. The Company received $102,522, $39,775 and $61,180 during the years ended May 31, 1996, 1995 and 1994 from Targhee Institute for room, board, and site fees related to its educational and cultural programs. High Mountain Travel is a for-profit travel agency formed by the shareholder to provide bus transportation to the ski resort area. The Company accrued commissions totaling $31,879, $37,485 and $40,020 to High Mountain Travel for the years ended May 31, 1996, 1995 and 1994, respectively. During the years ended May 31, 1996, 1995 and 1994, the Company incurred interest expense of $9,064, $22,596 and $6,169, respectively, with related parties. The Company incurred lease expense of $63,000, $99,000 and $96,000 with related parties during the years ended May 31, 1996, 1995 and 1994, respectively. See also Notes 7 and 8. During the year ended May 31, 1994, the Company acquired furniture and fixtures from Grand Teton Furniture totaling $41,230. Grand Teton Furniture is related to the Company through common ownership and management. 6. INCOME TAXES At May 31, 1996, the Company has for tax purposes unused Alternative Minimum Tax (AMT) credits of approximately $60,000 which can be carried forward indefinitely. The Company has established a valuation allowance of $60,000 because of limitations on the usage of this credit. As a result, the Company has used $0 of its AMT tax credit carryovers to reduce deferred income taxes payable. Deferred income taxes arise primarily because of temporary differences related to recognition of the gain on the disposal of the building and equipment destroyed in a fire. For tax purposes, the gain is treated as a reduction of the cost of the replacement property and is recognized ratably over the life of the property as a F-95 144 GRAND TARGHEE INCORPORATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 6. INCOME TAXES -- (CONTINUED) reduction of depreciation. The resulting deferred taxes are allocated between current and non-current liabilities based on the expected reversal period. Income tax expense for the years ended May 31, 1996, 1995 and 1994 vary from Federal statutory rates because of the impact of the Alternative Minimum Tax and use of the Alternative Minimum Tax Credit. Income tax expense includes the following components:
PAYABLE -------------------- EXPENSE CURRENT DEFERRED ------- ------- -------- Balance June 1, 1993........................................ $ 33,206 $192,627 Payments.................................................... (33,204) -- Expense..................................................... $113,371 95,998 17,373 ======== --------- -------- Balance May 31, 1994........................................ 96,000 210,000 Payments.................................................... (96,098) -- Expense..................................................... $ 79,098 107,098 (28,000) ======== --------- -------- Balance May 31, 1995........................................ 107,000 182,000 Payments.................................................... (213,000) -- Expense..................................................... $ 73,000 125,000 (52,000) ======== --------- -------- Balance May 31, 1996........................................ $ 19,000 $130,000 ========= ========
7. LEASING ARRANGEMENTS The Company leases certain furniture, fixtures, and equipment under leases which expire at various times over the next three years. In addition, the Company leases a building from its stockholder as more fully described in Note 8. The following is a yearly schedule of future minimum lease payments under long-term capital and operating leases:
YEAR ENDED CAPITAL OPERATING MAY 31, LEASES LEASES ---------- ------- --------- 1997...................................................... $ 68,276 $ 59,000 1998...................................................... 46,673 59,000 1999...................................................... 18,261 59,000 2000...................................................... -- 59,000 2001...................................................... -- -- -------- -------- Total minimum lease payments................................ 133,210 $236,000 ======== Less amounts representing interest.......................... 17,105 Less portion included in current liabilities................ 59,821 -------- $ 56,284 ========
Substantially all of the operating leases are with the stockholder. Management expects, as part of normal operations, to renew its operating leases after the current lease term. In addition to these long-term operating leases, minimum payments for short-term renewable leases with related parties in effect at May 31, 1996 was approximately $250 per month. F-96 145 GRAND TARGHEE INCORPORATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 7. LEASING ARRANGEMENTS -- (CONTINUED) Equipment under capital leases of approximately $165,000, is included in snow cats and hill grooming equipment, furniture and fixtures, other equipment and transportation equipment. At the conclusion of these leases, title will transfer to the Company or the Company will have the option to acquire the asset at a bargain price. Amortization associated with the equipment under capital leases is included in depreciation expense. 8. COMMITMENTS AND CONTINGENCIES FOREST SERVICE LEASE The Company has an agreement with the United States Department of Agriculture whereby the Forest Service has granted the Company a permit for use at the Resort. The permit, expiring on December 31, 2034, is a special use permit covering approximately 2,400 acres for the purposes of constructing, operating and maintaining a ski and summer resort including food service, retail sales and other facilities. A further reissuance of the National Forest special use permit may be granted provided the holder shall comply with the then existing laws and regulations governing the occupancy and use of National Forest lands. The fee for this use is based on a graduated rate fee system using the cost of certain "gross fixed assets" and annual sales to determine the rate applied to sales. This fee was $171,436, $164,015 and $154,194 for the years ended May 31, 1996, 1995 and 1994, respectively. The Company is required to have minimum public liability and bodily injury insurance in force. All installations and improvements made on the property must be incompliance with the terms of the permits. The Resort is subject to inspection by the Forest Service and must be maintained to meet the applicable safety standards. The Company may sublease the use of land and improvements covered under these permits and the operation of concessions and facilities upon prior written notice to the authorized officer. LEASE WITH RELATED PARTY The Company has a sub-lease with its stockholder extending through May, 2000, allowing the stockholder the right to use and occupy a portion of the Forest Service lease. The lease term requires payment of $1,000 per year. The Company has a five year lease with the stockholder extending through May, 2000, allowing the Company the use of the Teewinot Lodge, located on the sub-lease with the stockholder described above. The lease agreement calls for annual payments of $60,000 payable in equal monthly installments of $5,000. The Company is to maintain the premises and pay insurance and taxes thereon. During the years ended May 31, 1996, 1995 and 1994, rent under this lease was $60,000. CONCENTRATION OF CREDIT RISK The Company's revenues are earned from the general public. The nature of operations are such that credit is not generally extended to its customers. Goods and services purchased are supplied by a variety of vendors. The Company is, however, dependent upon a permit from the U.S. Forest Service because the Resort is located in the Targhee National Forest. The Company maintains its bank accounts in a Federally insured financial institution. Amounts are insured up to $100,000. At times during the year, amounts in excess of $100,000 are on deposit with the financial institution. F-97 146 GRAND TARGHEE INCORPORATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 8. COMMITMENTS AND CONTINGENCIES -- (CONTINUED) CONSTRUCTION OF NEW LIFTS At May 31, 1996, the Company has committed to the construction of two new lifts. One is a stealth detachable quad and the second is a fixed grip quad. These lifts will replace the current Bannock and Shoshone lifts. The Bannock lift will continue to operate until its replacement is fully operational. The Shoshone lift is being abandoned and impairment of its net carrying value at May 31, 1996 has been recognized (Note 9). The contract calls for the new Bannock detachable quad to cost $2,371,865 and the Shoshone fixed grip quad to cost $437,750. The price is a "turnkey" price but does not include removal of existing equipment nor taxes. Financing for these lifts is provided in part by the existing term loan from the Company's bank. The balance of the financing is to be provided through loans arranged by the potential purchaser of the Company (Note 11). At May 31, 1996, the Company has made deposits of $684,500. Of this amount, $100,000 was deposited as of May 31, 1995 and the balance was paid with $334,500 advanced from the line of credit and $250,000 advanced from the term loan. 9. IMPAIRMENT OF LONG-LIVED ASSETS At May 31, 1996, the Company has contracted to construct two new ski lifts to be operational for the 1996-1997 ski season (Note 8). As part of this process, the existing Shoshone lift with a net book value of $42,619 will be abandoned. Fair market value of the abandoned lift, estimated by management based on published advertisements for lifts with similar characteristics, is $25,000. Cost to salvage this lift is also estimated at $25,000. A loss of $42,619 is included in the statements of operations for the year ended May 31, 1996. The impairment is included in accumulated depreciation and amortization in the balance sheet. 10. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value of funds in financial institutions, which includes checking accounts and operating money markets, are equal to their carrying value. The estimated fair values of amounts due to/from related parties are equal to their carrying value because terms of these rights and obligation have been recently established or have recently been subject to remodification. The established fair values of capitalized lease obligations and notes payable are equal to their carrying value because all material obligations of their nature have been negotiated recently with the exception of the note payable to the U.S. Department of Agriculture, F.H.A. Department. The carrying amount of this loan is $202,715 and the estimated fair value is not determinable because notes of this nature are no longer issued. 11. SUBSEQUENT EVENT On November 15, 1996, Mr. Moritz O. Bergmeyer and Ms. Carol Mann Bergmeyer executed a letter of intent with Booth Creek, Inc. pursuant to which Booth Creek proposes to acquire all of the issued and outstanding capital stock of the Company. F-98 147 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Truckee, State of California, as of January 29, 1998. BOOTH CREEK SKI HOLDINGS, INC. By: /s/ NANCI N. NORTHWAY ------------------------------------ Nanci N. Northway Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed by the following persons in the capacities and as of the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ GEORGE N. GILLETT, JR. Chairman of the Board of Directors and January 29, 1998 - ------------------------------------------ Chief Executive Officer George N. Gillett, Jr. /s/ NANCI N. NORTHWAY Vice President and Chief Financial January 29, 1998 - ------------------------------------------ Officer (principal financial and Nanci N. Northway accounting officer)
148 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- *3.1 Certificate of Incorporation of Booth Creek Ski Holdings, Inc. *3.2 Bylaws of Booth Creek Ski Holdings, Inc. *3.3 Restated Articles of Incorporation of Trimont Land Company. *3.4 Bylaws of Trimont Land Company. *3.5 Certificate of Incorporation of Sierra-at-Tahoe, Inc. *3.6 Bylaws of Sierra-at-Tahoe, Inc. *3.7 Certificate of Incorporation of Bear Mountain, Inc. *3.8 Bylaws of Bear Mountain, Inc. *3.9 Certificate of Incorporation of Booth Creek Ski Acquisition Corp. *3.10 Bylaws of Booth Creek Ski Acquisition Corp. *3.11 Amended and Restated Certificate of Incorporation of Waterville Valley Ski Resort, Inc. *3.12 Bylaws of Waterville Valley Ski Resort, Inc. *3.13 Amended and Restated Certificate of Incorporation of Mount Cranmore Ski Resort, Inc. *3.14 Bylaws of Mount Cranmore Ski Resort, Inc. *3.15 Amended and Restated Articles of Incorporation of Ski Lifts, Inc. *3.16 Bylaws of Ski Lifts, Inc. *3.17 Certificate of Incorporation of Grand Targhee Incorporated. *3.18 Bylaws of Grand Targhee Incorporated. *3.19 Articles of Incorporation of B-V Corporation. *3.20 Bylaws of B-V Corporation. *3.21 Certificate of Incorporation of Targhee Company. *3.22 Bylaws of Targhee Company. *3.23 Certificate of Incorporation of Targhee Ski Corp. *3.24 Bylaws of Targhee Ski Corp. *4.1 Indenture dated as of March 18, 1997 by and among Booth Creek Ski Holdings, Inc., as Issuer, Trimont Land Company, Sierra-at-Tahoe, Inc., Bear Mountain, Inc., Waterville Valley Ski Resort, Inc., Mount Cranmore Ski Resort, Inc., Booth Creek Ski Acquisition Corp., Ski Lifts, Inc., Grand Targhee Incorporated, B-V Corporation, Targhee Company and Targhee Ski Corp., as Subsidiary Guarantors, and Marine Midland Bank, as trustee (including the form of 12 1/2% Senior Note due 2007 and the form of Guarantee). *4.2 Supplemental Indenture No. 1 to Indenture dated as of April 25, 1997 by and among Booth Creek Ski Holdings, Inc., as Issuer, Trimont Land Company, Sierra-at-Tahoe, Inc., Bear Mountain, Inc., Waterville Valley Ski Resort, Inc., Mount Cranmore Ski Resort, Inc., Booth Creek Ski Acquisition Corp., Ski Lifts,Inc., Grand Targhee Incorporated, B-V Corporation, Targhee Company and Targhee Ski Corp., as Subsidiary Guarantors, and Marine Midland Bank, as trustee. *4.3 Registration Rights Agreement dated as of March 18, 1997 by and among Booth Creek Ski Holdings, Inc., as Issuer, Trimont Land Company, Sierra-at-Tahoe, Inc., Bear Mountain, Inc., Waterville Valley Ski Resort, Inc., Mount Cranmore Ski Resort, Inc., Booth Creek Ski Acquisition Corp., Ski Lifts, Inc., Grand Targhee Incorporated, B-V Corporation, Targhee Company and Targhee Ski Corp., as Subsidiary Guarantors, and CIBC Wood Gundy Securities Corp.
149
EXHIBIT NUMBER DESCRIPTION - ------- ----------- *4.4 Securities Purchase Agreement dated as of March 13, 1997, by and among Booth Creek Ski Holdings, Inc., Trimont Land Company, Sierra-at-Tahoe, Inc., Bear Mountain, Inc., Waterville Valley Ski Resort, Inc., Mount Cranmore Ski Resort, Inc., Booth Creek Ski Acquisition Corp. and Ski Lifts, Inc. and CIBC Wood Gundy Securities Corp. *10.1 Amended and Restated Credit Agreement dated as of March 18, 1997 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 and The First National Bank of Boston. *10.2 Purchase and Sale Agreement dated as of August 30, 1996 by and between Waterville Valley Ski Area, Ltd., Cranmore, Inc., American Skiing Company and Booth Creek Ski Acquisition Corp. *10.3 Subordinated Promissory Note dated November 27, 1996 issued by Booth Creek Ski Acquisition Corp.,Waterville Valley Ski Resort, Inc. and Mount Cranmore Ski Resort, Inc. to American Skiing Company. *10.4 Stock Purchase and Indemnification Agreement dated as of November 26, 1996 among Booth Creek Ski Holdings, Inc., Fibreboard Corporation, Trimont Land Company, Sierra-at-Tahoe, Inc. and Bear Mountain, Inc. *10.5 Escrow Agreement dated December 3, 1996 by and among Fibreboard Corporation, Booth Creek Ski Holdings, Inc. and First Trust of California. *10.6 Purchase Agreement dated February 11, 1997 among Booth Creek Ski Holdings, Inc., Grand Targhee Incorporated, Moritz O. Bergmeyer and Carol Mann Bergmeyer. *10.7 Promissory Note dated February 11, 1997 issued by Grand Targhee Incorporated to Booth Creek Ski Holdings, Inc. *10.8 Stock Purchase Agreement dated as of February 21, 1997 by and between Booth Creek Ski Holdings, Inc., William W. Moffett, Jr., David R. Moffett, Laurie M. Padden, individually and as custodian for Christina Padden, Jennifer Padden and Mary M. Padden, Stephen R. Moffett, Katharine E. Moffett, Frances J. DeBruler, individually and as representative of the Estate of Jean S. DeBruler, Jr., deceased, and Peggy Westerlund, and David R. Moffett, as representative. *10.9 Preferred Stock Purchase Agreement dated as of February 21, 1997 by and between DRE, L.L.C., William W. Moffett, Jr., David R. Moffett, Laurie M. Padden, individually and as custodian for Christina Padden, Jennifer Padden and Mary M. Padden, Stephen R. Moffett, Katharine E. Moffett, Frances J. DeBruler, individually and as representative of the Estate of Jean S. DeBruler, Jr., deceased, and Peggy Westerlund and David R. Moffett, as representative. *10.10 Management Agreement dated as of November 27, 1996 by and between Booth Creek Ski Holdings, Inc. and Booth Creek, Inc. *10.11 Letter Agreement dated December 3, 1996 between Booth Creek Ski Holdings, Inc. and Nanci N. Northway. *10.12 Ski Area Term Special Use Permit No. 4002/01 issued by the United States Forest Service to Waterville Valley Ski Resort, Inc. *10.13 Ski Area Term Special Use Permit No. 5123/01 issued by the United States Forest Service to Bear Mountain, Inc. *10.14 Ski Area Term Special Use Permit No. 4186/01 issued by the United States Forest Service to Sierra-at-Tahoe, Inc. *10.15 Ski Area Term Special Use Permit No. 4033/01 issued by the United States Forest Service to Grand Targhee Incorporated. *10.16 Ski Area Term Special Use Permit No. 4127/09 issued by the United States Forest Service to Ski Lifts, Inc.
150
EXHIBIT NUMBER DESCRIPTION - --------- ------------------------------------------------------------------------------------------------------- *10.17 Annual Special Use Permit Nos. 4127/19 & 4127/19 issued by the United States Forest Service to Ski Lifts, Inc. *10.18 Amendment No. 1 to Credit Agreement as amended and restated dated as of June 15, 1997 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 and BankBoston, N.A. **10.19 Amendment No. 2 to Credit Agreement as amended and restated dated as of July 30, 1997 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 and BankBoston, N.A. 10.20 Amendment No. 3 to Credit Agreement as amended and restated dated as of October 27, 1997 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 and BankBoston, N.A. 10.21 Employment Agreement dated May 5, 1997 by and between Booth Creek Ski Holdings, Inc. and Timothy M. Petrick. 10.22 Stock Option Agreement dated as of October 1, 1997 between Booth Creek Ski Group, Inc. and Timothy M. Petrick. 10.23 Waiver Agreement dated January 27, 1998 to Credit Agreement dated as of December 3, 1996, as amended and restated as of March 18, 1997, as further amended as of June 15, 1997, July 30, 1997 and October 27, 1997 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 and BankBoston, N.A. 10.24 Waiver Agreement dated January 28, 1998 to Credit Agreement dated as of December 3, 1996, as amended and restated as of March 18, 1997 as further amended as of June 15, 1997, July 30, 1997 and October 27, 1997 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 and BankBoston, N.A. *21.1 Subsidiaries of the Registrants. 27.1 Financial Data Schedule.
- ------------------------- * Filed with Registration Statement No. 333-26091 and incorporated herein by reference. ** Filed with the Company's Quarterly Report on Form 10-Q for the Quarterly Period Ended August 1, 1997 and incorporated herein by reference. EX-10.20 2 CREDIT AGREEMENT 1 EXHIBIT 10.20 Execution Copy AMENDMENT NO. 3 TO CREDIT AGREEMENT AS AMENDED AND RESTATED As of October 27, 1997 BOOTH CREEK SKI HOLDINGS, INC., a Delaware corporation (together with its successors and assigns, "BCS Holdings"), BOOTH CREEK SKI ACQUISITION CORP., a Delaware corporation (together with its successors and assigns, "BCS Acquisition"), TRIMONT LAND COMPANY, a California corporation (together with its successors and assigns, "Northstar-at-Tahoe"), SIERRA-AT-TAHOE, INC., a Delaware corporation (together with its successors and assigns, "Sierra-at-Tahoe"), BEAR MOUNTAIN, INC., a Delaware corporation (together with its successors and assigns, "Bear Mountain"), WATERVILLE VALLEY SKI RESORT, INC., a Delaware corporation (together with its successors and assigns, "Waterville"), MOUNT CRANMORE SKI RESORT, INC., a Delaware corporation (together with its successors and assigns, "Cranmore"), SKI LIFTS, INC., a Washington corporation (together with its successors and assigns, "Ski Lifts"), GRAND TARGHEE INCORPORATED, a Delaware corporation (together with its successors and assigns, "Grand Targhee", and together with BCS Holdings, BCS Acquisition, Northstar-at-Tahoe, Sierra-at-Tahoe, Bear Mountain, Waterville, Cranmore and Ski Lifts, the "Borrowers" and each a "Borrower"), BANKBOSTON, N.A. (f/k/a The First National Bank of Boston), a national banking association (together with its successors and assigns, "BankBoston"), any other Lenders from time to time party hereto, and BankBoston, as agent for itself and the other Lenders (the "Agent") hereby agree as follows: 1. Reference to Credit Agreement: Definitions. Reference is made to the Credit Agreement dated as of December 3, 1996, as amended and restated as of March 18, 1997, as further amended and in effect on the date hereof (the "Credit Agreement"), among the Borrowers, BankBoston and the Agent. The Credit Agreement as amended by this Amendment is referred to herein as the "Amended Credit Agreement". Terms defined in the Amended Credit Agreement and not otherwise defined herein are used herein with the meanings so defined. 2. Amendments to the Credit Agreement. Subject to all the terms and conditions hereof, effective as of the date hereof, the Credit Agreement is hereby amended as set forth herein. 2.1. Amendment to Definitions. The definition of the term "Lending Officer" is hereby amended to read in its entirety as follows: ""Lending Officer" shall mean Carlton Williams or other officers of the Agent from time to time designated by it to the Borrowers." 2.2 New Definition. A new definition is added to Section 1, immediately following the definition of the term "Ski Lifts Security Agreement", to read in its entirety as follows: 2 ""Star Resorts" has the meaning provided in Section 7.9.11." 2.3 Amendment to Section 7.6. A new section is added immediately following Section 7.6.17, to read in its entirety as follows: "7.6.18. Indebtedness in respect of the obligations of Northstar-at-Tahoe to Star Resorts, pursuant to the Agreement to Purchase and Sell Units between Star Resorts and Northstar-at-Tahoe, dated as of October 27, 1997, such obligations not to exceed in the aggregate $700,000." 2.4. Amendment to Section 7.9. A new section is added immediately following Section 7.9.10, to read in is entirety as follows: "7.9.11. Investments consisting of a Promissory Note made by Star Resorts, an Arizona limited liability company ("Star Resorts"), not to exceed $700,000 in principal amount and the related Agreement to Purchase and Sell Real Property between Star Resorts and Northstar-at-Tahoe, dated as of October 27, 1997." 2.5. Amendment to Section 7.12. Section 7.12 of the Credit Agreement is hereby amended to read in its entirety as follows: "7.12. Merger and Dispositions of Assets. None of the Borrowers will become a party to any merger or consolidation, and none of the Borrowers will sell, sell and lease back, lease, sublease or otherwise dispose of any of its assets; provided, however, that so long as immediately prior to and after giving effect thereto no Default exists, the Borrowers may sell or otherwise dispose of (i) inventory in the ordinary course of business, (ii) tangible assets to be replaced in the ordinary course of business by other assets of substantially equal or greater value, (iii) assets to any Borrower; (iv) assets consisting of less than one acre of real property owned by Northstar-at-Tahoe, to be sold to Star Resorts pursuant to the Agreement to Purchase and Sell Real Property dated as of October 27, 1997; and (v) tangible assets either obsolete or no longer used or useful in the business of the Borrowers; provided, however, that the aggregate fair market value (or book value, if greater) of the assets sold or disposed of pursuant to this clause (v) shall not exceed $ 1,000,000 in any fiscal year." 3. Representations and Warranties. In order to induce the Lenders to enter into this Amendment, and to continue to extend credit to the Borrowers under the Amended Credit Agreement, each of the Borrowers represents and warrants to the Lenders that: 3.1. Organization and Qualification. Each of the Borrowers is a Corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and has all requisite Corporate power necessary to execute and deliver this Amendment and to perform its obligations thereunder and under the Amended Credit Agreement. 3 3.2 Corporate Authority. The execution, delivery and performance of this Amendment and the Amended Credit Agreement, and the borrowings and transactions contemplated hereby and thereby, are within the corporate power and authority of each of the Borrowers and have been authorized by proper corporate proceedings, and do not and will not (a) require any consent or approval of the stockholders of any of the Borrowers, (b) contravene any provision of the charter documents or by-laws of any of the Borrowers or any law, rule or regulation applicable to any of the Borrowers, (c) contravene any provision of, or constitute an event of default or event which, but for the requirement that time elapse or notice be given, or both, would constitute an event of default under, any other agreement, instrument or undertaking binding on any of the Borrowers, or (d) result in or require the imposition of any Lien on any of the properties of any of the Borrowers. 3.3. No Default. No Default under the Credit Agreement now exists, and after giving effect to this Amendment no Default under the Amended Credit Agreement shall exist. 4. Miscellaneous. Except to the extent specifically amended hereby, the provisions of the Credit Agreement shall remain unmodified, and subject to the conditions contained in this Amendment, the Amended Credit Agreement is hereby confirmed as being in full force and effect. The Borrowers hereby affirm that, after giving effect to this Amendment, the security interests contemplated by the Credit Agreement and all other Credit Documents attach in favor of the Agent so as to secure due and punctual performance of all Credit Obligations contemplated by the Amended Credit Agreement. This Amendment may be executed in any number of counterparts which together shall constitute one instrument, shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts, without regard to the conflict of laws rules of any jurisdictions, and shall bind and inure to the benefit of the parties hereto and their respective successors and assigns pursuant to Section 12 of the Amended Credit Agreement. 4 Each of the undersigned has caused this Agreement to be executed and delivered by its duly authorized officer as an agreement under seal 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 By: /s/ Jeffrey J. Joyce ----------------------------- Title: Executive Vice President BANKBOSTON, N.A., as Agent By: /s/ Carlton Williams ----------------------------- Title: 100 Federal Street Boston, Massachusetts 02110 Attention: Carlton Williams Telecopy: (617) 434-8108 BANKBOSTON, N.A., as Agent By: /s/ Carlton Williams ----------------------------- Title: 100 Federal Street Boston, Massachusetts 02110 Attention: Carlton Williams Telecopy: (617) 434-8108 EX-10.21 3 EMPLOYMENT AGREEMENT 1 EXHIBIT 10.21 AGREEMENT This Agreement (the "Agreement") is entered into this 5th day of May, 1997 by and between Booth Creek Ski Holdings, Inc., a Delaware corporation ("Company"), and Tim Petrick ("Executive"), an individual residing at Seattle, Washington. WHEREAS, Company desires to employ Executive in accordance with the terms and conditions hereinafter set forth and Executive desires to be so employed; NOW, THEREFORE, in consideration of the mutual covenants herein contained, Company and Executive agree as follows: 1. EMPLOYMENT. Company hereby employs Executive as a member of the Office of the President with the title of Executive Vice President. In this position, Executive shall report directly to Company's Chief Executive Officer. 2. DUTIES. During the Term of Employment (as hereinafter defined), Executive's duties shall be consistent with his position as Executive Vice President, along with such other duties consistent therewith as may be assigned to Executive from time to time by Company. Executive and Company acknowledge that a Related Entity, rather than Company, may be the entity that acquires a destination resort and, in such event, Executive will perform duties on behalf of such entity in addition to Company. Executive shall devote his entire productive time, abilities and attention to these activities, shall perform his duties in a professional, ethical and businesslike manner, and shall comply with all policies and procedures of Company. 3. TERM OF EMPLOYMENT. Unless earlier terminated as provided herein, the "Term of Employment," as that phrase is used in this Agreement, shall be a period commencing May 5, 1997 and ending April 30, 2002. 4. COMPENSATION AND BENEFITS. During the Term of Employment, Company shall provide to Executive and Executive shall accept from Company as full compensation for Executive's services hereunder, compensation and benefits as follows: a. BASE SALARY. Executive shall be paid at an annual base salary rate of One Hundred Seventy Five Thousand Dollars ($175,000) ("Base Salary"). The Base Salary shall be provided in accordance with payroll practices in effect for all salaried executives of Company. b. ANNUAL BONUS(ES). Executive shall be eligible to receive annual bonus(es) as determined in the discretion of the Company. For the period beginning on the date of this Agreement and ending on October 31, 1997, however, Executive will be entitled to a minimum bonus equal to 35% of Executive's Base Salary (prorated for the partial fiscal year) or such larger amount as Company may determine. Prior to the beginning of each fiscal year thereafter, Executive and Company will establish a set of financial, business, and personal goals, with a target bonus of 50% of Executive's Base Salary if such goals are satisfied (and a lesser bonus to the extent such goals are not satisfied but are approximated). The bonus for any fiscal year will be payable not later than sixty (60) days after the end of Company's fiscal year. Executive will be entitled to the full 2 bonus if Executive was employed through the end of the fiscal year as to which the bonus is payable, and if Executive's employment during a fiscal year is terminated pursuant to Paragraph 9(a), 9(b), 9(e) or 9(f) hereof (but not if the Term of Employment is terminated under any other circumstances), Executive shall be entitled to a prorated bonus for such fiscal year (through the last day of Executive's employment). c. INCREASE IN DUTIES. In the event Company or any Related Entity acquires a destination resort and, as a result of such acquisition, Executive's duties are materially increased, Executive's Base Salary may be increased as the parties may agree. d. BENEFIT PLANS. Executive shall be eligible to participate in the health, disability and retirement plans offered generally to executives of Company or any Related Entity engaged in operating a ski resort, in accordance with the terms of those plans and with participation levels and benefits to Executive that are not less favorable than those that are provided to such other executives. e. LIFE INSURANCE. Provided Executive is insurable at a reasonable rate, Company shall provide to Executive a term life insurance policy in the amount of one million dollars ($1,000,000), with at least a five year renewable term. Upon the end of the Employment Term, Executive may acquire the policy from Company by payment of the unamortized portion of the premium for the then current policy year. f. BUSINESS EXPENSES. Company shall reimburse Executive for reasonable and necessary business expenses, in accordance with Company's policies and upon presentation of appropriate documentation. 5. BONUS PAYMENT IN THE EVENT OF AN IPO. In the event Company conducts an initial public offering, it shall thereafter establish, fund and distribute a bonus pool of $1,000,000 for its management executives, which shall include senior management level personnel at the Company and its subsidiaries. Provided he is employed at the time such bonus pool is established, Executive shall be entitled to a bonus out of such bonus pool, the amount of which shall be determined by Company in its discretion. 6. LOCATION OF WORK. Executive shall perform services at the various properties owned by the Company and will be expected to reside in the general area of the community in which the Company's executive offices are located. It is anticipated that the present executive offices in Vail, Colorado will not be the permanent executive offices of Company and that Executive will not be required to relocate his residence until permanent executive offices are established. When such offices are established, Executive, at the request of Company, will be required to relocate his residence to the general area of such executive offices, but in no event prior to the end of six months from the date on which such permanent executive offices are established. 7. MOVING EXPENSES/LIVING EXPENSES. In the event Executive is required (subject to Paragraph 6 hereof) to move to a location other than Seattle, Washington, Company shall reimburse 2 3 Executive for reasonable moving expenses associated with moving his possessions and immediate family (equal to the lower of two bids obtained by Executive) and shall reimburse Executive for any real estate brokerage fee and/or mortgage points (up to 2%) incurred by Executive in connection with a related residential purchase. In the event Executive is required to spend a substantial amount of his working time at the Company's executive offices before he is required to relocate, Company shall reimburse Executive for the reasonable cost of travel between Seattle, Washington and such offices and of temporary housing in the community in which such executive offices are located until such time as Executive is required to relocate his residence as provided under Paragraph 6. Such housing for Executive shall either be provided by or approved by the Company, at the Company's option. 8. RIGHT TO PURCHASE PROPERTY. In the event Executive is required to relocate his residence as set forth in Paragraph 6, Executive shall have the right to purchase one residential parcel in the community where such offices are located (if the Company owns residential development land in such community) at Company's cost, or if such cost is not readily ascertainable, at a discounted price agreed to by Company and Executive. The residential parcel will be selected by Executive, subject to the approval of Company, such approval not to be unreasonably withheld. 9. TERMINATION. The Term of Employment shall terminate upon: a. Executive's death; b. Termination owing to Executive's disability or incapacity, due to physical or mental illness that materially detracts from Executive's ability to perform his duties hereunder for a period in excess of ninety (90) consecutive days; c. Termination by Company for "Cause." For purposes of this Agreement, "Cause" means: (i) failure by Executive (other than by reasons of Executive's disability or incapacity as set forth in Paragraph 9(b) hereof) to substantially perform his duties in any material respect, after notice and a reasonable opportunity to cure is provided to Executive; (ii) commission by Executive of a felony; or (iii) fraud, misappropriation or embezzlement involving property of Company or other intentional wrongful acts that materially impair the goodwill or business of Company or that cause material damage to its property, goodwill or business; d. Written agreement of Company and Executive; e. Termination by Company without Cause. f. Termination by Executive for "Good Reason." Good Reason means (1) Company breaches its obligations hereunder in any material respect and fails to cure such breach within 30 days after written notice of such breach from Executive; (2) Company effects a material reduction in Executive's reporting responsibilities, titles, authority, offices or duties as in effect immediately prior to such change and fails to cure such reduction within 30 days after written notice 3 4 of such reduction from Executive; (3) George N. Gillett, Jr. ceases to be Chief Executive Officer of Company and Booth Creek Ski Holdings, Inc.; or (4) George N. Gillett, Jr. and members of his immediate family cease to own sufficient shares of stock of Booth Creek Ski Group, Inc. to be able to elect a majority of the Board of Directors of Booth Creek Ski Group, Inc. 10. COMPENSATION UPON TERMINATION. a. If the Term of Employment is terminated pursuant to Paragraph 9(a), 9(b) or 9(c) hereof or by Executive for any reason other than for a reason set forth in Paragraph 9(f) hereof, Executive shall not be entitled to receive any compensation or benefits after the date of such termination except for disability insurance in the case of a termination under Paragraph 9(b). b. If the Term of Employment is terminated by the parties pursuant to Paragraph 9(d) hereof, Executive shall be entitled to receive such compensation as may be specified in a written agreement, if any, between Company and Executive regarding Executive's termination. c. If the Term of Employment is terminated by Company pursuant to Paragraph 9(e) or by Executive pursuant to Paragraph 9(f), Company shall provide to Executive salary continuation and continuation of health insurance coverage and disability insurance coverage at the same level provided to Executive prior to such termination for a period of eighteen months or until Executive is eligible for comparable benefits from another entity, whichever date is earlier. Such salary continuation shall be provided at Executive's Base Salary rate then in effect and shall be subject to required withholdings. 11. RESTRICTIVE COVENANTS. a. Confidential Information. Executive acknowledges that he has had and will have access to confidential information (including, but not limited to, current and prospective confidential know-how, inventions, trade secrets, customer lists, marketing plans, business plans, information regarding acquisitions, mergers and/or joint ventures) concerning the business, customers, products, plans, finances, suppliers, and assets of Company and its parents, subsidiaries, affiliates and other related entities (collectively, the "Related Entities") that is not generally known outside Company and/or the Related Entities ("Confidential Information"). Executive agrees that he shall not, at any time, directly or indirectly use, divulge, furnish or make accessible to any person any Confidential Information, but instead shall keep all Confidential Information strictly and absolutely confidential. Executive agrees to deliver promptly to Company, at the termination of his employment or at any other time at Company's request, without retaining any copies, all documents and other materials in his possession relating, directly or indirectly, to any Confidential Information. Notwithstanding the foregoing provisions, information will not be considered Confidential Information if it (a) becomes a part of the public domain without a breach by Executive of his duty of confidentiality; (b) was made known to Executive by a source other than the Company prior to commencement of his employment with Company; (c) is required to be disclosed by any court, arbitrator or government authority, or by law (subject to Executive's obligation to notify 4 5 Company if he becomes obligated to disclose any such information so as to provide Company with the opportunity, to the extent feasible, to contest such disclosure); or (d) is disclosed in connection with any legal proceeding regarding a breach or an alleged breach of the terms of this Agreement by either party. b. Non-Competition. Executive agrees that during the Term of Employment and for a period of one year thereafter (the "Period"), he shall not, without the prior written consent of the Company's Board of Directors ("Board"), participate or engage in, directly or indirectly (as an owner, partner, executive officer, director, independent contractor, consultant, advisor or in any other capacity calling for the rendition of services, advice, or acts of management, operation or control), any business that, during the Period (x) is engaged in the business of operating a ski resort in the United States, or (y) is engaged in any material respect in the real estate development business within a 45-mile radius of any ski resort owned by Company or a Related Entity at the end of the Employment Term. c. Non-Solicitation of Executives. Executive agrees that, during the Period, he shall not, without the prior written consent of the Board, directly or indirectly solicit any current Executive of Company or any of the Related Entities or any individual who becomes an Executive during the Period to leave such employment and join or become affiliated with any other business. d. No Diversion of Business Opportunities and Prospects. During the Period, Executive shall not, without the written consent of the Board, directly or indirectly seek to dissuade from continuing to do business with or entering into business with Company or any of the Related Entities, any supplier, customer, or other person or entity that had a business relationship with or with which Company was actively planning or pursuing a business relationship at or before the date of termination of her employment, or to reduce the amount of such business between Company or any of the Related Entities and any such entity. e. Irreparable Harm. Executive acknowledges that: (i) Executive's compliance with this Agreement is necessary to preserve and protect the proprietary rights, Confidential Information and the goodwill of Company and the Related Entities as going concerns; (ii) any failure by Executive to comply with the provisions of this Agreement will result in irreparable and continuing injury for which there will be no adequate remedy at law; and (iii) in the event that Executive should fail to comply with the terms and conditions of this Agreement, Company shall be entitled, in addition to such other relief as may be proper, to all types of equitable relief (including, but not limited to, the issuance of an injunction and/or temporary restraining order) as may be necessary to cause Executive to comply with this Agreement, to restore to Company its property, and to make Company whole. f. The provisions set forth in this Paragraph 11 shall, as noted, survive termination of this Agreement. 5 6 12. MISCELLANEOUS PROVISIONS. a. No modification, amendment or waiver of this Agreement nor consent to any departure by Executive from any of the terms or conditions thereof, shall be effective unless in writing and signed by Executive and any officer of the Company authorized by the Board to do so. Any such waiver or consent shall be effective only in the specific instance and for the purpose for which given. This Agreement sets forth the entire agreement and understanding between Company and Executive and supersedes all prior agreements and understandings, written or oral, relating to the subject matter hereof. b. This Agreement shall be binding upon and enforceable by Executive and shall inure to the benefit of Executive's executors, administrators, heirs, successors, devisees and legal representatives and Company and any successor or assignee of Company, but neither this Agreement nor any rights or payments arising hereunder may be assigned, pledged, transferred (except upon death) or hypothecated by Executive. c. All notices required to be given under the terms of the Agreement, or that either of the parties desires to give hereunder, shall be in writing and delivered personally or be sent by registered mail or certified mail, postage prepaid, return receipt requested, addressed as follows: If to Company: George N. Gillett, Jr. 6755 Granite Creek Tetron Village, Wyoming 83025 With Copies to: Booth Creek, Inc. 1000 S. Frontage Road West Suite 100 Vail, Colorado 81657 (970) 476-4030 (970) 479-0291 (fax) Rex L. Sessions WINSTON & STRAWN 35 West Wacker Drive Chicago, Illinois 60601 (312) 558-5600 (312) 558-5700 (fax) 6 7 If to Executive: Tim Petrick 15236 Maplewild Ave., S.W. Seattle, WA 98166 Any party may change the address to which notice is to be sent to it or to him by notice in writing to the other party as provided above. d. This Agreement shall be subject to and governed by the laws of the State of Delaware. e. If any provisions(s) of this Agreement shall be found invalid or unenforceable, in whole or in part, then such provision(s) shall be deemed to be modified or restricted to the extent and in the manner necessary to render the same valid and enforceable, or shall be deemed excised from this Agreement, as the case may require, and this Agreement shall be construed and enforced to the maximum extent permitted by law, as if such provision(s) had been originally incorporated herein as so modified or restricted, or as if such provision(s) had not been originally incorporated herein, as the case may be. f. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original. g. Company will indemnify Executive to the maximum extent permitted by Section 145 of the Delaware Corporation Laws. The foregoing obligation will survive termination of this Agreement. [signature page follows] 7 8 IN WITNESS WHEREOF, the undersigned have executed this Employment Agreement as of the date first above written. BOOTH CREEK SKI HOLDINGS, INC. By: /s/ George N. Gillett, Jr. /s/ Tim Petrick ----------------------------- --------------------------- Its: Chairman ----------------------------- Dated: June 6, 1997 Date: June 3, 1997 8 EX-10.22 4 STOCK OPTION AGREEMENT 1 EXHIBIT 10.22 BOOTH CREEK SKI GROUP, INC. 1997 STOCK OPTION PLAN STOCK OPTION AGREEMENT This STOCK OPTION AGREEMENT dated as of October 1, 1997 (this "Agreement"), is by and between Booth Creek Ski Group, Inc., a Delaware corporation ("BCSG"), and the individual whose name appears on the signature page hereof as "Holder" (together with such individual's Designated Beneficiary (as defined in the Plan), the "Holder"). RECITALS WHEREAS, BCSG has adopted the Booth Creek Ski Group, Inc. 1997 Stock Option Plan (the "Plan") to promote the long-term success of the Company by strengthening the Company's ability to attract and retain highly competent managers and other selected employees and to provide a means to encourage stock ownership and proprietary interest in BCSG; and WHEREAS, pursuant to the Plan, the Board of Directors of BCSG has awarded an option (the "Option") to purchase shares of the Class A Common Stock, $0.001 par value, of BCSG ("Common Stock"), to the Holder, and BCSG and the Holder desire to evidence and set forth the terms and conditions of the Option pursuant to this Agreement; NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements contained herein, the parties hereto agree as follows: 1. Defined Terms. Capitalized terms used and not otherwise defined herein shall have the meanings given to such terms in the Plan. 2. Grant of Option. In accordance with the terms of the Plan, BCSG hereby grants to the Holder, as a matter of separate agreement and not in lieu of salary or any other compensation for services, an Option to purchase one hundred (100) shares of Common Stock, subject to the terms and conditions of the Plan and this Agreement. Any shares of Common Stock issuable upon the exercise of the Option are referred to herein as "Shares." 3. Exercise Price. The exercise price for the Option shall be $500.00 per vested Share, subject to adjustment as provided in Section 11 hereof and Section 14 of the Plan. The exercise price shall be paid by the Holder to BCSG on the date on which the Option is exercised for Shares with respect to which the Option has vested. 2 4. Medium and Time of Payment. The exercise price for Shares shall be paid in United States dollars in cash on or prior to the date on which the Option is exercised with respect to such Shares. Payment in full shall be required prior to the issuance of any Shares pursuant to the Option. In addition, prior to or concurrently with delivery to the Holder of a certificate representing such Shares, the Holder shall pay any and all amounts necessary to satisfy applicable federal, state and local tax requirements (including withholding requirements). 5. Vesting of Option. (a) The Option shall not become exercisable with respect to any Shares until the date it vests with respect to such Shares. The Option awarded pursuant to Section 2 shall vest (i) with respect to 20% of the Shares, on the date hereof and (ii) with respect to an additional 20% of the Shares, on each of the second, third, fourth and fifth anniversary of the date hereof. Subject to Sections 5(b) and 6 below, in the event Holder's Employment with the Company is terminated (A) by the Company for any reason (other than for Cause), (B) as a result of the death or disability of the Holder or (C) by the Holder, if the Holder is a party to a written employment agreement with the Company, (i) as the result of a breach by the Company in any material respect of its obligations under its employment agreement with such Holder and the Company's failure to cure such breach within any cure periods provided therein or (ii) as the result of a material reduction by the Company in such Holder's reporting responsibilities, titles, authority, offices or duties as in effect immediately prior to such change and the Company's failure to cure such reduction within any cure periods provided in such Holder's employment agreement, in any case, during the period commencing on the first anniversary of the date hereof and ending on the fifth anniversary of the date hereof, then the Option shall vest with respect to an additional 1.6667% of the Shares for each full month between the date of the immediately preceding anniversary of the date hereof and the Employment Termination Date (i.e., the 20% that would have vested at the end of such year will vest on a monthly, pro rata basis). (b) Notwithstanding the provisions of Section 5(a) hereof, if not earlier terminated, the Option shall immediately become fully vested and exercisable with respect to all Shares upon (i) the occurrence of a Change in Control or (ii) the termination by Holder of Holder's Employment within 45 days after either of the two following occurrences (each is referred to hereinafter as, a "Good Reason"): (A) George N. Gillett, Jr. ceases to be Chief Executive Officer of BCSG or (B) George N. Gillett, Jr. and members of his immediate family cease to own sufficient shares of stock of BCSG to be able to elect a majority of the Board of Directors of BCSG. (c) The Option shall not vest or become exercisable with respect to any Shares solely as a result of a Public Offering, but shall vest and become exercisable only as otherwise set forth in Sections 5(a) and (b) hereof. 2 3 (d) Notwithstanding anything else herein to the contrary, in no event may the Option be exercised with respect to a vested Share after the tenth anniversary of the Effective Date, except as otherwise provided in the proviso to Section 6(b) hereof. 6. Termination of Employment. (a) (i) If the Holder's Employment is terminated for Cause (as defined in clause (ii)(B) or (ii)(C) of the definition thereof (or, if applicable, the corresponding provisions of the definition of "cause" in Holder's employment agreement with the Company)), the Holder's Option, whether or not vested at the Employment Termination Date with respect to any Shares, will be automatically canceled as of the Employment Termination Date. (ii) If Holder's Employment is terminated for Cause (other than of the type referenced in Section 6(a)(i) hereof), the Holder's Option will be automatically canceled as of the Employment Termination Date (A) to the extent not vested at the Employment Termination Date with respect to any Shares and (B) to the extent of 50% of the Shares that have vested as of the Employment Termination Date (other than the Shares with respect to which the Option vested on the Award Date). (b) If the Holder's Employment is terminated for any reason (other than by the Company for Cause), including due to the Holder's death, disability, voluntary resignation or termination by the Company for reasons other than for Cause, that portion of the Holder's Option that was not vested in Shares at the Employment Termination Date (according to the rules provided therefor in Section 5 hereof) will be automatically canceled as of the Employment Termination Date, and the Shares subject to that portion of the Holder's Option that were vested at the Employment Termination Date must be purchased by the Holder for the Exercise Price within 120 days of such Employment Termination Date, or otherwise be canceled on such 120th day; provided, however, that if (i) BCSG is then prohibited by law or by any agreement to which it is bound from purchasing any such Shares pursuant to a Put and the Common Stock is not then Publicly Traded or (ii) the Common Stock is Publicly Traded but the Holder is subject to a contractual agreement, executed by the Holder at the request of the Company, not to sell Shares, Holder shall have the right to purchase such Shares until 120 days after the earlier of (A) Holder's receipt of written notice from BCSG that BCSG is able to perform its obligations under Section 7 with respect to such Shares and (B) the Common Stock becoming Publicly Traded and any such contractual restrictions cease to apply, and such Shares have been registered in accordance with Section 10(b). If the Holder does not exercise Holder's right to purchase such Shares by the expiration of such 120-day period, the Option shall be canceled upon the expiration of such 120-day period; provided, however, that if Holder has delivered a Put Notice, but the Put Closing has not occurred on or as of such 120th day, Holder shall have the right to purchase such Shares until and including the date of the Put Closing. BCSG will provide such notice promptly following its becoming permitted to purchase such Shares. 7. Put Rights. 3 4 (a) Put. Subject to Section 7(d) hereof, if the Holder's Employment is terminated for any reason other than Cause, the Holder will have the right (a "Put"), for a period of 180 Qualified Days commencing on the Employment Termination Date, exercisable by delivery of written notice (the "Put Notice") to BCSG, to require BCSG to purchase for the Put Price (as defined below) any part or all of the Shares then owned by the Holder which has been issued upon exercise of the Holder's Option or which is issuable upon the exercise of the Holder's Option (the Shares or the underlying Option described in each Put Notice is referred to collectively as the "Put Shares"). For purposes hereof, a "Qualified Day" is any day on which BCSG is not prohibited by law or by any agreement to which it is bound from purchasing Shares pursuant to a Put. The Holder may not deliver more than one Put Notice. A Put Notice, once delivered, shall be irrevocable. The date on which a Put Notice is so delivered by the Holder shall be referred to as the "Put Exercise Date." (b) Determination of Put Price. The "Put Price" shall be the price of the Put Shares on the Employment Termination Date determined as set forth in this Section 7(b). In the event that a Put is exercised by Holder with respect to Shares without Holder first having exercised the Option with respect to such Shares, the Put Price for such Shares shall be equal to (i) the Put Price determined in accordance with this Section 7(b) minus (ii) the Exercise Price for such Shares. The Holder and BCSG shall seek to reach agreement on the fair market value of the Put Shares for a period of up to 30 days after the Put Exercise Date and, if they shall reach agreement thereon, the dollar amount so agreed upon shall be the "Put Price". For purposes of this Agreement, the fair market value of the Put Shares will be their pro rata portion of the fair market value of all of the shares of Common Stock outstanding (on a fully diluted basis). If the Holder and BCSG are unable to reach agreement within such 30-day period, the Holder and BCSG shall seek for an additional 15 days to reach agreement on an Investment Bank to determine the fair market value of the Put Shares on the Put Exercise Date. If the parties reach agreement on an Investment Bank, such Investment Bank shall be promptly retained by BCSG and shall, within 60 days following its retention, determine the fair market value of the Put Shares on the Put Exercise Date and submit its report to each of the parties. If the parties are unable to reach agreement on an Investment Bank, each party shall, within the following 15 days, deliver to the other party a list of six Investment Banks, numbered one through six. The Investment Bank appearing on both lists and having the lowest total numbers assigned to it shall be promptly retained by BCSG and shall, within 60 days following its retention, determine the fair market value of the Put Shares (as provided above) and submit its report to each of the parties (e.g., if Investment Bank X is assigned number 1 on the Holder's list and number 6 on BCSG's list and Investment Bank Y is assigned number 2 on BCSG's list and number 4 on the Holder's list, Investment Bank Y shall be retained to determine the Put Price). If either party fails to deliver a list of six Investment Banks within such 15-day period, the determination as to "Put Price" shall be made by the Investment Bank assigned number one on the list of the other party. If no Investment Bank appears on the lists of both the Holder and BCSG, the Holder and BCSG shall, within the following 15-day period, deliver to the other party a list of six Investment Banks, numbered one through six. The Investment Bank appearing on both lists and having the lowest total numbers assigned to it shall be promptly retained by BCSG to determine the fair market value of the Put Shares in accordance with the foregoing. If no Investment Bank appears on the lists of both the Holder and BCSG, the Holder and BCSG shall continue to deliver lists of six Investment Banks until 4 5 one Investment Bank is chosen as provided above. In any event, if no Investment Bank has been chosen pursuant to this methodology within 90 days after the Put Exercise Date, either the Holder or BCSG may retain the American Arbitration Association to select an Investment Bank. The fees and expenses of any Investment Bank retained to determine the Put Price shall be paid by BCSG. The determination of the Put Price by an Investment Bank in accordance with the terms hereof shall be final and binding on the Holder and BCSG. (c) Put Closing. The closing (the "Put Closing") of the purchase and sale of Shares pursuant to a Put will take place on a date selected by BCSG which will be no earlier than the 16th and no later than the 30th day following the date of the final determination of the Put Price pursuant to Section 7(b) hereof. Payment of the Put Price for all Shares tendered will be paid by BCSG at the Put Closing by cashier's or certified check or by wire transfer of immediately available funds to an account designated by the Holder. If Holder's right to exercise Holder's Option was suspended in accordance with the proviso to Section 6(b), BCSG shall pay to the Holder, in addition to the Put Price, interest on the unpaid Put Price at an annual rate equal to the prime rate as published from time to time by The Wall Street Journal for the period between the Put Exercise Date and the Put Closing. (d) Limitations on Put Rights. Notwithstanding anything in this Agreement to the contrary, (i) Holder shall not have a Put with respect to any Shares if and so long as the Common Stock is Publicly Traded and (ii) BCSG shall not be required to purchase any Shares pursuant to a Put to the extent that BCSG is then prohibited from doing so by law or by any agreement to which it is bound. 8. Call Right. (a) Call. BCSG shall have the right (a "Call"), exercisable at any time after the termination of Holder's Employment by the Company for Cause or by the Holder without Good Reason, in either case, by the delivery of written notice to the Holder (a "Call Notice"), to purchase all Shares acquired by such Holder pursuant to the exercise of an Option (the Shares described in each Call Notice is referred to collectively as the "Call Shares"). The date on which a Call Notice is so delivered by BCSG shall be referred to as the "Call Exercise Date." (b) Determination of Call Price. The "Call Price" shall be the price of the Call Shares on the Call Exercise Date determined as set forth in this Section 8(b). The Holder and BCSG shall seek to reach agreement on the fair market value of the Call Shares for a period of up to 30 days after the Call Exercise Date and, if they shall reach agreement thereon, the dollar amount so agreed upon shall be the "Call Price". For purposes of this Agreement, the fair market value of the Call Shares will be their pro rata portion of the fair market value of all of the shares of Common Stock outstanding (on a fully diluted basis). If the Holder and BCSG are unable to reach agreement within such 30-day period, the Holder and BCSG shall seek for an additional 15 days to reach agreement on an Investment Bank to determine the fair market value of the Call Shares on the Call Exercise Date. If the parties reach agreement on an Investment Bank, such Investment Bank shall be 5 6 promptly retained by BCSG and shall, within 60 days following its retention, determine the fair market value of the Call Shares on the Call Exercise Date and submit its report to each of the parties. If the parties are unable to reach agreement on an Investment Bank, each party shall, within the following 15 days, deliver to the other party a list of six Investment Banks, numbered one through six. The Investment Bank appearing on both lists and having the lowest total numbers assigned to it shall be promptly retained by BCSG and shall, within 60 days following its retention, determine the fair market value of the Call Shares (as provided above) and submit its report to each of the parties. If either party fails to deliver a list of six Investment Banks within such 15-day period, the determination as to "Call Price" shall be made by the Investment Bank assigned number one on the list of the other party. If no Investment Bank appears on the lists of both the Holder and BCSG, the Holder and BCSG shall, within the following 15-day period, deliver to the other party a list of six Investment Banks, numbered one through six. The Investment Bank appearing on both lists and having the lowest total numbers assigned to it shall be promptly retained by BCSG to determine the fair market value of the Call Shares in accordance with the foregoing. If no Investment Bank appears on the lists of both the Holder and BCSG, the Holder and BCSG shall continue to deliver lists of six Investment Banks until one Investment Bank is chosen as provided above. In any event, if no Investment Bank has been chosen pursuant to this methodology within 90 days after the Call Exercise Date, either the Holder or BCSG may retain the American Arbitration Association to select an Investment Bank. The fees and expenses of any Investment Bank retained to determine the Call Price shall be paid by BCSG. The determination of the Call Price by an Investment Bank in accordance with the terms hereof shall be final and binding on the Holder and BCSG. (c) Call Closing. Each closing (a "Call Closing") of the purchase and sale of Shares pursuant to a Call will take place on a date selected by BCSG which will be no earlier than the 16th and no later than the 30th day following the date of the final determination of the Call Price pursuant to Section 8(b) hereof. Payment of the Call Price for all Shares tendered will be paid by BCSG at the Call Closing by cashier's or certified check or by wire transfer of immediately available funds to an account designated by the Holder. 9. Stockholders Agreement. The Shares shall be subject to the terms of the Stockholders Agreement. Concurrently with the issuance to Holder of Shares upon the exercise of the Option, Holder shall become a party to the Stockholders Agreement by executing an amendment or restatement of the Stockholders Agreement or a supplementary agreement to that effect. The certificates representing Shares issued upon exercise of the Option shall bear the legends required by the Stockholders Agreement and such other legends as BCSG may deem appropriate to comply with all applicable federal and state securities laws. 10. Compliance with Securities Laws. (a) Unless the Shares issued upon exercise of the Option are registered under the Securities Act of 1933, as amended (the "Securities Act"), and the securities laws of all other 6 7 appropriate jurisdictions, the obligation of BCSG to issue Shares upon exercise of the Option shall be subject to receipt from Holder of a written representation to the effect that (i) Holder is purchasing the Shares for Holder's own account for investment, and not with a view to, or for resale in connection with, the distribution thereof, and has no present intention of distributing or reselling any thereof, (ii) Holder has the financial ability to bear the economic risks of Holder's investment in the Shares to be purchased, (iii) Holder has such knowledge and experience in financial and business matters, and knowledge of and experience with the Company, to be capable of evaluating the merits and risks of the purchase of the Shares to be purchased by Holder, and (iv) such other representations as are necessary or appropriate to establish an exemption from registration. Shares issued or issuable upon the exercise of the Option shall not be transferable unless an exemption from such registration is available and, as appropriate, only with a written opinion of counsel (which shall be satisfactory in form and substance to BCSG) that an exemption from registration under the Securities Act is available and that the transaction would not violate any applicable securities laws. Certificates for the Shares will bear such legends as BCSG deems necessary or appropriate in connection with the Securities Act and all other applicable securities laws. (b) BCSG shall have no obligation to register the Shares under the federal securities laws or take any other steps as may be necessary to enable the Shares to be offered and sold under the securities laws of any jurisdiction; provided, however, that in the event the Common Stock at any time becomes Publicly Traded, BCSG shall promptly cause the Shares to be registered pursuant to a Form S-8 registration statement. 11. Dilution and Other Adjustments; Extraordinary Dividends. (a) In the event the shares of Common Stock, as presently constituted, shall be changed into or exchanged for a different number or kind of shares of stock or other securities of BCSG or of another corporation (whether by reason of merger, consolidation, recapitalization, reclassification, split, reverse split, combination of shares or otherwise) or if the number of such shares of Common Stock shall be increased through the payment of a stock dividend, then there shall be substituted for or added to each share of Common Stock subject or which may become subject to the Option, the number and kind of shares of stock or other securities into which each outstanding share of Common Stock shall be so changed, or for which each such share shall be exchanged, or to which each such share shall be entitled, as the case may be. The Option shall also be appropriately amended as to price and other terms as the Board, in its sole discretion, may determine are necessary to reflect the foregoing events. (b) In the event that BCSG shall pay any extraordinary dividends or extraordinary distributions (which determination, in either case, shall be made in the good faith determination of the Board) on or with respect to the Common Stock, the Board shall treat the Option as having been fully exercised but shall retain the dividends or distributions applicable to the Option and release such dividends or distributions (without interest thereon) to the Holder of the Option only if, to the extent and at such time as the Option shall be exercised. Holder shall not be entitled to receive any extraordinary dividends or extraordinary distributions unless and until Holder's Option shall have 7 8 vested and been exercised. Except as otherwise expressly provided in this Section 11(b), Holder shall not have any right to any dividends or distributions on or with respect to the Shares, unless and until Holder becomes a holder of Shares. 12. Miscellaneous Provisions. (a) The Holder shall have no rights as a holder of BCSG's Common Stock with respect to the Option, unless and until certificates for Shares are issued to the Holder, except as otherwise provided in Section 11(b) hereof. (b) The Option shall not be transferable or assignable other than (i) by will or the laws of descent and distribution; (ii) by gift or other transfer to any trust or estate in which the original Holder or such Holder's spouse or other immediate relative has a substantial beneficial interest, or to a spouse or other immediate relative; or (iii) pursuant to a domestic relations order (as defined by the Code); provided, however, that the Option, if so transferred, shall continue to be subject to all the terms and conditions hereof. Shares received upon the exercise of the Option shall be transferable or assignable only pursuant to the terms of the Stockholders Agreement. (c) Neither this Agreement, the Option, the Plan nor any action taken hereunder or thereunder shall be construed as giving any employee, including the Holder, any right to be retained in the employ of the Company or any of its Affiliates or shall interfere with or restrict in any way the rights of the Company or any of its Affiliates, which are hereby reserved, to discharge Holder at any time for any reason whatsoever, with or without cause. (d) The Option shall be canceled if it does not vest in accordance with Section 5 hereof. (e) The costs and expenses of the administering the Plan shall be borne by BCSG and not charged to the Holder. (f) During the term of the Option and Plan, BCSG will at all times reserve and keep available such numbers of Shares as may be issuable under the Plan upon exercise of the Option. (g) This Agreement is an Individual Option Agreement as described in Section 8 of the Plan. This Agreement is intended to conform in all respects with, and is subject to all applicable provisions of, the Plan, which is incorporated herein by reference. Any inconsistency between this Agreement and the Plan shall be resolved in accordance with the terms of the Plan. By executing and delivering this Agreement, Holder acknowledges receipt of the Plan and agrees to be bound by all of the terms thereof. (h) In the event that a court of competent jurisdiction determines that BCSG has failed to perform in any material respect any of its obligations under the Plan or this Agreement, BCSG shall pay all reasonable attorneys' fees and disbursements incurred by Holder in enforcing such Holder's rights thereunder or hereunder with respect to such failure to perform. 8 9 13. Amendments and Termination. (a) The Plan may be amended by the Board as it deems necessary or appropriate to better achieve the purposes of the Plan, except that no such amendment which would increase the number of shares available for issuance (except as required in accordance with Section 14 of the Plan or Section 11 hereof) shall be made without the approval of the holders of a majority of BCSG's outstanding Common Stock. The Board may suspend the Plan or terminate the Plan at any time; provided, that no such action shall adversely affect any benefit outstanding hereunder. (b) The Board, in its sole discretion, may amend this Agreement or the Plan as it relates to the Option without the consent of Holder, but not in any manner adversely affecting the rights, interests or obligations of Holder hereunder. 14. Tax Withholding. BCSG shall have the right to deduct from any settlement of the Option, including the delivery or vesting of Shares, a sufficient amount to cover withholding of any federal, state or local taxes required by law, or to take such other action as may be necessary to satisfy any such withholding obligations, including requiring that Holder, upon exercise of the Option, pay to BCSG in cash, in addition to the Exercise Price for Shares to be issued, an amount equal to any withholding tax liability incurred by BCSG in connection with such issuance. 15. Other Benefit and Compensation Programs. Unless otherwise specifically determined by the Board, the Option is intended to be "non-qualified compensation" under the Code and shall not be deemed a part of Holder's regular, recurring compensation for purposes of calculating payments or benefits from any Company benefit plan or severance program. Further, the Company may adopt other compensation programs, plans or arrangements as it deems appropriate or necessary. Nothing in this Agreement shall be deemed to confer upon Holder any right to receive additional options under the Plan. 16. Unfunded Plan; No Fiduciary Relationship. Unless otherwise determined by the Board, the Plan shall be unfunded and shall not create (or be construed to create) a trust or a separate fund or funds. The Plan shall not establish any fiduciary relationship between BCSG and the Holder or other Person. To the extent any Person holds any rights by virtue of an award granted under the Plan, such rights shall be no greater than the rights of an unsecured general creditor of BCSG. 17. Regulatory Approvals. 9 10 The implementation of the Plan, the granting of the Option and the issuance of Shares upon the exercise or settlement thereof shall be subject to BCSG's procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the Options granted under it or the Shares issued pursuant to it. 18. Successors and Assigns. This Agreement shall be binding on all heirs, successors and assigns of the Holder, including, without limitation, his or her Designated Beneficiary and the estate of the Holder and the executor, administrator or trustee of such estate, or any receiver or trustee in bankruptcy or representative of the Holder's creditors. 19. GOVERNING LAW. THE VALIDITY AND CONSTRUCTION OF THE PLAN AND THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF DELAWARE. [signature page follows] 10 11 IN WITNESS WHEREOF, BCSG and the Holder have duly executed this Stock Option Agreement as of the date first written above. BOOTH CREEK SKI GROUP, INC., a Delaware corporation By: /s/ Jeffrey J. Joyce ----------------------------- Name: ---------------------------- Title: -------------------------- HOLDER: /s/ Timothy Petrick -------------------------------- Timothy Petrick Address: ------------------------ ------------------------ ------------------------ 11 EX-10.23 5 WAIVER AGREEMENT 1 EXHIBIT 10.23 WAIVER AGREEMENT This Waiver Agreement (the "Agreement") is entered into as of January 27, 1998 by and among Booth Creek Ski Holdings, Inc., a Delaware corporation (together with its successors and assigns, "BCS Holdings"), Booth Creek Ski Acquisition Corp., a Delaware corporation (together with its successors and assigns, "BCS Acquisition"), Trimont Land Company, a California corporation (together with its successors and assigns, "Northstar-at-Tahoe"), Sierra-at-Tahoe, Inc., a Delaware corporation (together with its successors and assigns, "Sierra-at-Tahoe"), Bear Mountain, Inc., a Delaware corporation (together with its successors and assigns, "Bear Mountain"), Waterville Valley Ski Resort, Inc., a Delaware corporation (together with its successors and assigns, "Waterville"), Mount Cranmore Ski Resort, Inc., a Delaware corporation (together with its successors and assigns, "Cranmore"), Ski Lifts, Inc., a Washington corporation (together with its successors and assigns, "Ski Lifts"), Grand Targhee Incorporated, a Delaware corporation (together with its successors and assigns, "Grand Targhee," and together with BCS Holdings, BCS Acquisition, Northstar-at-Tahoe, Sierra-at-Tahoe, Bear Mountain, Waterville, Cranmore and Ski Lifts, the "Borrowers," and each a "Borrower"), and BankBoston, N.A. (f/k/a The First National Bank of Boston), a national banking association, as a lender (the "Lender") and as agent (the "Agent"). W I T N E S S E T H : WHEREAS, the Borrowers, the Lender and the Agent are parties to that certain Credit Agreement dated as of December 3, 1996, as amended and restated as of March 18, 1997, as further amended as of June 15, 1997, July 30, 1997 and October 27, 1997 and in effect on the date hereof (the "Credit Agreement") among the Borrowers, the Lender and the Agent; WHEREAS, the Borrowers have requested the Lender and the Agent to waive Defaults and Events of Default with respect to the Credit Agreement in connection with certain capital expenditures made by the Borrowers during their respective fiscal years ended October 31, 1997 and the failure of the Borrowers to give notice thereof to the Agent. 2 NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. Defined Terms. Capitalized terms used herein and not otherwise defined herein shall have the meanings attributed to such terms in the Credit Agreement. 2. Waiver. The Lender and the Agent hereby waive any Default or Event of Default arising out of any violations of Sections 7.4.5 and 7.11 of the Credit Agreement which are attributable to (i) capital expenditures made by the Borrowers during their respective fiscal years ended October 31, 1997 in excess of the aggregate amount permitted under Section 7.11 of the Credit Agreement and (ii) the failure of the Borrowers to give notice thereof to the Agent in the manner described in Section 7.4.5 of the Credit Agreement. 3. Representation and Warranties, etc. The Borrowers hereby represent and warrant to the Agent that after giving effect to the terms of this Agreement (i) all of the representations and warranties contained in the Credit Agreement are true and correct as of the date hereof, (ii) no Default or Event of Default exists or is continuing and (iii) the Borrowers have performed all the agreements on their part to be performed prior to the date hereof as set forth in the Credit Agreement. The Borrowers further represent to the Agent that the aggregate capital expenditures of the Borrowers during their respective fiscal years ended October 31, 1997 did not exceed $12.0 million. 4. Effectiveness of Waiver. This Agreement is not conditioned upon the approval of any amendment to the Credit Agreement or the grant of any other waiver by the Lender or the Agent. This Agreement shall be deemed effective as of October 31, 1997. 5. Effect on the Credit Agreement. Except as provided hereinabove, all of the terms, conditions and covenants of the Credit Agreement and all other Credit Documents shall remain unaltered and in full force and effect and shall continue to be binding upon the Borrowers in all respects and are hereby ratified and confirmed. -2- 3 6. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (signature page follows) -3- 4 IN WITNESS WHEREOF, the Borrowers, the Lender and the Agent have executed this Agreement 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 By: /s/ Jeffrey J. Joyce ------------------------- Title: ---------------------- Lender BANKBOSTON, N.A. By: /s/ Carlton Williams ------------------------- Title: ---------------------- Agent BANKBOSTON, N.A. By: /s/ Carlton Williams ------------------------- Title: ---------------------- EX-10.24 6 WAIVER AGREEMENT 1 EXHIBIT 10.24 WAIVER AGREEMENT This Waiver Agreement (the "Agreement") is entered into as of January 28, 1998 by and among Booth Creek Ski Holdings, Inc., a Delaware corporation (together with its successors and assigns, "BCS Holdings"), Booth Creek Ski Acquisition Corp., a Delaware corporation (together with its successors and assigns, "BCS Acquisition"), Trimont Land Company, a California corporation (together with its successors and assigns, "Northstar-at-Tahoe"), Sierra-at-Tahoe, Inc., a Delaware corporation (together with its successors and assigns, "Sierra-at-Tahoe"), Bear Mountain, Inc., a Delaware corporation (together with its successors and assigns, "Bear Mountain"), Waterville Valley Ski Resort, Inc., a Delaware corporation (together with its successors and assigns, "Waterville"), Mount Cranmore Ski Resort, Inc., a Delaware corporation (together with its successors and assigns, "Cranmore"), Ski Lifts, Inc., a Washington corporation (together with its successors and assigns, "Ski Lifts"), Grand Targhee Incorporated, a Delaware corporation (together with its successors and assigns, "Grand Targhee," and together with BCS Holdings, BCS Acquisition, Northstar-at-Tahoe, Sierra-at-Tahoe, Bear Mountain, Waterville, Cranmore and Ski Lifts, the "Borrowers," and each a "Borrower"), and BankBoston, N.A. (f/k/a The First National Bank of Boston), a national banking association, as a lender (the "Lender") and as agent (the "Agent"). W I T N E S S E T H : WHEREAS, the Borrowers, the Lender and the Agent are parties to that certain Credit Agreement dated as of December 3, 1996, as amended and restated as of March 18, 1997, as further amended as of June 15, 1997, July 30, 1997 and October 27, 1997 and in effect on the date hereof (the "Credit Agreement") among the Borrowers, the Lender and the Agent; WHEREAS, the Borrowers have requested the Lender and the Agent to waive Defaults and Events of Default with respect to the Credit Agreement in connection with the failure of BCS Holdings to maintain, assign and deliver certain key employee life insurance policies and the failure of the Borrowers to give notice thereof to the Agent. 2 NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. Defined Terms. Capitalized terms used herein and not otherwise defined herein shall have the meanings attributed to such terms in the Credit Agreement. 2. Waiver. The Lender and the Agent hereby waive any Default or Event of Default arising out of any violations of Sections 7.4.5 and 7.16 of the Credit Agreement which are attributable to (i) the failure of BCS Holdings to maintain, assign and deliver key employee life insurance policies on the lives of George N. Gillett, Jr. and the chief operating officer of BCS Holdings on or before May 1, 1998 in the manner described in Section 7.16 of the Credit Agreement and (ii) the failure of the Borrowers to give notice of such failure to the Agent in the manner described in Section 7.4.5 of the Credit Agreement. 3. Representation and Warranties, etc. The Borrowers hereby represent and warrant to the Agent that after giving effect to the terms of this Agreement (i) all of the representations and warranties contained in the Credit Agreement are true and correct as of the date hereof, (ii) no Default or Event of Default exists or is continuing and (iii) the Borrowers have performed all the agreements on their part to be performed prior to the date hereof as set forth in the Credit Agreement. 4. Effectiveness of Waiver. This Agreement is not conditioned upon the approval of any amendment to the Credit Agreement or the grant of any other waiver by the Lender or the Agent. This Agreement shall be deemed effective as of October 31, 1997. 5. Effect on the Credit Agreement. Except as provided hereinabove, all of the terms, conditions and covenants of the Credit Agreement and all other Credit Documents shall remain unaltered and in full force and effect and shall continue to be binding upon the Borrowers in all respects and are hereby ratified and confirmed. 6. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties -2- 3 hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (signature page follows) -3- 4 IN WITNESS WHEREOF, the Borrowers, the Lender and the Agent have executed this Agreement 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 By: /s/ Jeffrey J. Joyce ------------------------- Title: ---------------------- Lender BANKBOSTON, N.A. By: /s/ John Bender ------------------------- Title: ---------------------- Agent BANKBOSTON, N.A. By: /s/ John Bender ------------------------- Title: ---------------------- EX-27.1 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF BOOTH BREEK SKI HOLDINGS, INC. AS OF OCTOBER 31, 1997 AND FOR THE YEAR THEN ENDED, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS OCT-31-1997 OCT-31-1997 462 0 1,528 35 3,059 6,445 132,427 9,273 186,416 33,079 120,380 3,125 0 0 29,407 186,416 0 71,807 0 47,423 25,400 0 15,078 (15,928) 1,728 (14,200) 0 (2,664) 0 (17,093) 0 0
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