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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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: November 1, 2002
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 (I.R.S. Employer
incorporation or organization) Identification Number)
1000 South Frontage Road West, Suite 100
Vail, Colorado 81657
(970) 476-1311
(Address, including zip code and telephone number, including
area code, of registrant's principal executive offices)
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Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
None.
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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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [_] No [X]
As of December 31, 2002, 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 registrant's 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.
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TABLE OF CONTENTS
Item Page Number
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PART I
1. Business..................................................... 1
2. Properties................................................... 15
3. Legal Proceedings............................................ 15
4. Submission of Matters to a Vote of Security
Holders...................................................... 16
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters.......................................... 17
6. Selected Financial Data...................................... 17
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 20
7a. Quantitative and Qualitative Disclosures About
Market Risk.................................................. 38
8. Financial Statements and Supplementary Data.................. 39
9. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure.......................... 39
PART III
10. Directors and Executive Officers of the Registrant........... 40
11. Executive Compensation....................................... 43
12. Security Ownership of Certain Beneficial Owners
and Management............................................... 47
13. Certain Relationships and Related Transactions............... 51
14. Controls and Procedures...................................... 54
PART IV
15. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.......................................... 55
Signatures................................................... 60
Certifications............................................... 62
Index of Financial Statements................................ F-1
PART I
Item 1. Business
Overview
As used in this Report, the "Company" or "Booth Creek" refers to Booth
Creek Ski Holdings, Inc. and its subsidiaries, unless the context otherwise
requires. The Company is a wholly-owned subsidiary of Booth Creek Ski Group,
Inc. ("Parent"). The Company currently owns and operates six ski resort
complexes encompassing nine separate resorts, including the Northstar-at-Tahoe
("Northstar") and Sierra-at-Tahoe ("Sierra") ski resorts in the Lake Tahoe
region of Northern California, the Waterville Valley ("Waterville Valley"),
Mount Cranmore ("Mt. Cranmore") and Loon Mountain ("Loon Mountain") ski resorts
in the White Mountains of New Hampshire and the Summit at Snoqualmie (the
"Summit") ski resort complex, which consists of four separate resorts, in the
Cascade Mountains of Northwest Washington. The Company divested the Grand
Targhee ski resort ("Grand Targhee") in Wyoming on June 20, 2000, and the Bear
Mountain ski resort ("Bear Mountain") in Southern California on October 10,
2002.
The Company is the fourth largest ski resort operator in North America
based on approximately 2.2 million skier days recorded during the 2001/02 ski
season at its current resorts. Booth Creek primarily operates regional ski
resorts which attract the majority of their guests from their regional ski
markets, within a 200 mile driving radius of each resort. The Company's resort
properties are located near major skiing populations, including three of the
five largest regional ski markets in the United States: San
Francisco/Sacramento, Boston and Seattle/Tacoma. The Company's properties offer
approximately 6,485 acres of skiable terrain, 347 trails, 87 lifts (including 14
high-speed lifts and two gondolas) and on-mountain capacity to accommodate
approximately 45,000 guests daily. For the year ended November 1, 2002, the
Company generated revenues of $120.5 million, operating income of $14.8 million
and income from operations before depreciation, depletion and amortization
expense and the noncash cost of real estate sales ("Total EBITDA (excluding
Noncash Cost of Real Estate Sales)") of $34.3 million, and incurred a net loss
of $1.9 million. For the year ended November 2, 2001, the Company generated
revenues of $107.4 million, operating income of $2.3 million and Total EBITDA
(excluding Noncash Cost of Real Estate Sales) of $24.4 million, and incurred a
net loss of $13.8 million. See page 25 of this Report for additional information
regarding the manner in which Total EBITDA (excluding Noncash Cost of Real
Estate Sales) is calculated and the reasons why the Company believes such
measure provides useful information to investors.
The Company's resorts seek to differentiate themselves in their respective
markets by selectively upgrading on-mountain facilities and guest services,
employing targeted marketing strategies and offering extensive skier development
programs, all of which create a competitively-priced, high-quality guest
experience. The Company's current resorts have collectively invested
approximately $49.3 million (including $8.1 million of equipment acquired
through capital leases and other debt) in capital expenditures during the last
three fiscal years, including the addition of high-speed chairlifts, additional
snowmaking capabilities, improved trail grooming equipment, and enhanced
on-mountain skier service, retail and food service amenities. The Company
believes its existing resort infrastructure is reasonably well maintained. 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.
On October 10, 2002, the Company consummated the sale of all of the capital
stock of Bear Mountain, Inc., the owner and operator of the Bear Mountain ski
resort, to Snow Summit Ski Corporation for a purchase price of $12,000,000 in
cash, subject to certain adjustments for working capital, assumed debt and
allocations of off-season operating losses and capital expenditures. The
purchase price was determined through arms-length negotiations.
The following is an organizational chart of Parent, the Company and the
Company's subsidiaries. Each subsidiary of the Company is, directly or
indirectly, wholly-owned by Booth Creek.
1
[GRAPHIC OF ORGANIZATIONAL CHART OMITTED]
The Company's principal executive offices are located at 1000 South
Frontage Road West, Suite 100, Vail, Colorado 81657. Its telephone number at
that location is (970) 476-1311. The Company was incorporated in Delaware on
October 8, 1996.
Industry
There are approximately 493 ski areas in the United States which, during
the 2001/02 ski season, generated approximately 54.4 million skier days. A
"skier day" represents one skier or snowboarder visiting one ski resort for one
day, including skiers and snowboarders using complimentary tickets and season
passes. Calculation of skier days requires an estimate of visits by season
passholders. Although different ski resort operators may use different
methodologies for making such estimates, management believes that any resulting
differences in total skier days are immaterial. U.S. ski areas range from small
ski resort operators, which primarily cater 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 well as the perceived overall quality of the
vacation experience. The table below summarizes skier day information for each
region from the 1997/98 ski season through the 2001/02 ski season.
2
U.S. Ski Industry Regions and Skier Days
(In thousands)
Rocky Pacific Lake
Season Northeast Southeast Midwest Mtns West Tahoe Total
- --------------------- --------- --------- ------- ------ ------- ----- ------
1997/98.............. 12,712 4,343 6,707 19,191 7,419 3,750 54,122
1998/99.............. 12,299 4,261 6,005 18,440 6,702 4,382 52,089
1999/00.............. 12,025 5,191 6,422 18,109 6,560 3,891 52,198
2000/01.............. 13,697 5,458 7,580 19,324 7,355 3,923 57,337
2001/02.............. 12,188 4,994 6,980 18,123 8,098 4,028 54,411
Five year average.... 12,584 4,849 6,739 18,637 7,227 3,995 54,031
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 Mtns: CO, ID, MT, NM, UT, WY
Pacific West: AK, AZ, CA (excluding Lake Tahoe Region), NV, OR, WA
Source: 2001/02 Kottke National End of Season Survey
Over the last fifteen years, the ski resort industry has experienced a
period of consolidation. The number of United States ski areas has declined from
709 in 1986 to 493 in 2002. The number of ski areas may decline further, as many
mountain resorts lack the infrastructure and capital and management resources to
effectively compete in this multi-dimensional and service-intensive industry. Of
the 493 ski areas, the 2001/02 Kottke National End of Season Survey estimates
the average resort recorded approximately 110,000 skier days. All of the
Company's resorts, except Mt. Cranmore, 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. During the last three fiscal years, the Company has invested
approximately $49.3 million in capital expenditures at its current resorts to
improve their competitive position and to meet sustaining capital requirements.
Management believes the need for increased investment in resorts in general has
required a greater access to capital and has enhanced the position of resorts
owned by larger, better capitalized owners. Despite the recent consolidation in
the ski industry, the industry remains fragmented, with no one resort accounting
for more than 3%, and no one resort operator accounting for more than 10%, of
the United States' approximately 54.4 million skier days during the 2001/02 ski
season. The four largest ski resort companies, including the Company, accounted
for approximately 27% of all U.S. skier days recorded during the 2001/02 ski
season.
The Lake Tahoe region has averaged approximately 4.0 million annual skier
days over the last five years. Management estimates that approximately 70% to
75% of the skiers visiting Lake Tahoe resorts during the 2001/02 ski season were
from the San Francisco, Sacramento and Central California Valley metropolitan
areas and the Lake Tahoe region. Other guests were principally from Southern
California and states with large ski populations, such as Texas, Illinois and
Florida.
The Northeast market (including New York) has averaged approximately 12.6
million annual skier days over the last five years. The Northeast market
consists of a significant percentage of day or weekend skiers due 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. 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 Pacific West market has averaged approximately 7.2 million skier days
over the last five years. Management estimates that more than 90% of the skier
days recorded at Washington state resorts during the 2001/02 ski season were
attributable to residents of the Seattle/Tacoma metropolitan area. Other guests
were primarily from other parts of Washington, Oregon and Western Canada.
Washington state resorts do not attract a significant number of destination
skiers.
3
Resort Operations
The Company's six 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.
Approx.
Snow- Approx.
Vertical making Beds
Skiable Drop Trail Within
Resort Acres (Feet) Trails Lifts Coverage 12 Miles
- -------------------- ------- -------- ------ ------------- -------- --------
Northstar-at-Tahoe.. 2,420 2,280 70 1 High-Speed 50% 16,000
Gondola
5 High-Speed
Quads (1)
4 Fixed Grip
7 Surface
Sierra-at-Tahoe..... 1,680 2,212 46 3 High-Speed 4% 30,000
Quads
6 Fixed Grip
3 Surface
Waterville Valley... 255 2,020 52 2 High-Speed 100% 6,500
Quads
6 Fixed Grip
4 Surface
Mt. Cranmore........ 183 1,270 39 1 High-Speed 100% 16,000
Quad
4 Fixed Grip
6 Surface
Loon Mountain....... 250 2,100 44 1 High-Speed 96% 13,000
Gondola
1 High-Speed
Quad
5 Fixed Grip
3 Surface
The Summit.......... 1,697 2,280 96 2 High-Speed 0% 1,000
Quads
17 Fixed Grip
6 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.
Total skier visits generated by each of the Company's resorts during the
2001/02, 2000/01 and 1999/00 ski seasons were as follows:
2001/02 2000/01 1999/00
(In thousands)
Northstar....................... 521 519 477
Sierra.......................... 419 391 310
Waterville Valley............... 205 235 204
Mt. Cranmore.................... 96 129 100
Loon Mountain................... 301 385 304
The Summit...................... 612 508 504
--------- --------- ----------
Current Resorts............... 2,154 2,167 1,899
Grand Targhee................... - - 137
Bear Mountain................... 303 333 251
--------- --------- ----------
2,457 2,500 2,287
========= ========= ==========
4
Northstar-at-Tahoe
Northstar-at-Tahoe, located near the north end of Lake Tahoe, California,
offers extensive activities and services in both winter and summer. The resort's
8,600-foot Mt. Pluto features 2,420 acres of skiable terrain and a 2,280 foot
vertical drop. Northstar's 70 ski trails are served by 17 operating lifts,
including one gondola, 5 high-speed quads, two triple lifts and two double
lifts, which combine to transport up to approximately 23,000 skiers uphill per
hour. Northstar also has approximately 65 kilometers of groomed trails for
cross-country skiing and snowshoeing and several on-mountain terrain parks for
snowboarders and adventurous skiers. Other amenities at Northstar include a
village consisting of condominium/hotel accommodations, restaurants, bars,
shops, a child-care center, conference facilities, a 22,700 square foot
on-mountain ski lodge, a 9,000 square foot rental equipment facility and a 5,800
square foot on-mountain children's ski school facility. Summer recreation
amenities include an 18-hole golf course, extensive mountain biking trails and
bike rentals, ten tennis courts, a horseback riding stable, fly fishing and
swimming pools. Northstar currently ranks third in total skier days in the Lake
Tahoe area. In 2002, Northstar was ranked by Ski magazine as the 21st best ski
resort in North America and received gold medals in a number of important
categories, including guest service, family programs, grooming, terrain parks,
lifts and favorable weather.
Northstar's snowmaking system is engineered to cover approximately 50% of
its ski trails. Annual snowfall at the resort has averaged 285 inches per year
during the past five years. Northstar has water rights from various sources
which, when coupled with its 60 million gallon water storage capacity, have been
sufficient to support the resort's needs.
Northstar consists of approximately 8,000 acres of land privately owned by
the Company. Management believes that Northstar has significant opportunities to
develop additional ski terrain, as well as certain other real estate development
opportunities. Moreover, management believes that the planned expansion of the
existing on-mountain bed base at the resort from the East West development
project will result in increased skier days, thereby enhancing the value and
profitability of Northstar's resort operations. Such bed base development is
also expected to make additional ski terrain expansion at Northstar even more
attractive. 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, California and is the closest major ski resort to Sacramento and the
Central California Valley. The resort's 8,852-foot peak offers 1,680 skiable
acres and a 2,212 foot vertical drop. Sierra's 46 ski trails are served by 12
operating lifts, including three high-speed quads, one triple lift and five
double lifts, which combine to transport up to approximately 15,000 skiers
uphill per hour. Sierra operates a 46,000 square foot base lodge which offers a
variety of food and beverage, retail and other skier services. Management
believes that Sierra's investment in its ski infrastructure has made it one of
the best ski values in the South Lake Tahoe area. Sierra does not offer
summertime activities. In 2002, Ski magazine ranked Sierra as the 11th best ski
resort in the Pacific region, and Transworld Snowboarding magazine ranked Sierra
as the 18th best overall snowboarding resort in North America.
Sierra owns 20 acres of its 1,689 gross acreage and leases the remainder
under a Term Special Use Permit from the United States Forest Service (the
"Forest Service"). See Part I, Item 1. "Business - Regulation and Legislation."
Due to its abundant annual snowfall, which has averaged approximately 484 inches
per year over the past five years, Sierra's snowmaking equipment covers only 4%
of Sierra's total terrain.
Waterville Valley
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 52 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 approximately 16,000 skiers uphill per hour. The resort operates
a 42,000 square foot base lodge (complete with multiple food and beverage
service centers and a child care facility), three other base area facilities
comprising approximately 27,500 square feet, a mid-mountain lodge featuring a
cafeteria and deli and a mountain-top lodge with a snack bar and restaurant
dining.
5
The Waterville Valley resort has a year-round Adventure Center offering
mountain bikers, cross-country skiers and hikers access to 105 kilometers of
trails in the White Mountain National Forest. Other area amenities, which are
primarily owned and operated by third parties, include an ice skating arena,
golf course, tennis center, sports and fitness center, horsedrawn sleigh rides,
skateboard park, beach and paddle boats. Waterville Valley's Conference Center
has 17,000 square feet 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 is consistently recognized as one
of the top 20 ski resorts in the East by Ski magazine.
Waterville Valley owns 11 acres on Snow Mountain and two acres at the
Conference Center. It leases 790 acres of land on Mt. Tecumseh under a Term
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. Water for snowmaking is
currently pumped from a local river and a pond. Waterville Valley is in the
process of seeking 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. Located in the hub of New Hampshire's Mount Washington Valley, Mt.
Cranmore's 1,714 foot summit offers 183 skiable acres and a 1,270 foot vertical
drop. Mt. Cranmore's 39 trails are served by 11 operating lifts, including one
high-speed quad, one triple lift and three double lifts, which combine to
transport up to approximately 7,000 skiers uphill per hour. 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 square foot athletic facility which
includes four outdoor tennis courts, four indoor tennis courts, a pool, a spa, a
weight-lifting area, aerobic training rooms, an indoor climbing wall, locker
rooms, a kitchen area and a nursery. Mt. Cranmore also operates on-site retail
and rental shops.
Mt. Cranmore owns 754 acres and holds easements enabling it to develop an
additional 500 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 weather-monitoring and snowmaking system which covers 100% of the
resort's trails. In addition to pumping rights from a nearby stream, Mt.
Cranmore has an understanding with the local water district for an additional
reservoir of one million gallons of water for snowmaking. In addition, Mt.
Cranmore's base area pond holds 1.5 million gallons of water.
Loon Mountain
Loon Mountain is located in the White Mountains of New Hampshire in the
town of Lincoln. The resort's 3,050 foot peak features 250 skiable acres and a
2,100 foot vertical drop. Loon Mountain's 44 trails are served by 10 operating
lifts, including a four-passenger gondola, a high-speed quad, two triple lifts
and three double lifts, which combine to transport over 10,000 skiers uphill per
hour. Loon Mountain's trails cater mostly to intermediate level skiers (64%),
with trails provided for beginners (20%) and experts (16%) as well. Resort
amenities include a base lodge with a cafeteria and coffee shop, a restaurant
and deck at the summit, the 17,600 square foot Governor Adams lodge (which
provides traditional lodge facilities and also serves as a venue for summer
outdoor activities and concerts), two rental shops and a new ski and snowboard
tuning facility, a 17,300 square foot children's center, trails for
cross-country skiing, horseback riding and mountain biking, indoor and outdoor
climbing walls and a steam engine railroad for shuttling visitors. Loon Mountain
has the snowmaking capacity to cover approximately 96% of its skiable terrain.
In 2002, Loon Mountain was ranked as the sixth best ski resort in the East by
Ski magazine.
Loon Mountain owns 565 acres and leases 1,366 acres of land in the White
Mountain National Forest under a Term Special Use Permit issued by the Forest
Service permitting year-round recreational use. During 2002, Loon Mountain
received certain approvals from the Forest Service which generally permit the
enhancement and expansion of the resort, including new ski terrain and
facilities. See Part I, Item 1. "Business - Regulation and Legislation."
Management believes that Loon Mountain has significant real estate development
opportunities in connection with the expansion and enhancement of the resort.
See Part I, Item 1. "Business - Real Estate Development."
6
The Summit at Snoqualmie
The Summit at Snoqualmie is located in the Cascade Mountains of Northwest
Washington and consists of four separate resorts, Alpental at the Summit
("Alpental"), Summit West, Summit Central and Summit East, which collectively
offer 1,697 acres of skiable terrain. Individually, Alpental has a 5,450 foot
top elevation, a 2,280 foot vertical drop, 302 acres of skiable trails and runs
(121 acres of which are lighted for night skiing) and approximately 523 acres of
backcountry terrain; Summit West has a 3,765 foot top elevation, a 765 foot
vertical drop and 197 acres of skiable trails and runs (189 acres of which are
lighted for night skiing); Summit Central has a 3,865 foot top elevation, a
1,025 foot vertical drop and 466 acres of skiable trails and runs (231 acres of
which are lighted for night skiing); and Summit East has a 3,710 foot top
elevation, a 1,100 foot vertical drop and 209 acres of skiable trails and runs.
In total, the Summit complex has 96 designated trails and runs served by 25
operating lifts, including two high-speed quads, two fixed grip quads, four
triple lifts, 11 double lifts and six surface lifts, which combine to transport
up to approximately 33,000 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. The Summit operates 10
lodges which provide an aggregate of approximately 123,000 square feet of space
for food and beverage services (restaurants and cafeterias), skier services and
entertainment.
Overall, the Summit complex is one of the largest learn-to-ski areas in the
United States, with approximately 25% of its 2001/02 skier days being
attributable to guests enrolled in ski school programs. In addition, the Summit
is the largest night skiing complex in the United States, with approximately 20%
to 25% of its skier visits each season being recorded at night.
The Summit owns 686 acres of its 4,103 gross acreage, leases approximately
440 acres under a private permit, utilizes 1,280 acres for cross-country skiing
under an annual operating agreement with the Forest Service and utilizes 1,697
acres of mountain terrain under a Forest Service Term Special Use Permit. See
Part I, Item 1. "Business - Regulation and Legislation." The Summit typically
enjoys abundant annual snowfall, averaging 450 inches annually over the past
five years. As a result, there are no man-made snowmaking capabilities at any of
the Summit resorts.
Business Segments and Principal Products
The Company operates in two business segments: resort operations and real
estate and other. Business segment information is presented in Note 13 to the
accompanying consolidated financial statements.
The Company's principal products from resort operations include lift
tickets, season passes, snow school lessons, equipment rentals, retail sales,
food and beverage operations and other ancillary products and services. See Part
II, Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations - General," for information regarding the composition of
the Company's resort operations revenues for the last three fiscal years.
Real Estate Development
The Company has certain holdings of land suitable for either the expansion
of ski terrain or the development of residential and commercial properties. The
Company also has terrain expansion opportunities on land within its current
Forest Service permit areas as well as on land owned by third parties. 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 Company's real estate development strategy for residential and
commercial properties is comprised of the following components: (1) to build
recurring resort cash flow through increased bed base and diversification of
revenue sources, (2) to partner with proven real estate developers, (3) to
invest on a limited basis in infrastructure development in conjunction with the
development of single family lots at Northstar, and (4) to refrain from
investment in vertical or commercial development except in conjunction with the
development of ski related facilities.
7
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 position in that market, as
measured by the potential increase in the number of skier days, revenues and
revenue per skier on a long-term basis which the Company believes it can capture
through expansion and upgrades, and (ii) the return on capital expected to be
realized from an expansion project versus alternative projects. Management
undertakes extensive planning and pre-development steps prior to investing
significant capital into any development project. Currently, the Company is in
the process of developing comprehensive master plans and obtaining entitlements
(e.g., zoning approvals) for Northstar, Loon Mountain, Waterville Valley and the
Summit. In management's view, the expansion projects at Northstar and Loon
Mountain represent the Company's best development opportunities, and would
likely take priority over the pursuit of expansion and development initiatives
at the Company's other resorts.
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. Current and future single
family residential development at Northstar is limited based on the present real
estate master development plan, and consists of three phases or subdivisions
known as "Unit 7", "Unit 7A" and "Unit 7B."
The property underlying the Unit 7 development lots was sold by Trimont
Land Company ("TLC"), the owner and operator of Northstar and a wholly-owned
subsidiary of the Company, to Trimont Land Holdings, Inc. ("TLH"), a
wholly-owned subsidiary of Parent and an affiliate of the Company, on November
17, 1999. The Company obtained a fairness opinion for the transaction from an
independent firm qualified in the subject matter of the transaction. See Note 8
to the accompanying consolidated financial statements. Under the terms of the
transaction with TLH, the Company is entitled to receive any excess net cash
proceeds (over the proceeds received in November 1999) from the subsequent
resale of the lots by TLH.
During the year ended November 1, 2002, TLH consummated the sale of 25 Unit
7 lots for net proceeds of approximately $11,300,000. As the net proceeds of the
25 lot sales were more than the $6,000,000 in cash initially paid by TLH for the
underlying real estate, additional cash proceeds of $5,300,000 were distributed
to TLC during the year ended November 1, 2002. In addition, during the year
ended November 1, 2002 the Company relieved the existing $6,000,000 deposit
liability relating to cash previously paid by TLH for the property on November
17, 1999. As of November 1, 2002, one lot remained available for sale within the
Unit 7 subdivision.
The Company has received preliminary approvals for the Unit 7A subdivision,
which consists of 15 single family lots. Initial infrastructure construction
commenced in October 2002, and is expected to be completed during the summer of
2003. Marketing and sales activities have commenced in 2003. Subject to further
regulatory approvals and market demand, lot closings are currently targeted to
begin in the fourth calendar quarter of 2003. However, no assurances can be
given regarding the ultimate timing of lot closings or proceeds therefrom.
The Company is in the preliminary stages of the entitlement and approval
process for the Unit 7B subdivision, which is expected to consist of between 10
and 18 single family lots.
On September 22, 2000, TLC and TLH entered into an Agreement for Purchase
and Sale of Real Property (the "Northstar Real Estate Agreement") relating to
certain development real estate at Northstar. Pursuant to the Northstar Real
Estate Agreement, TLC agreed to sell to TLH certain development real estate
consisting of approximately 550 acres of land located at Northstar (the
"Development Real Estate") for a total purchase price of $27,600,000, of which
85% was payable in cash and 15% was payable in the form of convertible secured
subordinated promissory notes. The purchase price was based on an appraisal
obtained from an independent third party appraiser. In addition to receiving the
fair market value for the Development Real Estate, under the terms of the
Northstar Real Estate Agreement (i) TLH or its joint venture partner, East West
Partners, Inc. (together with its affiliates, "East West"), is required, at its
expense, to pay for substantially all mitigation costs associated with the
development project, and (ii) TLH is obligated to reconvey to TLC certain excess
land following the subdivision of the Development Real Estate. TLC retained
significant approval rights over various aspects of the real estate development,
including development activities that could impact resort operations at
Northstar.
In connection with the execution of the Northstar Real Estate Agreement,
TLH and East West entered into a joint venture agreement (the "East West Joint
Venture") providing for the development of the property purchased by TLH and
subsequently transferred to the East West Joint Venture. The proposed project
contemplated by the East West Joint Venture includes the development of a
mixture of approximately 1,800 hotel, condominium, townhome and time share
units, as well as significant additional commercial/retail space in Northstar.
Under the East West Joint Venture, TLH retains financial responsibility for
approximately $5,000,000 of costs associated with the development of the
infrastructure of the Development Real Estate.
8
On September 22, 2000, TLC and TLH consummated the sale of the initial land
parcels contemplated by the Northstar Real Estate Agreement, and TLC transferred
the bulk of the Development Real Estate to TLH for a total purchase price of
$21,000,000, of which $17,850,000, or 85%, was paid in cash and $3,150,000, or
15%, was paid in the form of a convertible secured subordinated promissory note.
During the year ended November 1, 2002, TLH paid $5,610,000 to TLC, which
represents the cash portion of the purchase price for the remaining Development
Real Estate subject to the Northstar Real Estate Agreement. The $5,610,000
payment has been deferred as a deposit liability as of November 1, 2002 pending
the consummation of the sale of the remaining Development Real Estate under the
Northstar Real Estate Agreement, which is subject to certain subdivision
requirements to effect the transfer of such property and other normal and
customary closing conditions, and is expected to be consummated in 2003.
Management believes that the expected substantial increase in on-mountain
bed base from the East West development will result in increased visitation and
skier days at Northstar, thereby enhancing the value and profitability of
Northstar's resort operations. The Company has been able to secure these
benefits without incurring the economic risks associated with real estate
development.
The Company intends to enhance the ski terrain at the Northstar resort by
upgrading the existing trails and lifts, reducing or eliminating on-mountain
bottlenecks and providing better access to and from the resort's existing base
area. During 1999 and 2000, five trails were cut on Lookout Mountain and a new
detachable quad lift was constructed to provide new advanced skiing terrain at
the resort. The Company has preliminarily identified a number of other sites
within Northstar's present boundaries that are suitable for future expansion. In
general, such expansion is expected to occur concurrently with the anticipated
bed base expansion resulting from the East West development. In 2002, the
Company submitted applications for permit approvals for various mountain
improvements, including new and replacement lifts, additional trails and trail
widening and snowmaking infrastructure. These applications are currently being
reviewed by applicable regulatory agencies. Any lift construction or terrain
expansion would require customary permits and approvals, and no assurance can be
given that the Company will be able to develop any additional terrain at
Northstar or, if completed, any such projects will be successful. In addition,
in 2000 and 2001, the Company expanded and improved the existing snowmaking
system at Northstar in order to lessen the influence of unfavorable weather,
which can negatively impact operating conditions at the resort.
In addition, Northstar has a program to harvest timber through third party
contracting. The timber harvesting program, which produced revenues of $405,000
during the year ended November 1, 2002, is managed carefully to avoid
interference with Northstar's resort operations and prevent any diminution in
the quality of the resort's natural environment.
As part of the new Special Use Permit obtained in 2002, Loon Mountain
leases approximately 581 acres known as "South Mountain" from the Forest
Service. The available South Mountain land is located in an area directly
adjacent to the present Loon Mountain ski area and would be able to accommodate
alpine and cross country trails, ski lifts (including one connecting the current
ski area with South Mountain) and snowmaking from newly installed snowmaking
facilities. Expansion and upgrades to the resort would serve to better meet and
fulfill the anticipated needs of guests by enhancing the quality and diversity
of skiable terrain. Loon Mountain owns 327 acres of land located at the base of
South Mountain and approximately 5 acres at the base of the existing ski area.
The current zoning for this property is rural residential and general use, and
would allow for, subject to approvals, construction of a maximum of 997 units.
Loon Mountain also owns (1) approximately 32 acres of land with existing
approvals for development of 31 single family lots, and (2) 49 acres of land
which is zoned rural residential and could accommodate up to a maximum of 147
additional units, subject to receipt of applicable approvals. The timing and
scope of development will depend on market conditions, receipt of required
regulatory approvals, the limitations set out in the Forest Service's Record of
Decision and in the settlement agreements with certain environmental plaintiffs,
the Company's financial position and an evaluation of the Company's other
expansion opportunities. See Part I, Item 1. "Business - Regulation and
Legislation."
9
Mt. Cranmore holds a perpetual easement entitling it to develop at least
500 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 by a third party. 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 could increase Mt. Cranmore's skier
capacity, and could enhance the quality and diversity of its skiable terrain.
Additionally, Mt. Cranmore has 35 acres of privately owned land at the southwest
flank of the mountain. This southwest facing ski-in/ski-out land is very
suitable for development. The Company does not have any immediate expansion or
development plans for Mt. Cranmore and the timing and scope of any development
will depend on market conditions, receipt of required regulatory approvals, the
Company's financial position and the Company's other expansion opportunities.
The Summit owns 66 acres of real property on various parcels in and around
its resorts, a portion of which is available for residential development. The
developmental real estate at the Summit is owned by DRE, L.L.C. (the "Real
Estate LLC"), a subsidiary of the Company. The Summit also owns 39 acres of real
property at Summit East that is ski-to/ski-from and is zoned as high-density
residential and commercial. Any potential real estate development activities at
the Summit could be constrained by existing or future planned resort operations
at the Summit. The Summit's development parcels will be studied for future
development potential when market conditions warrant.
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. The Senior Credit Facility, the Indenture and the Securities
Purchase Agreements (as defined herein) each contain restrictive covenants that
may significantly limit the Company's ability to pursue real estate development
opportunities. No assurance can be given that the Company will develop any
additional properties or, if completed, any such projects will be successful.
Moreover, there can be no assurances that the East West development at Northstar
will be successful or be completed as currently planned, or that such
development will have the currently anticipated favorable effects on the
Company's resort operations. In addition, there are significant risks inherent
in any expansion project and in the implementation of the Company's development
strategy.
Marketing and Sales
Staff
The Company has a marketing and sales staff of approximately 60 persons,
including a marketing director at each resort who reports to the Vice President
of Marketing and Sales, 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 including advertising, sales, public relations,
events, promotions, Internet strategies and research. Each resort's marketing
personnel also participate 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 three of the five largest regional ski markets in the United
States. The Company has positioned 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, (v) attract and retain
new guests to the Company's resorts by expanding the scope of Booth Creek's
resorts to winter recreation centers offering a multitude of snowsport options
in addition to skiing and snowboarding, and (vi) develop products and execute
sales efforts that provide advance bookings and sales.
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
phone and Internet 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.
10
Programs
The Company has developed a number of specific marketing and sales programs
to achieve its objectives, including the following:
o Customer loyalty and season pass programs
o Sales initiatives
o Multimedia advertising (including Internet strategies)
o Data-base marketing programs (including e-mail broadcasting)
o Snowsport development programs
o Strategic marketing alliances
o School, group and business affiliations
Customer loyalty and season pass 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. The
Company believes a critical component to developing customer frequency will be
the success of its customer loyalty programs, including its Vertical Plus
frequent skier programs in place at the Company's Lake Tahoe resorts. For an
annual membership fee, 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 members' expenditures and 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. In addition, over
the past several years, the Company's resorts have successfully introduced new
season pass products that were attractively priced to entice visitation during
non-peak periods, stimulate demand, attract market share and develop guest
loyalty. The Company is continuing its successful season pass initiatives for
the 2002/03 ski season.
Sales Initiatives. The Company's sales initiatives include a variety of
programs designed to increase and enhance buying opportunities for its customers
in order to provide a complete vacation experience. Through merchandising
efforts, increasing sales outlets and channels, sales training for front-line
employees, on-site and Internet-based promotions and other marketing efforts,
the Company seeks to increase sales of products and services to its customers
and generate additional revenue per skier visit.
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 San Francisco, Sacramento,
Seattle 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. Market research has shown that the typical Booth Creek
guest utilizes the Internet extensively as a source of information and
additional Company resources have been concentrated towards this communication
vehicle. For the 2002/03 ski season, Booth Creek will continue to feature
e-commerce "virtual stores" on each resort's website offering products such as
season passes, loyalty program memberships, gift certificates and lodging/lift
packages as well as private lessons, child care and lift tickets.
Data-base marketing programs. Through the information obtained from its
customer loyalty and season pass programs, extensive market surveys and other
market research, the Company maintains a data-base containing detailed
information on its existing customers. Management believes that data-base
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 offers
to build volume and penetration.
11
Snowsport development programs. The Company's resorts operate a variety of
snowsport development programs designed to improve the skills of children and
beginners, as well as more advanced skiers and snowboarders. The Company's
resorts 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, geared toward intermediate and advanced
skiers, which offers free specialized instruction and daily training. This
program has increased guest loyalty and repeat visitation. Other efforts have
been instituted at all resorts to embrace and welcome new participants to the
sport of skiing or snowboarding.
Strategic marketing alliances. The Company is a national ski resort
operator with approximately 2.2 million skier days recorded during the 2001/02
ski season. At least one of the Company's resorts is within driving distance of
three of the five largest ski markets in the United States. Sponsorship
opportunities include potential relationships with automobile manufacturers,
soft drink companies, and ski and snowboard equipment manufacturers. For
example, Northstar and Sierra have relationships with a major automobile
manufacturer that involves over $1.2 million worth of television exposure, free
use of vehicles for Company purposes and a vehicle give-away promotion for
resort guests. This provides exposure of Booth Creek's resorts to a targeted
audience of skiers in key markets.
School, group and business affiliations. The Company is dedicated to
developing special programs designed to attract school, business and other
groups. By introducing skiing, snowboarding and other methods of sliding on snow
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. Sales personnel at each resort provide year-round assistance to group
leaders in organizing and developing events. Business affiliations are developed
and maintained through corporate ticket 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 optimal operating
results during key holidays and weekends during this period. The Company's
results of operations are, in turn, significantly dependent upon favorable
weather conditions and other factors beyond the Company's control.
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 improvements in preparation for the ensuing
ski season.
Competition
The general unavailability of new developable ski mountains, regulatory
requirements and the high costs and expertise required to build and operate
resorts present significant barriers to entry in the ski industry. In the past
15 years, many 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 approximately
493 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, and quality and price
of complementary services.
The Company's Lake Tahoe resorts, Northstar and Sierra, face strong
competition from Lake Tahoe's five other major ski resorts. Northstar's primary
competition in the North Lake Tahoe area is from Squaw Valley, Alpine Meadows
and Sugar Bowl. Northstar also competes with major ski and non-ski destination
resorts throughout North America. Sierra primarily competes in the South Lake
Tahoe area with Heavenly and Kirkwood.
The Company's New England resorts, Waterville Valley, Mt. Cranmore and Loon
Mountain, compete in the highly competitive Northeast ski market, which consists
of Maine, New Hampshire, Vermont, Massachusetts, Rhode Island, 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, Mt. Cranmore's and Loon
Mountain's competitors include Bretton Woods, Mount Sunapee, Attitash/Bear Peak,
Gunstock, Cannon Mountain, King Pine and Wildcat Mountain in New Hampshire, as
well as other major regional ski resort operators, including Okemo, Sunday
River, Killington, Wachusett Mountain, Smuggler's Notch, Stowe, Stratton
Mountain and Shawnee Peak.
12
The Summit competes primarily with 11 other ski resorts in Washington,
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 Oregon and British Columbia.
On a regional basis, at least one of the Company's resorts is readily
accessible to three of the five largest ski markets in the United States.
Management estimates that more than 70% of the skiers visiting the Company's
Lake Tahoe resorts are from the San Francisco/San Jose, Sacramento, Central
California Valley and Lake Tahoe regions. Waterville Valley, Mt. Cranmore and
Loon Mountain are estimated to attract more than 75% of their guests from
Massachusetts and New Hampshire, with a large percentage of such visitors coming
from the Boston metropolitan area. The Summit attracts more than 90% of its
guests from the Seattle/Tacoma metropolitan region.
Regulation and Legislation
The Company's operations are dependent upon its ownership or control over
the real property used in its ski operations at each resort. The real property
presently used at the Northstar and Mt. Cranmore resorts is owned by the
Company, leased from third parties or controlled by easements. The Company has
the right to use a substantial portion of the real property associated with the
Sierra, Summit and Waterville Valley resorts under the terms of Term Special Use
Permits issued by the Forest Service. The Sierra permit expires in 2039, the
Waterville Valley permit expires in 2034 and the Summit permit expires in 2032.
A substantial portion of the real property associated with the Loon
Mountain resort is likewise used under a Forest Service Term Special Use Permit.
In 1993, the Forest Service authorized various improvements at Loon Mountain and
an expansion onto the adjacent South Mountain. The United States Court of
Appeals for the First Circuit overturned this authorization in 1996 on the
ground that the Forest Service had failed to properly address certain
environmental issues under the National Environmental Policy Act ("NEPA"). On
remand from the Court of Appeals, the United States District Court for the
District of New Hampshire (the "District Court") entered a final order dated
December 11, 1998 which imposed certain conditions and limitations on the Forest
Service and Loon Mountain Recreation Corporation ("LMRC") until the Forest
Service completed an additional environmental review process under NEPA. In
response to a separate 1997 action filed by an individual and an environmental
group, the District Court entered an injunction on February 12, 1999 which
limited LMRC's snowmaking and use of a snowmaking pipeline until the Forest
Service completed the additional environmental review process under NEPA.
Effective February 22, 2001, certain plaintiffs in the lawsuits alleging
violations of environmental laws by the Forest Service and LMRC entered into
settlement agreements with LMRC which resolved all issues among the plaintiffs
and LMRC relating to LMRC's prior operations and proposal for near term
expansion and upgrading of Loon Mountain. Among other things, these agreements
impose certain restrictions on the operation of the resort and the future
development of certain private land at the resort.
LMRC notified the District Court and interested parties that the December
11, 1998 final order and February 12, 1999 injunction expired under their terms
when the Forest Service completed its NEPA process, issued a Record of Decision
("ROD") on February 26, 2002 approving the Loon Mountain Final Environmental
Impact Statement (the "Final EIS"), and issued a Term Special Use Permit to LMRC
for Loon Mountain on June 24, 2002 (thereby replacing Loon Mountain's three
existing Forest Service permits). The new Loon Mountain Term Special Use Permit
expires in 2042.
Two written administrative appeals to the ROD were filed with the Forest
Service. One of the two appellants settled with LMRC and withdrew its appeal.
The Forest Service denied the other administrative appeal and upheld the ROD in
a letter decision dated June 7, 2002. With these actions, the Forest Service has
concluded its administrative appeal process for the ROD. The ROD and the Forest
Service's June 7, 2002 letter decision are subject to judicial review in federal
court under the Administrative Procedure Act by the appellant whose
administrative appeal was denied by the Forest Service. As of the date of this
Report, no action for judicial review had been filed. The Company can give no
assurance regarding whether such a judicial appeal will be filed or the timing
or outcome of such a process.
Elements of the expansion and development activities addressed in the Final
EIS that occur on private lands will be subject to separate federal, state and
local permitting processes. While the Company believes that it will successfully
navigate these remaining steps to undertaking the activities authorized in the
ROD, it can give no assurance regarding the timing or outcome of such processes.
13
The Forest Service has the right to approve the location, design and
construction of improvements in permit areas and many operational matters at
resorts with permits. Under the Term Special Use Permits, the Company is
required to pay fees to the Forest Service. The fees range from 1.5% to
approximately 4.0% of certain revenues, with the rate generally rising with
increased revenues. The calculation of gross revenues includes, among other
things, revenue from lift ticket, season pass, ski school lesson, food and
beverage, rental equipment and retail merchandise sales. Total fees paid to the
Forest Service by the Company during the year ended November 1, 2002 were
$1,352,000.
The Company believes that its relations with the Forest Service are good,
and, to the best of its knowledge, no Term Special Use Permit for any major ski
resort has ever been terminated by the Forest Service. The United States
Secretary of Agriculture has the right to terminate any Term Special Use Permit
upon 180-days notice if, in planning for the uses of the national forest, the
public interest requires termination. Term Special Use Permits may also be
terminated or suspended because of non-compliance by the permittee; however, the
Forest Service would be required to notify the Company of the grounds for such
action and to provide it with reasonable time to correct any curable
non-compliance.
The Company's resorts are subject to a wide variety of federal, state and
local laws and regulations relating to land use, water resources, discharge,
storage, treatment and disposal of various materials and other environmental
matters. Except as otherwise described in this section, 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. While the Company is
required from time to time to undertake remediation activities at its resorts to
assure compliance with environmental laws or to address instances of
non-compliance, the Company 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 materially adversely affect
operations.
The operations at the resorts require numerous permits and approvals from
federal, state and local authorities, including permits relating to land use,
ski lifts and the sale of alcoholic beverages. In addition, the Company's
operations are heavily dependent on its continued ability, under applicable
laws, regulations, policies, permits, licenses or contractual arrangements, to
have access to adequate supplies of water with which to make snow and service
the other needs of its facilities, and otherwise to conduct its operations.
There can be no assurance that new applications of existing laws, regulations
and policies, or changes in such laws, regulations and policies will not occur
in a manner that could have a detrimental effect on the Company, or that
material permits, licenses or agreements will not be canceled, or renewed, or
will be renewed on terms materially less favorable to the Company. Major
expansions of any one or more of the Company's 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 NEPA
and certain state or local NEPA counterparts if it is determined that the
expansion may have a significant impact upon the environment. Although the
Company has no reason to believe that it will not be successful in implementing
its operations and development plans, no assurance can be given that necessary
permits and approvals will be obtained or renewed.
Certain regulatory approvals associated with a snowmaking pipeline at Loon
Mountain, as well as certain contractual obligations, impose minimum stream flow
requirements on Loon Mountain. These requirements will compel Loon Mountain to
construct water storage facilities within approximately four years, and such
construction may require further regulatory approvals and environmental
documentation under NEPA. No assurances can be given that such regulatory
approvals will be obtained or that the Company will have the financial resources
to complete such construction.
Except for certain permitting and environmental compliance matters relating
to Loon Mountain described above and in Part I, Item 3. "Legal Proceedings," 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.
14
Employees
As of December 31, 2002, the Company employed a full-time corporate staff
of 40 persons. In addition, the Company's resorts employ an aggregate of
approximately 500 full-time and approximately 4,400 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.
Item 2. Properties
Northstar consists of approximately 8,000 acres of land privately owned by
the Company. Sierra owns 20 acres of its 1,689 gross acreage and leases the
remainder under a Term Special Use Permit with the Forest Service. Waterville
Valley owns 11 acres on Snow Mountain and two acres at the Conference Center,
and leases 790 acres of land on Mt. Tecumseh from the federal government under a
Term Special Use Permit issued by the Forest Service. Mt. Cranmore owns 754
acres and holds deeded easements enabling it to develop an additional 500 acres
of ski terrain. Loon Mountain owns 565 acres and leases 1,366 acres of land in
the White Mountain National Forest under a Term Special Use Permit issued by the
Forest Service permitting year-round recreational use. The Summit owns 686 acres
of its 4,103 gross acreage, leases approximately 440 acres under a private
permit, utilizes 1,280 acres for cross-country skiing under an annual operating
agreement with the Forest Service and utilizes 1,697 acres of mountain terrain
under a Forest Service Term Special Use Permit. In addition, each of the
Company's resorts have ski lodges and other facilities that management believes
are suitable for the Company's current operations. For further information
regarding the Company's properties, see Part I, Item 1. "Business - Resort
Operations" and "- Regulation and Legislation."
Substantially all of the consolidated assets of the Company are pledged as
collateral for outstanding borrowings under the Senior Credit Facility (as
defined herein). In addition, the Term Special Use Permits with the Forest
Service relating to the Sierra, Waterville Valley, Loon Mountain and Summit
resorts are encumbered as collateral for the Senior Credit Facility.
Item 3. Legal Proceedings
Each of the Company's resorts has pending and is regularly subject to
litigation, and the threat thereof, with respect to personal injury claims
relating principally to snow sports activities at its resorts as well as to
premises and vehicular operations and workers' compensation matters. The Company
maintains liability insurance that the Company considers adequate to insure
claims related to such usual and customary risks associated with the operation
of four-season recreation resorts.
In connection with the Company's 1998 acquisition of Loon Mountain
Recreation Corporation ("LMRC"), certain shareholders of LMRC filed several
lawsuits challenging the transaction and seeking to exercise dissenters' rights
under the New Hampshire Business Corporation Act. Each of these lawsuits has
been decided or otherwise resolved in favor of the Company, LMRC and its former
directors, resulting in no further liability or obligation relating to the
transaction for LMRC, its former directors or the Company and its affiliates.
The New Hampshire Superior Court has awarded attorneys fees to the defendants in
certain of these cases in the amount of $972,000 (with $420,000 for LMRC and the
Company and $552,000 for the insurer that funded certain costs of defending the
former LMRC directors), although the amount of such award remains subject to
appeal and the likelihood or timing of collection of such amount is uncertain.
On January 3, 2002, an adjacent property owner (the "Easement Plaintiff")
affiliated with certain of the plaintiffs in several of the lawsuits challenging
the Company's acquisition of LMRC, filed suit against LMRC and Loon Realty Corp.
in the Grafton County, New Hampshire Superior Court. LMRC and Loon Realty Corp.
are the beneficiaries of certain easements across Easement Plaintiff's land, and
Easement Plaintiff sought to vacate such easements and recover damages relating
to the use thereof. This latest action was the refiling of a suit raising
identical claims that was ultimately dismissed by the New Hampshire Supreme
Court. On June 5, 2002, the Grafton County, New Hampshire Superior Court
dismissed this suit and, based on its determination that the Easement Plaintiff
brought this action in bad faith, ruled that LMRC and Loon Realty Corp. are
entitled to recovery of attorney's fees and costs. The New Hampshire Supreme
Court summarily affirmed the Superior Court's dismissal of the suit and this
matter is therefore resolved.
15
In 1995, an individual sued the Forest Service in the United States
District Court for the District of New Hampshire (the "District Court") alleging
that the Forest Service had violated the National Environmental Policy Act
("NEPA"), the Clean Water Act ("CWA"), and an executive order in approving
improvements to and an expansion at Loon Mountain. The District Court entered a
final order dated December 11, 1998 that imposed certain conditions and
limitations on LMRC's operations. Under its terms, the order was effective until
the Forest Service completed an additional environmental review process under
NEPA and issued a new Term Special Use Permit for Loon Mountain. In 1997, an
individual and an environmental group filed a second lawsuit against the Forest
Service in the District Court alleging that the Forest Service violated NEPA in
authorizing LMRC to construct and operate a snowmaking pipeline. The District
Court entered an injunction on February 12, 1999 which limited LMRC's use of the
snowmaking pipeline until the Forest Service completed its additional
environmental analysis under NEPA and issued a Record of Decision ("ROD").
As described in Part I, Item 1. "Business - Regulation and Legislation", on
February 26, 2002, the Forest Service completed its environmental analysis under
NEPA and issued a ROD approving the Final Environmental Impact Statement for
Loon Mountain. The Forest Service issued a Term Special Use Permit to LMRC for
Loon Mountain on June 24, 2002. The Forest Service denied an administrative
appeal of the ROD in a June 7, 2002 letter decision. The ROD and the June 7,
2002 letter decision are subject to judicial review in federal court. As of the
date of this Report, no action for judicial review had been filed. The Company
can give no assurance regarding whether such a judicial appeal will be filed or
the timing or outcome of such process.
Effective February 22, 2001, certain plaintiffs in lawsuits (each of which
have now been dismissed or settled) alleging violations of environmental laws by
LMRC entered into settlement agreements with LMRC, which resolve all issues
among them and LMRC relating to LMRC's prior operations and current proposal for
near term expansion and upgrading of the Loon Mountain resort. Among other
things, these agreements impose certain restrictions on the operation of the
resort and the future development of certain private land at the resort.
On November 13, 2001, the Company filed a lawsuit against ASU International
LLC, Essex Insurance Company and Certain Underwriters, Lloyd's London
(collectively, the "Insurers") in Superior Court in Massachusetts. The Company
had placed with the Insurers weather/income stabilization coverage for the
2000/01 ski season for certain of its resorts. During the applicable period of
the policies, the Company incurred losses at two of its resorts which the
Company believes were covered under the terms of such policies. The Company
believes that it complied with its obligations under the policies and has
properly reported and made claims in accordance with the policies for losses
aggregating in excess of $1.5 million. In response to the Insurers' failure to
properly process the Company's claims, the Company seeks recovery for breach of
contract, breach of covenant of good faith and unfair and deceptive business
practices. The Company's complaint seeks recovery for the full amount of its
claims as well as multiple damages and attorneys' fees based on its assertion of
unfair and deceptive claims practices by the Insurers.
Partial resolution of the claims was reached and a payment of $700,000 was
made by the Insurers in April 2002. This payment was made and accepted without
prejudice to the remainder of the Company's claims. This lawsuit remains in the
discovery phase, with certain key depositions scheduled for the first quarter of
2003. Based on an evaluation of information and progress of discovery to date
and the advice of counsel, the Company believes that realization of its recorded
claims is probable. However, no assurance can be given regarding the timing of
resolution of this matter.
Item 4. Submission of Matters to a Vote of Security Holders
On October 4, 2002, Parent, the sole shareholder of the Company, acting
through its President, Christopher P. Ryman, voted to reelect and confirm George
N. Gillett, Jr., Dean C. Kehler, Edward Levy and Gary M. Pelletier as the
members of the Board of Directors of the Company. No other matters were
submitted to a vote of security holders of the Company during the fourth quarter
of fiscal 2002.
16
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. All of the Company's equity securities are owned by Parent.
The Company's principal debt agreements contain restrictions on the
Company's ability to pay dividends. The Company has not paid any dividends on
its common stock since inception. See Part II, Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity" and
Note 5 to the accompanying consolidated financial statements.
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with
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
consolidated financial data of the Company as of and for the years ended October
30, 1998, October 29, 1999, October 27, 2000, November 2, 2001 and November 1,
2002, have been derived from the audited consolidated financial statements of
the Company, which have been audited by Ernst & Young LLP, independent auditors.
The financial information presented below includes information on "Total
EBITDA," "Noncash Cost of Real Estate Sales" and "Total EBITDA (excluding
Noncash Cost of Real Estate Sales)." "Total EBITDA" represents operating income
before depreciation, depletion and amortization expense. "Noncash 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 real estate sales. Although
EBITDA is not a measure of performance under accounting principles generally
accepted in the United States ("GAAP"), the information is presented because
management believes it provides useful information regarding a company's ability
to incur and service debt. Further, Total EBITDA (excluding Noncash Cost of Real
Estate Sales) is calculated consistent with the manner that "EBITDA" is
calculated under the Indenture governing the Company's 12.5% senior notes due
2007 (the "Senior Notes"), and therefore, management believes this measure is
meaningful to holders of the Senior Notes. EBITDA should not be considered in
isolation or as a substitute for net income, operating 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, the EBITDA measures 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.
17
--------------------------------------------------------------------
Year Year Year Year Year
Ended Ended Ended Ended Ended
October October October November November
30, 1998(b) 29, 1999 27, 2000(c) 2, 2001 1, 2002
----------- ----------- ----------- ----------- -----------
(Dollars in Thousands, except Revenue per Skier Day)
Statement of Operations Data: (a)
Revenue:
Resort Operations............................. $ 86,131 $ 101,962 $ 108,430 $ 107,090 $ 108,827
Real Estate and Other......................... 7,608 12,744 19,670 276 11,705
----------- ----------- ----------- ----------- -----------
93,739 114,706 128,100 107,366 120,532
Operating Expenses:
Cost of Sales - Resort Operations............. 54,570 66,581 62,804 61,290 63,137
Cost of Sales - Real Estate and Other......... 4,671 5,244 4,507 211 2,920
Depreciation, Depletion and Amortization (d).. 15,535 18,769 19,437 22,181 17,094
Selling, General and Administrative........... 17,313 20,736 21,187 21,428 22,614
Unusual Items, Net............................ - 487 - - -
----------- ----------- ----------- ----------- -----------
Operating Income................................. 1,650 2,889 20,165 2,256 14,767
Other Income (Expense):
Interest Expense.............................. (17,456) (18,517) (18,158) (16,822) (15,281)
Amortization of Deferred Financing Costs...... (1,203) (1,093) (1,084) (966) (1,126)
Gain on Early Retirement of Debt.............. - - - 1,723 2,761
Other Income (Expense)........................ (280) (261) 47 153 (105)
----------- ----------- ----------- ----------- -----------
Other Income (Expense), Net................... (18,939) (19,871) (19,195) (15,912) (13,751)
----------- ----------- ----------- ----------- -----------
Income (Loss) from Continuing Operations Before
Change in Accounting Principle................ (17,289) (16,982) 970 (13,656) 1,016
Discontinued Operations:
Income (Loss) from Discontinued Operations of
Bear Mountain Resort........................ (241) (1,811) (1,327) (138) 549
Loss on Sale of Bear Mountain Resort.......... - - - - (3,235)
----------- ----------- ----------- ----------- -----------
Loss on Discontinued Operations.................. (241) (1,811) (1,327) (138) (2,686)
----------- ----------- ----------- ----------- -----------
Loss Before Change in Accounting Principle....... (17,530) (18,793) (357) (13,794) (1,670)
Change in Accounting Principle for Goodwill (d).. - - - - (200)
----------- ----------- ----------- ----------- -----------
Net Loss......................................... $ (17,530) $ (18,793) $ (357) $ (13,794) $ (1,870)
=========== =========== =========== =========== ===========
Other Financial and Operating Data:
Total Skier Days (e)............................. 1,811,000 2,139,000 2,036,000 2,167,000 2,154,000
Revenue (Excluding Paid Skier Visit Insurance
Policy Revenue) per Skier Day (f)............. $ 47.56 $ 47.67 $ 50.56 $ 48.61 $ 50.52
Capital Expenditures for Property and Equipment.. $ 15,500 $ 14,342 $ 21,909 $ 12,944 $ 11,638
Net Cash Provided by (Used in):
Operating Activities.......................... $ 7,559 $ 15,393 $ 29,737 $ 13,366 $ 23,523
Investing Activities.......................... $ (47,718) $ (18,504) $ (9,124) $ (15,280) $ (782)
Financing Activities.......................... $ 40,322 $ 2,947 $ (20,378) $ 1,676 $ (22,535)
Ratio of Earnings to Fixed Charges (g) .......... - - 1.03 - 1.05
Total EBITDA (h)................................. $ 17,185 $ 21,658 $ 39,602 $ 24,437 $ 31,861
Noncash Cost of Real Estate Sales................ $ 3,721 $ 4,743 $ 2,460 $ - $ 2,478
Total EBITDA (Excluding Noncash Cost of Real
Estate Sales) (h)............................. $ 20,906 $ 26,401 $ 42,062 $ 24,437 $ 34,339
As of As of As of As of As of
October October October November November
30, 1998 29, 1999 27, 2000 2, 2001 1, 2002
----------- ----------- ----------- ----------- -----------
Balance Sheet Data: (In Thousands)
Working Capital (Deficit), Including Revolving
Credit Facility Borrowings.................... $ (33,093) $ (45,309) $ (31,628) $ (46,221) $ (35,935)
Total Assets..................................... $ 218,546 $ 210,346 $ 199,063 $ 189,218 $ 166,600
Long-term Debt................................... $ 137,352 $ 136,483 $ 136,790 $ 128,664 $ 120,195
Total Debt (i)................................... $ 156,280 $ 160,986 $ 144,498 $ 148,040 $ 127,157
Preferred Stock of Subsidiary (j)................ $ 2,634 $ 2,133 $ 1,638 $ 1,136 $ -
Common Shareholder's Equity...................... $ 37,377 $ 18,584 $ 18,227 $ 4,433 $ 2,563
(see accompanying footnotes)
18
Notes to Selected Financial Data
(a) Pursuant to Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No.
144"), which was adopted by the Company effective as of October 28, 2000,
the historical results of operations and loss on sale of the Bear Mountain
resort are presented as discontinued operations in the Company's
consolidated statements of operations. As the sale of the Grand Targhee
resort occurred prior to the adoption of SFAS No. 144, the former
operations of the Grand Targhee resort through June 20, 2000 are reflected
in the Company's continuing operations for the years ended October 30,
1998, October 29, 1999 and October 27, 2000.
(b) Reflects the financial results of Waterville Valley, Mt. Cranmore,
Northstar, Sierra, the Summit and Grand Targhee for the entire period, and
Loon Mountain for the period beginning February 26, 1998, the date on which
it was acquired by the Company. Reported total skier days for the year
ended October 30, 1998 reflects 77,000 actual skier days for Loon Mountain
during the period of the Company's ownership. Total skier days for Loon
Mountain for the entire 1997/98 ski season were 350,000 skier days.
(c) Reflects the divestiture of the Grand Targhee resort on June 20, 2000.
(d) In June 2001, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFAS No. 142"). The Company adopted SFAS No. 142 effective as of
November 3, 2001. Under the new rules, goodwill will no longer be amortized
but will be subject to annual impairment tests in accordance with the
pronouncement. In connection with the adoption of SFAS No. 142, the Company
performed a transitional impairment test for recorded goodwill as of
November 3, 2001 for each resort. Based on the transitional impairment
test, the Company wrote down goodwill by $200,000 for one resort, which has
been reflected as the cumulative effect of a change in accounting principle
for the year ended November 1, 2002. The following table reflects the
amount of recorded goodwill amortization and adjusted net income (loss)
excluding such goodwill amortization for the periods indicated:
Year Year Year Year
Ended Ended Ended Ended
October October October November
30, 1998 29, 1999 27, 2000 2, 2001
---------- ---------- ---------- ----------
(In Thousands)
Reported Net (Loss).....$ (17,530) $ (18,793) $ (357) $ (13,794)
Goodwill Amortization... 2,237 2,391 2,356 2,343
---------- ---------- ---------- ----------
Adjusted Net Income
(Loss) ...............$ (15,293) $ (16,402) $ 1,999 $ (11,451)
========== ========== ========== ==========
(e) Total skier days associated with Bear Mountain's operations have been
excluded from the Company's reported total skier days disclosed in Other
Financial and Operating Data.
(f) Reflects revenue from resort operations divided by total skier days. For
the years ended October 27, 2000 and November 2, 2001, the amount presented
for revenue per skier day excludes the effect of paid skier visit insurance
policy revenue of $5,480,000 and $1,754,000, respectively.
19
(g) For purposes of this computation, earnings are the sum of (i) income (loss)
from continuing operations, and (ii) fixed charges excluding capitalized
interest and preferred stock dividend requirements. Fixed charges are the
sum of (i) interest expensed and capitalized, (ii) an estimate of the
interest within rent expense, (iii) amortization of deferred financing
costs, and (iv) preferred stock dividend requirements. Earnings were
inadequate to cover fixed charges by approximately $13,800,000, $17,500,000
and $17,700,000 during the years ended November 2, 2001, October 29, 1999
and October 30, 1998, respectively.
(h) The following table reconciles operating income from the Company's
consolidated statements of operations to Total EBITDA and Total EBITDA
(excluding Noncash Cost of Real Estate Sales) for the periods indicated:
Year Year Year Year Year
Ended Ended Ended Ended Ended
October October October November November
30, 1998 29, 1999 27, 2000 2, 2001 1, 2002
----------- ----------- ----------- ----------- -----------
(In Thousands)
Reported Operating Income................. $ 1,650 $ 2,889 $ 20,165 $ 2,256 $ 14,767
Depreciation and Depletion................ 13,298 16,339 17,037 19,776 17,094
Amortization of Goodwill and Other
Intangible Assets....................... 2,237 2,430 2,400 2,405 -
----------- ----------- ----------- ----------- -----------
Total EBITDA.............................. 17,185 21,658 39,602 24,437 31,861
Noncash Cost of Real Estate Sales......... 3,721 4,743 2,460 - 2,478
----------- ----------- ----------- ----------- -----------
Total EBITDA (Excluding Noncash Cost of
Real Estate Sales)...................... $ 20,906 $ 26,401 $ 42,062 $ 24,437 $ 34,339
=========== =========== =========== =========== ===========
(i) Includes Revolving Credit Facility borrowings, current portion of long-term
debt and long-term debt.
(j) Represented preferred stock of a subsidiary of the Company which was
subject to mandatory redemption requirements through January 15, 2002.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the
consolidated financial statements and related notes thereto included elsewhere
in this Report. The following discussion contains certain forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from those discussed herein. Factors that could cause or
contribute to the differences are discussed in "- Risk Factors," "-
Forward-Looking Statements" and elsewhere in this Report.
General
The Company's ski operations are highly sensitive to weather conditions and
the overall strength of the national economy and the regional economies in the
areas in which the Company operates. The Company believes that the geographic
diversity of its 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, high winds, drought and other types of
severe or unusual weather conditions, which can have a significant effect on the
operating revenues and profitability at one or more of the Company's resorts.
Moreover, since 2000, the Company has sold two resorts (Grand Targhee and Bear
Mountain), thereby reducing its geographical diversity.
The Company's three most weather-sensitive resorts, Waterville Valley, Loon
Mountain and Mt. Cranmore, have invested heavily in snowmaking capabilities to
provide coverage on virtually all of their trails and have been open for skiing
at least 136, 139 and 99 days, respectively, during each of the last five ski
seasons, including the 2001/02 ski season. However, the efficiency and
effectiveness of snowmaking operations can be negatively impacted by numerous
factors, including temperature variability, reliability of water sources,
availability and cost of adequate energy supplies and unfavorable weather events
such as heavy rains.
Sierra and the Summit generally experience higher natural snowfall levels,
averaging approximately 484 and 450 inches of snowfall, respectively, per year
for the past five ski seasons. As a result of their historic natural snowfall,
their snowmaking capabilities in terms of trail coverage are considerably less
extensive than at Waterville Valley, Loon Mountain or Mt. Cranmore. However,
such resorts are dependent upon early season snowfall to provide necessary
terrain for the important Christmas holiday period, and therefore, the timing
and extent of natural snowfall can significantly impact operating conditions.
20
Northstar has averaged approximately 285 inches of snowfall per year for
the past five ski seasons. The resort has snowmaking capabilities to provide
coverage on approximately 50% of its trails. Although the resort's operations
depend significantly on natural snowfall, particularly in the early part of the
ski season, in recent years the Company has invested in additional snowmaking
facilities to improve Northstar's snowmaking production capacity.
The Company's results of operations are also highly dependent on the
Company's ability to compete in each of the large regional ski markets in which
it operates. Management estimates that at Northstar and Sierra approximately 70%
of the 2001/02 ski season total skier days were attributable to residents of the
San Francisco/San Jose, Sacramento, Central California Valley and Lake Tahoe
regions. At Waterville Valley, Loon Mountain and Mt. Cranmore, more than 75% of
the 2001/02 ski season total skier days were attributable to residents of
Massachusetts and New Hampshire, with a large percentage of such visitors coming
from the Boston metropolitan area. At the Summit, the Company estimates that
approximately 90% of the 2001/02 ski season total skier days were attributable
to residents of the Seattle/Tacoma metropolitan region.
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 and season pass strategies and sales and marketing programs to
improve peak and off-peak volume. The Company also seeks to increase skier days
by offering a quality guest experience and developing effective target marketing
programs. See Part I, Item 1. "Business - Marketing and Sales." 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,
equipment rentals, lessons and food and beverage facilities.
The Company's current resorts have invested approximately $49.3 million
(including $8.1 million of equipment acquired through capital leases and other
debt) in capital expenditures during the last three fiscal years to upgrade
chairlift capacity, expand terrain, improve skier service, enhance retail and
food and beverage facilities, increase snowmaking capabilities and to meet
sustaining capital requirements, all of which management believes are important
in providing a quality guest experience.
The following table summarizes the sources of the Company's revenues from
resort operations for the years ended November 1, 2002, November 2, 2001 and
October 27, 2000. The information for the year ended October 27, 2000 includes
the operating results of the Grand Targhee resort, which was sold in June 2000.
Pursuant to Statement of Financial Accounting Standards No. 144, which the
Company adopted in fiscal 2001, the information presented does not include the
operating results of the Bear Mountain resort, which was sold in October 2002.
Year Ended
---------------------------------------------
November 1, November 2, October 27,
2002 2001 2000
------------ ------------ ------------
(In thousands)
Lift Tickets......................$ 42,655 $ 42,900 $ 40,427
Season Passes..................... 14,520 11,596 10,931
Snow School....................... 8,119 7,348 6,802
Equipment Rental.................. 8,930 8,597 7,773
Retail............................ 4,916 4,965 5,311
Food and Beverage................. 15,864 15,895 16,132
Other............................. 13,823 14,035 15,574
------------ ------------ ------------
Revenues from Resort Operations
before Paid Skier Visit
Insurance...................... 108,827 105,336 102,950
Paid Skier Visit Insurance........ - 1,754 5,480
------------ ------------ ------------
Total Resort Operations Revenues..$ 108,827 $ 107,090 $ 108,430
============ ============ ============
21
A meaningful 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, administrative and maintenance personnel, substantially 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 adjust staffing levels when skier volumes
or seasonal needs dictate.
Each of the Company's resorts is subject to the threat of personal injury
claims relating principally to snow sports activities as well as premises and
vehicular operations and workers' compensation matters. The Company maintains
various forms of insurance covering claims related to its properties and usual
and customary risks associated with the operation of four-season recreation
resorts. As a result of the terrorist attacks on September 11, 2001, the
insurance industry has experienced significant losses and a substantial
reduction in underwriting capacity, which has generally resulted in
significantly higher renewal premiums for companies seeking insurance. In
connection with its annual renewal of insurance coverage for 2003, the Company
experienced an increase in insurance premium costs of approximately $1,500,000
over the level of such costs in 2002. In addition, the elimination of paid skier
visit insurance coverage is likely to lead to more variability in the Company's
operating results.
The Company's real estate and other segment is primarily engaged in the
sale of single family lots, development real estate and timber at Northstar. The
revenues, operating income and cash flows of the real estate and other segment
are highly variable. Revenues from the Company's real estate and other segment
were $11,705,000, $276,000 and $19,670,000 for the years ended November 1, 2002,
November 2, 2001 and October 27, 2000, respectively.
Results of Operations of the Company
Overview
The opening and closing dates for the Company's resorts for the 2001/02,
2000/01 and 1999/00 ski seasons were as follows:
Opening Dates
2001/02 Season 2000/01 Season 1999/00 Season
Northstar............. Nov. 29, 2001 Nov. 18, 2000 Nov. 20, 1999
Sierra................ Nov. 25, 2001 Nov. 3, 2000 Nov. 24, 1999
Waterville Valley*.... Nov. 16, 2001 Nov. 19, 2000 Nov. 19, 1999
Mt. Cranmore.......... Dec. 15, 2001 Nov. 25, 2000 Dec. 4, 1999
Loon Mountain*........ Nov. 16, 2001 Nov. 22, 2000 Nov. 19, 1999
The Summit............ Nov. 30, 2001 Dec. 1, 2000 Nov. 27, 1999
Closing Dates
2001/02 Season 2000/01 Season 1999/00 Season
Northstar............. April 21, 2002 April 22, 2001 April 24, 2000
Sierra................ April 15, 2002 April 23, 2001 April 24, 2000
Waterville Valley..... April 7, 2002 April 15, 2001 April 9, 2000
Mt. Cranmore.......... March 24, 2002 April 1, 2001 March 26, 2000
Loon Mountain......... April 14, 2002 April 29, 2001 April 23, 2000
The Summit............ May 5, 2002 April 22, 2001 April 23, 2000
* Following their openings for the 2001/02 season, Waterville Valley and Loon
Mountain ceased operations in December 2001 for six and ten days,
respectively, due to eroding conditions as a result of warm weather.
22
Due to warm temperatures and the lack of natural snowfall in the Lake Tahoe
region for most of November 2001, Northstar and Sierra did not open for the
2001/02 season until after Thanksgiving Day, whereas for the 2000/01 season,
Northstar opened on schedule and Sierra experienced an unusually early opening.
In the first half of December 2001, the Lake Tahoe region received significantly
above average snowfall, which allowed Northstar and Sierra to open 100% of their
terrain earlier than usual, and provided favorable conditions going into the
Christmas holiday period and the first half of January 2002. However, snowfall
levels in the Lake Tahoe region in January and February 2002 were below
historical levels, and several weekends in March 2002 were negatively impacted
by disruptive storms. In addition, the early timing of the Easter holiday period
and softening conditions in April 2002 negatively impacted late season business.
For the 2000/01 season as a whole, snowfall levels in the Lake Tahoe region were
below historical levels, although as compared to the 1999/00 ski season, both
Northstar and Sierra benefited from generally improved trail coverage and
conditions during the 2000 Christmas holiday period and early January 2001. For
the 1999/00 ski season, Northstar and Sierra experienced unseasonably dry
weather and a lack of natural snowfall during November, December and the first
part of January 2000, which significantly impacted terrain availability at these
resorts during such period. However, snowfall for these resorts returned to more
normal levels during the later half of January and February 2000.
For the 2001/02 season, the Northeast experienced drought conditions and
one of the warmest winters on record. While Waterville Valley and Loon Mountain
opened for the 2001/02 season on schedule, the resorts were forced to close for
six and ten days, respectively, in early December 2001 due to eroding conditions
as a result of warm weather. Mt. Cranmore was unable to open for the 2001/02
season until December 15, 2001. In addition to difficult early season conditions
and below average snowfall, the Company's New Hampshire resorts experienced an
above average number of negative weather events during the 2001/02 season,
including periods of warm weather and rain. By comparison, weather conditions
for the Company's New Hampshire resorts for the 2000/01 season were generally
favorable, with cold temperatures and above average snowfall. The New Hampshire
resorts experienced variable temperatures and a lack of significant natural
snowfall through the middle of January of the 1999/00 ski season.
The Summit received above average snowfall and experienced generally
favorable conditions during the 2001/02 season, whereas the 2000/01 season was
marked by significantly below average snowfall. Conditions at the Summit for the
1999/00 season were generally favorable.
On October 10, 2002, the Company consummated the sale of all of the capital
stock of Bear Mountain, Inc., the owner and operator of the Bear Mountain ski
resort, to Snow Summit Ski Corporation for a purchase price of $12,000,000 in
cash, subject to certain adjustments for working capital, assumed debt and
allocations of off-season operating losses and capital expenditures. The
purchase price was determined through arms-length negotiations. As a result of
the disposal, the Company has reflected the historical operating results of Bear
Mountain as discontinued operations in its consolidated statements of
operations. Based on the terms of the transaction, the Company recognized a loss
on sale of $3,235,000. Additional financial information relating to Bear
Mountain is included in Note 10 to the accompanying consolidated financial
statements.
The Company sold the assets associated with the Grand Targhee resort on
June 20, 2000. Grand Targhee contributed resort operations revenues of
$7,367,000, income from operations of $1,539,000 and income from operations
before depreciation expense of $2,229,000 during the year ended October 27,
2000.
The Company's fiscal years ended November 1, 2002 and October 27, 2000 were
52 week periods, whereas the fiscal year ended November 2, 2001 was a 53 week
period. As the additional week in 2001 occurred during the non-peak period prior
to the start of the 2001/02 ski season, the inclusion of the 53rd week in 2001
did not have a significant impact on the comparability of resort operations
revenues between periods. Cost of operations for the Company's resort business
and selling, general and administrative expense in 2001 included approximately
$400,000 in incremental labor costs due to payroll associated with the 53rd
week.
23
Year Ended November 1, 2002 Compared to the Year Ended November 2, 2001
Continuing Operations:
Total revenue for the year ended November 1, 2002 was $120,532,000, an
increase of $13,166,000, or 12%, over the Company's revenues for the year ended
November 2, 2001. Revenues from resort operations for the 2002 period were
$108,827,000, an increase of $1,737,000, or 2%, as compared to the 2001 period.
Revenues from real estate operations for the year ended November 1, 2002 were
$11,300,000, due to the close of escrow on 25 lots within the Unit 7 development
at Northstar. There were no real estate sales in the 2001 period. Timber
operations contributed revenues of $405,000 in the 2002 period as compared to
$276,000 in the 2001 period.
For the 2000/01 season, the Company arranged for four separate paid skier
visit insurance policies covering Bear Mountain, Loon Mountain, Waterville
Valley and the Summit. The policies had a deductible for the initial decline
from targeted paid skier visit and revenue levels and stated maximum coverage
levels. In addition, the policies required the insured to experience monthly or
annual snowfall amounts below certain agreed upon levels before a claim could be
filed for the decline in paid skier visits. For the year ended November 2, 2001,
the Company recorded resort operations revenues of $1,500,000 for claims
attributable to lower than agreed upon paid skier visits and snowfall levels
under the Summit and Waterville Valley policies. The Company's claims were
determined based on a specified formula under the paid skier visit insurance
policies and snowfall information verified by an independent third party. The
Company believes that it fully complied with its obligations under the policies,
and properly reported and made claims in accordance with the policies for losses
aggregating in excess of $1,500,000. As a result of the underwriters' failure to
properly process the Company's claims, in November 2001, the Company filed a
lawsuit against the underwriters seeking recovery for breach of contract, breach
of covenant of good faith and unfair and deceptive business practices. In April
2002, the underwriters made a partial offer of settlement of $700,000, which the
Company accepted with a reservation of all rights and remedies under the terms
of the policies and applicable law with respect to its remaining claims. The
Company intends to vigorously pursue collection of its remaining claims. The
parties to the lawsuit are currently conducting discovery in the matter. Based
on an evaluation of information to date and the advice of counsel, the Company
believes that realization of its recorded claims is probable. However, no
assurance can be given regarding the timing of the