ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q (the “Report”)
and with
the audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2017 filed with the Securities and Exchange Commission
. In addition to historical financial information, the following discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
Unless the context suggests otherwise, references in this Report to the “Company”, “Peak”, “our”, “us”, or “we” refer to Peak Resorts, Inc. and its consolidated subsidiaries.
Forward-Looking Statements
Except for any historical information contained herein, the matters discussed in this
Report
contain certain “forward-looking statements'' within the meaning of the federal securities laws.
This includes statements regarding our future financial position, economic performance, results of operations, business strategy, budgets, projected costs, plans and objectives of management for future operations, and the information referred to under “Management's Discussion and Analysis of Financial Condition and Results of Operations''.
These forward-looking statements generally can be identified by the use of forward-looking terminology, such as “may,'' “will,'' “expect,'' “intend,'' “estimate,'' “anticipate,'' “believe,'' “continue'' or similar terminology, although not all forward-looking statements contain these words. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management's beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, you are cautioned that any such forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Although we believe that the expectations reflected in such forward-looking statements are reasonable as of the date made, expectations may prove to have been materially different from the results expressed or implied by such forward-looking statements. Unless otherwise required by law, we also disclaim any obligation to update our view of any such risks or uncertainties or to announce publicly the result of any revisions to the forward-looking statements made in this
R
eport. Important factors that could cause actual results to differ materially from our expectations include, among others:
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weather, including climate change;
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availability of funds for capital expenditures and operations;
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competition with other indoor and outdoor winter leisure activities and ski resorts;
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the leases and permits for property underlying certain of our ski resorts;
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ability to integrate new acquisitions;
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environmental laws and regulations;
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our dependence on key personnel;
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the effect of declining revenues on margins;
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the future development and continued success of our Mount Snow and Hunter Mountain ski resorts;
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our reliance on information technology;
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our current dependence on our primary lender and the lender's option to purchase certain of our ski resorts;
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our dependence on a seasonal workforce;
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our ability to avoid or recover from cyber and other security breaches and other disruptions; and
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You should also refer to Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for a discussion of factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this
Report
will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may prove to be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time-frame, or at all.
Company Overview
We are a leading owner and operator of high-quality, individually branded ski resorts in the U.S. We currently operate 14 ski resorts primarily located in the Northeast and Midwest, 13 of which we own. The majority of our resorts are located within 100 miles of major metropolitan markets, including New York City, Boston, Philadelphia, Cleveland and St. Louis, enabling day and overnight drive accessibility. Our resorts are comprised of nearly 1,859 acres of skiable terrain that appeal to a wide range of ages and abilities. We offer a breadth of activities, services and amenities, including skiing, snowboarding, terrain parks, tubing, dining, lodging, equipment rentals and sales, ski and snowboard instruction and mountain biking and other summer activities. We believe that both the day and overnight drive segments of the ski industry are appealing given their stable revenue base, high margins and attractive risk-adjusted returns. We have successfully acquired and integrated 11 ski resorts since our incorporation in 1997, and we expect to continue executing this strategy.
We and our subsidiaries operate in a single business segment—resort operations.
Business Overview
Capital Projects
As part of our mission to build value by investing in our current properties through expansions, new products and amenities that will elevate our customers’ skiing and off-season experiences, during the first quarter of fiscal 2018 we continued to move forward with capital improvement projects at our Hunter Mountain, Hidden Valley and Mount Snow resorts. At Hunter Mountain, we plan to increase the resort’s skiable acreage by approximately 25-30% and add a new detachable high-speed chair lift and parking area. We expect to complete the project in time for the 2018/2019 ski season. At Hidden Valley, we plan to construct a zip tour which we anticipate will generate additional sales and diversify that resort’s revenue base. We expect to complete the project for use beginning in the fall of 2018. At Mount Snow, we continued construction on the West Lake Water Project and Carinthia Ski Lodge Projects. The West Lake Water Project includes i) construction of a new water storage reservoir for snowmaking with capacity of up to 120 million gallons; ii) three new pump houses; iii) installation of snowmaking pipelines; iv) trail expansions and upgrades; and v) a new ski lift and ancillary equipment. The Carinthia Ski Lodge Project includes the construction of the Carinthia Ski Lodge - a three-story, 36,000-square foot skier service building which will include i) a restaurant, cafeteria and bars with seating for over 600 people
;
ii) retail facilities
:
and iii) a sales center for lift tickets and equipment rentals. We expect to complete the West Lake Water Project and Carinthia Ski Lodge projects prior to the 2017/2018 and 2018/2019 ski seasons, respectively.
Seasonality of Business
Our resort operations are seasonal in nature and revenue and profits from operations are substantially lower and have historically resulted in losses from late spring to late fall, which occur during our first and second fiscal quarters. Revenue and profits generated by our summer operations have historically not been sufficient to fully offset our operating expenses during the same timeframe. Therefore, our operating results for any interim period are not necessarily indicative of the results that may be achieved for any subsequent quarter or for a full year.
Recent Developments
Chief Financial Officer Succession Plan
On August 16, 2017, the Company announced its succession plan for its Chief Financial Officer, Stephen J. Mueller. Mr. Mueller will step down from his position as the Company’s Chief Financial Officer and Secretary on
October 3, 2017 and assume a new role as Executive Vice President. In connection with this planned transition, on August 15, 2017, the Board of Directors of the Company appointed Christopher J. Bub as Vice President, Chief Financial Officer and Secretary, to take effect on October 3, 2017 upon Mr. Mueller’s transition.
Mr. Bub currently serves as the Company’s Vice President and Chief Accounting Officer.
Royal Banks of Missouri Credit Facilities
We maintain a $15.0 million acquisition line of credit with Royal Banks of Missouri (the “Acquisition Line of Credit”) under which, as of July 31, 2017, $2.75 million was outstanding. On
August 5, 2017, the Company entered into a Loan Renewal Agreement with Royal Banks of Missouri extending the maturity of the $2.75 million outstanding under the Company’s
Acquisition Line of Credit
to November 5, 2017.
On August 25, 2017, the Company entered into a conditional commitment agreement (the “Commitment Letter”) with Royal Banks of Missouri pursuant to which the bank agreed to provide a renewal of the
Acquisition
Line of Credit and a new
$10.0 million
revolving working capital line of credit (together with the
renewed
Acquisition Line of Credit, the “Loans”). A portion of the
renewed
Acquisition Line of Credit is to be used to repay amounts outstanding under the Royal Banks of Missouri Debt, and to roll over the $2.75 million outstanding under the
existing
Acquisition
Line of Credit. The remainder of the
renewed
Acquisition Line of Credit may be used for future acquisitions.
The bank’s obligation to provide the Loans pursuant to the Commitment Letter is subject to a number of customary conditions, including, without limitation, the bank’s ability to secure participant lenders and the execution and delivery by the relevant parties of definitive loan documentation consistent with the Commitment Letter. The bank’s obligations to provide the Loans expire if the Loans have not been closed by October 18, 2017.
Under the terms of the Commitment Letter, the Loans will be payable in monthly interest only installments, charged at the bank’s prime rate plus 1.00 percent per annum, with any outstanding principal amounts due and payable in full within 14 months after the loan advance. We will be required to open a debt service account with the bank and deposit into the account an amount equal to one-third of the estimated annual interest due in connection with the Loans, subject to adjustment by the bank. It is intended that the terms and conditions of the Loans shall be similar to those set forth in the existing Master Credit and Security Agreement, dated as of December 1, 2014, between us and affiliates of EPR Properties, as amended and modified, including debt covenant requirements. Amounts outstanding will be secured by the assets of each of the subsidiary borrowers to the Acquisition Line of Credit.
Results of Operations
Three Months Ended July 31, 2017, Compared with the Three Months ended July 31, 2016
The following table presents our condensed unaudited consolidated statements of operations for the three months ended July 31, 2017 and 2016 (dollars in thousands):
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Three months ended
July 31,
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2017
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2016
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$ change
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% change
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Revenues:
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Food and beverage
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$
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2,830
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$
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2,487
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$
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343
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13.8%
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Hotel/lodging
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1,841
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1,808
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33
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1.8%
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Retail
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241
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149
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92
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61.7%
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Summer activities
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1,881
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1,864
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17
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0.9%
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Other
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727
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818
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(91)
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-11.1%
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7,520
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7,126
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394
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5.5%
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Costs and Expenses:
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Resort operating expenses:
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Labor and labor related expenses
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8,611
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7,707
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904
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11.7%
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Retail and food and beverage cost of sales
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752
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761
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(9)
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-1.2%
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Power and utilities
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789
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588
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201
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34.2%
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Other
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3,387
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2,708
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679
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25.1%
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13,539
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11,764
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1,775
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15.1%
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Depreciation and amortization
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3,145
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3,217
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(72)
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-2.2%
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General and administrative expenses
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1,248
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1,372
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(124)
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-9.0%
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Real estate and other non-income taxes
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684
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563
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121
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21.5%
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Land and building rent
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353
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327
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26
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8.0%
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18,969
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17,243
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1,726
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10.0%
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Loss from operations
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(11,449)
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(10,117)
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(1,332)
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13.2%
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Other (expense) income
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Interest, net of interest capitalized of $431 and $384 in 2017 and 2016, respectively
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(3,011)
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(3,048)
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37
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-1.2%
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Gain on sale/leaseback
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83
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83
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-
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0.0%
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Other income
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55
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2
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53
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> 100%
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(2,873)
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(2,963)
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90
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-3.0%
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Loss before income taxes
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(14,322)
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(13,080)
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(1,242)
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9.5%
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Income tax benefit
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(5,727)
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(5,176)
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(551)
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10.6%
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Net loss
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$
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(8,595)
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$
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(7,904)
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$
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(691)
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8.7%
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Total reported EBITDA
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$
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(8,304)
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$
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(6,900)
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$
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(1,404)
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20.3%
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Net Revenue.
Net
revenue increased $0.4 million, or 5.5%, for the three months ended July 31, 2017
,
compared with the three months ended July 31, 2016. The increase is primarily attributable to increased food and beverage sales at summer concerts and conferences.
Resort Operating Costs.
Resort operating costs increased $1.8 million, or 15.1%, for the three months ended July 31, 2017, compared with the same period in the prior year. During the first quarter of fiscal 2017, we experienced low liquidity levels and, as a result, implemented employee furloughs and strict spending controls on discretionary costs.
By the first quarter of fiscal 2018, our liquidity levels had normalized, and, as a result, we did not have similar employee furloughs and our resorts incurred costs relating to the preparation for the upcoming ski season.
This additional activity during the first quarter of fiscal 2018 resulted in higher labor, power and other costs, including repairs and maintenance and supplies expense. This level of spending is more consistent with our first fiscal quarter spending in years prior to fiscal 2017.
General and Administrative Costs
. General and administrative expenses decreased $0.1 million, or 9.0%, for the three months ended July 31, 2017 compared with the three months ended July 31, 2016, primarily due to a decrease in professional fees.
Income Taxes.
Income tax benefit increased $0.4 million, or 7.9%, as
compared with the
three mon
ths ended July 31, 2016, as
result of an increase in the loss before income taxes for the three months ended July 31, 2017 compared with the
same period in the prior year.
Reported EBITDA.
We have specifically chosen to include “Reported EBITDA” (which we define as net income before interest, income taxes, depreciation, amortization, gain on sale/leaseback, other income and expense and other non-recurring items) as a measurement of our results of operations because we consider this measurement to be a significant indication of our financial performance and available capital resources. Because of large depreciation and other charges relating to our ski resorts operations, it is difficult for management to fully and accurately evaluate our financial results and available capital resources using net income alone. In addition, the use of this non-U.S. GAAP measure provides an indication of our ability to service debt, and we consider it an appropriate measure to use because of our highly leveraged position.
We believe that by providing investors with Reported EBITDA, they will have a clearer understanding of our financial performance and cash flow
s
because Reported EBITDA i) is widely used in the ski industry to measure a company’s operating performance without regard to items excluded from the calculation of such measure; ii) helps investors to more meaningfully evaluate and compare the results of our operations from period to period by removing the effect of our capital structure and asset base from our operating results; and iii) is used by our board of directors, management and our lenders for various purposes, including as a measure of our operating performance and as a basis for planning.
The items we exclude from net income to arrive at Reported EBITDA are significant components for understanding and assessing our financial performance and liquidity. Reported EBITDA should not be considered in isolation or as an alternative to, or substitute for, net income, net change in cash and cash equivalents or other financial statement data presented in our condensed consolidated financial statements as indicators of financial performance or liquidity. Because Reported EBITDA is not a measurement determined in accordance with U. S. GAAP and is susceptible to varying calculations, Reported EBITDA
,
as presented
,
may not be comparable to other similarly titled measures of other companies, limiting its usefulness as a comparative measure.
Reconciliations of net loss to EBITDA
for the three months ended July 31, 2017 and 2016, were as follows
(dollars in thousands)
:
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Three months ended
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July 31,
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2017
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2016
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Net loss
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$
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(8,595)
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$
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(7,904)
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Income tax benefit
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(5,727)
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(5,176)
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Interest expense, net
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3,011
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3,048
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Depreciation and amortization
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3,145
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3,217
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Other income
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(55)
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(2)
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Gain on sale/leaseback
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(83)
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(83)
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$
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(8,304)
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$
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(6,900)
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Reported EBITDA decreased by $1.4 million, or 20.3%, for the three months ended July 31, 2017, as compared with the same period in the prior year
,
primarily as a result of increased resort operating costs, partially offset by higher net revenues.
Liquidity and Capital Resources
Significant Sources of Cash
Our available cash is consistently highest in our fourth quarter primarily due to the seasonality of our resort business. We had $26.9 million of cash and cash equivalents as of July 31, 2017, compared with $33.7 million at April 30, 2017. Cash of $5.9 million was used by operating activities during the three months ended July 31,
2017, compared with $7.2 million of cash used in the three months ended July 31, 2016. We generate the majority of our cash from operations during the ski season, which occurs during our third and fourth quarters. We currently anticipate cash flow from operations will continue to provide a significant source of our future cash flows. We expect our liquidity needs for the near term and the next fiscal year will be met by operating cash flows (primarily those generated in our third and fourth fiscal quarters) and additional borrowings under our various credit agreements, as needed.
Long-term debt at July 31, 2017 and April 30, 2017 consisted primarily of borrowings pursuant to the loans and other credit facilities with EPR
Properties
, our primary lender, Royal Banks of Missouri, our primary banking partner, and our EB-5 partnerships. We have presented in the table below the
composition of our long-term debt
as of July 31, 2017 and April 30, 2017 (dollars in thousands):
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July 31,
2017
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April 30,
2017
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Attitash/Mount Snow Debt; payable in monthly interest only payments at an increasing interest rate (11.26% at July 31, 2017 and April 30, 2017); remaining principal and interest due on December 1, 2034
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$
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51,050
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$
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51,050
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EPR Credit Facility Debt; payable in monthly interest only payments at an increasing interest rate (10.28% at July 31, 2017 and April 30, 2017); remaining principal and interest due on December 1, 2034
|
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37,562
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37,562
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West Lake Water Project EB-5 Debt; payable in quarterly interest only payments of 1.0%; remaining principal and interest due on December 27, 2021
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30,000
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30,000
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Carinthia Ski Lodge EB-5 Debt; payable in quarterly interest only payments of 1.0%; remaining principal and interest due on December 27, 2021
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21,500
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21,500
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Hunter Mountain Debt; payable in monthly interest only payments at an increasing interest rate (8.14% at July 31, 2017 and April 30, 2017); remaining principal and interest due on January 5, 2036
|
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21,000
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|
21,000
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|
Royal Banks of Missouri Debt; payable in monthly principal payments of $42 and interest payments at prime plus 1.0% (5.25% at July 31, 2017 and 5.0% at April 30, 2017); remaining principal and interest due on January 6, 2020
|
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9,750
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|
9,875
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Sycamore Lake (Alpine Valley) Debt; payable in monthly interest only payments at an increasing interest rate (10.72% at July 31, 2017 and April 30, 2017); remaining principal and interest due on December 1, 2034
|
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4,550
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|
4,550
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Wildcat Mountain Debt; payable in monthly installments of $27, including interest at a rate of 4.00%; remaining principal and interest due on December 22, 2020
|
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3,377
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|
|
3,425
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Other debt
|
|
|
2,768
|
|
|
2,870
|
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|
Unamortized debt issuance costs
|
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|
(5,035)
|
|
|
(5,240)
|
|
|
|
|
|
|
176,522
|
|
|
176,592
|
|
|
|
Less: current maturities
|
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|
1,806
|
|
|
1,807
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|
|
|
|
|
$
|
174,716
|
|
$
|
174,785
|
|
|
|
In addition to the credit facilities listed above, we maintain a $15.0 million Acquisition Line of Credit with Royal Banks of Missouri which we entered into in December 2015 in connection with our acquisition of the Hunter Mountain resort. During the quarter ended July 31, 2017, we repaid $1.75 million that was outstanding under the Acquisition Line of Credit and as of July 31, 2017, $2.75 million remained outstanding. On August 5, 2017, we
entered into a Loan Renewal Agreement with Royal Banks of Missouri extending the maturity of the $2.75 million outstanding under the Company’s Acquisition Line of Credit to November 5, 2017.
As of July 31, 2017, we were in compliance will all debt covenants under our various credit facilities and debt agreements.
On August 25, 2017, we entered into the Commitment Letter with Royal Banks of Missouri pursuant to which the bank agreed to renew the $15.0 million Acquisition Line of Credit and provide a new $10.0 million revolving working capital line of credit. We intend to use a portion of
the
renewed Acquisition Line of Credit to repay amounts outstanding under the Royal Banks of Missouri Debt and roll over the $2.75 million outstanding under the existing Acquisition Line of Credit. The unused portion of the renewed Acquisition Line of Credit may be used for future acquisitions. As described in the section “Recent Developments” above, the bank’s obligation to provide the Loans pursuant to the Commitment Letter is subject to a number of customary conditions, including, without limitation, the bank’s ability to secure participant lenders and the execution and delivery by the relevant parties of definitive loan documentation consistent with the Commitment Letter. The bank’s obligations to provide the Loans expire if the Loans have not been closed by October 18, 2017.
Cash Flow
Three Months Ended July 31, 2017 Compared with the Three Months Ended July 31, 2016
Cash of $5.9 million was used in operating activities in the first three months of fiscal 2018, a decrease of $1.3 million when compared with the $7.2 million used in the first three months of fiscal 2017. The decrease was primarily a result of changes in working capital
,
partially offset by a higher net loss.
Cash of $
3.0
million was provided by investing activities in the first three months of fiscal 2018, a decrease of $1.
4
million when compared with the $4.4 million provided in the first three months of fiscal 2017.
I
ncreased capital expenditures, primarily related to the West Lake Water and Carinthia Ski Lodge projects,
were
offset by a higher level of cash released from restricted cash.
Cash of $3.9 million was used in financing activities in the first three months of fiscal 2018, a
n
increase of $3.7 million when compared with the $0.2 million used in the first three months of fiscal 2017. The increased use of cash primarily related to i) the repayment of approximately $1.8 million on
the
Acquisition Line of Credit with Royal Banks of Missouri; and ii) dividend payments of approximately $1.0 million, partially offset by $1.0 million
less
in EB-5 investor funds released from escrow.
Significant Uses of Cash
Our cash uses
are
currently
expected to
include
i)
operating expenditures
, ii)
capital expenditures
and iii) debt service
. We have historically invested significant cash in capital expenditures for our resort operations and expect to continue to invest in the future. Capital expenditures for fiscal 2017 were approximately $8.6 million,
of which $5.4 million was related to the West Lake Water and Carinthia Ski Lodge EB-5 projects. The remaining $3.2 million was used for resort maintenance capital expenditures.
The Company currently anticipates it will spend approximately $33.0 million to
$
35.0 million on capital expenditures in fiscal year 2018.
These expenditures include approximately $6.0 million to $7.0 million on resort maintenance; $5.0 million to $6.0 million on the Hunter Mountain expansion and Hidden Valley Zipline project
s
; and $22.0 million to $23.0 million on the
West Lake Water and Carinthia Ski Lodge projects
.
The West Lake Water and Carinthia Ski Lodge projects are being funded with proceeds raised pursuant to the Company’s EB-5 program
, which are currently reflected in Restricted cash, construction on our condensed consolidated balance sheet
.
We currently plan to use cash on hand, borrowings and cash
g
enerated from future operations to provide the cash necessary to execute our capital plans and believe that these sources of cash will be adequate to meet our needs.
Currently, 20,000 shares of our Series A Cumulative Convertible Preferred Stock, par value $0.01 per share (the “Series A Preferred Stock”)
,
are outstanding. The terms of the Series A Preferred Stock provide that cumulative dividends accrue on a daily basis in arrears at the rate of 8.0% per annum on the liquidation value of $1,000 per share, beginning
in
August 2017. All accrued and accumulated dividends on the Series A Preferred Stock must be paid prior and in preference to any cash dividend on our common stock. In addition, until the earlier of i) such date as no Series A Preferred Stock remains outstanding and ii) January 1, 2027, we are prohibited from paying any dividend on capital stock when there are accrued or unpaid dividends with respect to the Series A Preferred Stock. We intend to pay the Series A Preferred Stock dividends of approximately $1.6 million annually, or $0.4 million quarterly.
Our board of directors declared a cash dividend of $0.07 payable on August 11, 2017, to stockholders of record on July 27, 2017. The declaration and payment of future dividends will be at the sole discretion of our board of directors, and will depend on many factors, including our actual results of operations, financial condition, capital requirements, contractual restrictions, restrictions in our debt agreements,
preference of our Series A Preferred Stock,
economic conditions and other factors that could differ materially from our current expectations.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.