Peak Resorts Inc files 10-Q

Peak Resorts Inc revealed 10-Q form on Fri, Sep 13.

Shareholder as of the Signing Date, and (b) all additional shares of capital stock of the Company acquired by the Supporting Shareholder, beneficially or of record, including by way of converting any convertible securities, during the period commencing with the execution and delivery of such Support Agreement and expiring on the Expiration Date, among other things, (1) in favor of the adoption of the Merger Agreement and the approval of the other transactions contemplated thereby (collectively, the “Proposed Transaction”), (2) against the approval or adoption of any Alternative Proposal or any other proposal made in opposition to, or in competition with, the Proposed Transaction, and (3) against any Alternative Proposal or any other action that would reasonably be expected to impede, interfere with, delay, postpone, discourage or adversely affect the consummation of the Proposed Transaction, and (ii) not approve any Alternative Transaction (as defined in the Support Agreements) by written consent. Notwithstanding the foregoing, the Supporting Shareholders entered into the Support Agreements solely in their capacities as beneficial or record owners, and nothing therein limits or affects the actions taken by any director or officer of the Company affiliated with the Supporting Shareholder solely in his capacity as a director or officer of the Company in the exercise of his fiduciary duties as a director or officer of the Company. The shares covered by the Support Agreements constitute approximately 45.0% of the issued and outstanding shares of common stock entitled to notice of, and to vote at, the Special Meeting, as of the date of the Merger Agreement assuming the conversion of the Series A Preferred Stock, as of the date of the Merger Agreement. The Support Agreements will terminate upon the earliest of (the “Expiration Date”): (i) such date and time as the Merger Agreement shall have been validly terminated pursuant to the terms of Article VIII thereof; (ii) the Effective Time; (iii) the date of any amendment, modification or supplement to the Merger Agreement that decreases the amount, or changes the form, of Merger Consideration (as defined in the Merger Agreement) payable to such Supporting Shareholder; (iv) the date upon which Parent and the Supporting Shareholder agree to terminate such Support Agreement in writing; and (v) the date upon which the board or any committee thereof makes a Company Adverse Recommendation Change (as defined in the Merger Agreement). The Company, Snow Time Acquisition, Inc., a direct, wholly-owned subsidiary of the Company, and certain of its subsidiaries listed on the signature pages to the Cap 1 Support Agreement as “Subsidiary Guarantors” are also party to the Cap 1 Support Agreement. In addition to the provisions set forth in the other Support Agreements, the Cap 1 Support Agreement provides for, among other things, the consent of Cap 1, in its capacity as lender with respect to certain of the Company’s indebtedness, to the Merger. Transaction Costs During the three months ended July 31, 2019, the Company incurred merger-related costs of $2,308, which are included in general and administrative expenses in the condensed consolidated statements of operations. Note 3. The Snow Time Acquisition On November 21, 2018, the Company completed its acquisition of Snow Time in a transaction pursuant to which Snow Time became a wholly owned subsidiary of the Company (the “Snow Time Acquisition”). Purchase Price Allocation During the three months ended July 31, 2019, the Company completed various valuation studies and finalized its estimates of the fair value of the assets acquired and liabilities assumed in the Snow Time Acquisition.

The shares covered by the Support Agreements constitute approximately 45.0% of the issued and outstanding shares of common stock entitled to notice of, and to vote at, the Special Meeting, as of the date of the Merger Agreement assuming the conversion of the Series A Preferred Stock, as of the date of the Merger Agreement.

The following table summarizes the fair value of the net assets acquired in the Snow Time Acquisition on November 21, 2018. Pro Forma Information The following unaudited pro forma information presents the combined results of operations of Peak Resorts, Inc. and Snow Time for the three months ended July 31, 2018, as if the Snow Time Acquisition had been completed on May 1, 2018, with adjustments to give effect to pro forma events that are directly attributable to the Snow Time Acquisition. The unaudited pro forma results do not reflect any operating efficiencies or potential cost savings which may result from the consolidation of the operations of the companies. Accordingly, these unaudited pro forma results are presented for illustrative purposes and are not intended to represent or be indicative of the actual results of operations of the combined company that would have been achieved had the acquisition occurred at the beginning of each period presented, nor are they intended to represent or be indicative of future results of operations. The following table summarizes the unaudited pro forma revenues and earnings of the combined companies for the three months ended July 31, 2018: The pro forma net loss was adjusted to give effect to pro forma events which are directly attributable to the Snow Time Acquisition. Adjustments to the pro forma net income for the three months ended July 31, 2018 included: i) the addition of interest and financing cost amortization of $973 and ii) the increase of $1,387 of net expense related to fair value adjustments to acquisition-date net assets acquired. Note 4. Income Taxes The Company’s effective income tax rates were 24.8% and 28.0% for the three months ended July 31, 2019 and 2018, respectively. The effective tax rate for the three months ended July 31, 2019, was based on the expected full-year effective tax rate for the year ending April 30, 2020 and gives effect to the discrete tax effects of non-deductible costs incurred in connection with the Merger Agreement.

The Company’s effective income tax rates were 24.8% and 28.0% for the three months ended July 31, 2019 and 2018, respectively.

The Company estimated the fair value of the EPR Secured Notes, Term Loan due 2020, EB‑5 Development Notes and Wildcat Mountain Note using a discounted cash flow approach and Level 2 inputs, including market borrowing yields for instruments of similar maturities and Level 3 inputs, including the Company’s credit rating. The Company estimated the fair value of the Series A Preferred Stock using Level 2 inputs, including market yields for similar instruments. The Company estimated the fair value of capital leases and other borrowings to approximate their carrying value. Note 8. Commitments and Contingencies Loss Contingencies The Company is periodically involved in various claims and legal proceedings, many of which occur in the normal course of business. Management routinely assesses the likelihood of adverse judgments or outcomes, including consideration of its insurance coverage and, in the opinion of the Company’s management, the ultimate liabilities resulting from such claims and proceedings will not have a material adverse effect on its business, financial condition, results of operations or cash flows. Leases The Company leases certain land, land improvements, buildings and equipment under noncancelable operating leases. Certain of the leases contain escalation provisions based generally on changes in the consumer price index with maximum annual percentage increases capped at rates between 1.5% to 4.5%. Additionally, certain leases contain contingent rental provisions which are based on revenue. The Company paid no contingent rentals in the periods presented. Note 9. Stock-Based Compensation Stock-based compensation expense was recognized in general and administrative expense in the accompanying consolidated condensed statements of operations for the three months ended July 31, 2019 and 2018 in the amounts of $382 and $56, respectively. As of July 31, 2019, unrecognized compensation expense related to grants of RSUs was $1,010 and will be recognized over a weighted average period of approximately 1.8 years. Restricted Stock Units Under the Equity Incentive Plan and applicable award agreements, RSUs give the holder the right to receive (i) the number of shares of common stock underlying the RSUs or (ii) as may be elected by the compensation committee of the board of directors, cash equal to the closing sale price per share of common stock on the trading day immediately prior to the distribution date times the number of shares underlying the RSUs. Outstanding RSUs accrue dividends in the form of additional RSUs based on the market price of the Company’s common stock on the date cash dividends are paid to the Company’s common stockholders. RSUs granted to non-employee members of the board of directors as part of their annual retainers generally vest one year from the date of grant and will be distributed to the holder on a date that is six months after the date the holder ceases to be a member of the Company’s board. On May 8, 2019, the Company granted 140,000 RSUs to certain key employees. One-half of each RSU award will vest on the first anniversary of the grant date, and one-half of the RSU award will vest on the second anniversary of the grant date provided that the holder is employed by the Company at that time. Vested RSUs will be distributed to the holder immediately upon vesting. On June 26, 2019, the Company granted 185,190 RSUs to employee participants in the Company’s Annual Incentive Plan. One-third of each RSU award vested immediately on the grant date, and one-third will vest on each of the first and second anniversaries of the grant date, provided that the holder is employed by the registrant at that time. Vested RSUs will be distributed to the reporting person immediately upon vesting.

The Company leases certain land, land improvements, buildings and equipment under noncancelable operating leases. Certain of the leases contain escalation provisions based generally on changes in the consumer price index with maximum annual percentage increases capped at rates between 1.5% to 4.5%. Additionally, certain leases contain contingent rental provisions which are based on revenue. The Company paid no contingent rentals in the periods presented.

Our board of directors adopted and approved the Merger Agreement and declared advisable the Merger Agreement and the completion by the Company of the Merger and the other transactions contemplated thereby, and has recommended that our shareholders vote in favor of the adoption of the Merger Agreement and approve the Merger and the other transactions contemplated thereby at the Special Meeting. Certain of the Company’s largest shareholders, including Timothy Boyd, our President, Chief Executive Officer and Chairman of the Board, and Cap 1 LLC (“Cap 1”), have entered into voting and support agreements pursuant to which they have agreed to, among other things, and subject to certain conditions, vote shares representing approximately 45.0% of the total shares entitled to notice of, and to vote at, the Special Meeting, as of the date of the Merger Agreement, in favor of the proposal to the adopt the Merger Agreement and approve the Merger and the other transactions contemplated thereby. See Note 2 to the unaudited condensed consolidated financial statements included with this report, “Merger Agreement and Proposed Merger,” for additional information. The acquisition is expected to be completed in fall 2019, however, consummation of the Merger is subject to the satisfaction or (to the extent permitted by applicable law) waiver of the conditions to the completion of the Merger more fully described in the Proxy Statement.

Net Revenue. Net revenue increased by $2.7 million, or 37.9%, for the three months ended July 31, 2019, compared with the three months ended July 31, 2018. The increase is primarily attributable to i) $3.7 million of revenue associated with the resort properties acquired in the Snow Time Acquisition and ii) a $1.0 million decrease in revenues at legacy Peak Resorts properties. The decreased revenues at legacy Peak Resorts properties are primarily attributable to a decline in the volume of summer festivals, which negatively impacted summer activities, food and beverage and lodging revenue.

Depreciation and Amortization. Depreciation and amortization expense increased by approximately $3.2 million, or 96.9%, to $6.5 million for the three months ended July 31, 2019, primarily as a result of i) additional depreciable assets added during the last three quarters of fiscal 2019, including $70.4 million of property and equipment acquired from Snow Time and the Hunter Mountain expansion project and Carinthia Ski Lodge project assets, and ii) additional amortizing intangible assets added during the third quarter of fiscal 2019 as a result of the Snow Time Acquisition.

General and Administrative Costs. General and administrative expenses of approximately $3.6 million for the three months ended July 31, 2019, increased by approximately $2.4 million, or 189.5%, primarily as a result of $2.3 million of professional fees and other costs associated with the Merger.

Real Estate and Other Non-Income Taxes. Real estate and other non-income taxes of $0.9 million for the three months ended July 31, 2019, increased by approximately $0.2 million, or 30.3%, as compared to the $0.7 million of real estate and other non-income taxes for the same period in fiscal 2019. The increase is a primarily a result of real estate taxes associated with the resort properties acquired in the Snow Time Acquisition.

Interest, Net. Net interest expense of $4.6 million for the three months ended July 31, 2019, increased by $1.2 million, or 33.1%, as compared to the $3.5 million of net interest expense for the three months ended July 31, 2018. The increase in net interest expense relates primarily to i) approximately $0.9 million of interest on the $50 million Term Loan due 2020 which began accruing during the third quarter of fiscal 2019, ii) a $0.2 million decrease in the amount of capitalized interest during the first quarter of fiscal 2020, as compared to the same quarter in fiscal 2019, and iii) an increase in interest rates on variable rate debt.

Income Taxes. Income tax benefit increased $1.9 million, or 40.7%, to $6.5 million for the three months ended July 31, 2019 as compared with the three months ended July 31, 2018. As compared to the first quarter of fiscal 2019, the increase is primarily attributable to a larger pretax net loss in the first quarter of fiscal 2020 as compared with the first quarter of fiscal 2019.

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 (loss) 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 (loss), 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 income to EBITDA for the three months ended July 31, 2019 and 2018, were as follows (dollars in thousands): Reported EBITDA decreased by $3.2 million, or 33.8%, for the three months ended July 31, 2019, as compared with the same period in the prior year, primarily as a result of i) approximately $2.5 million of Reported EBITDA loss associated with the resort properties acquired in the Snow Time Acquisition, and ii) lower revenue and increased operating expenses at legacy Peak Resorts operations. 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 $14.5 million of cash and cash equivalents as of July 31, 2019, compared with $30.2 million at April 30, 2019. Cash of $10.0 million and $6.2 million was used in operating activities during the three months ended July 31, 2019 and 2018, respectively. 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.

Reported EBITDA decreased by $3.2 million, or 33.8%, for the three months ended July 31, 2019, as compared with the same period in the prior year, primarily as a result of i) approximately $2.5 million of Reported EBITDA loss associated with the resort properties acquired in the Snow Time Acquisition, and ii) lower revenue and increased operating expenses at legacy Peak Resorts operations.

distributions to stockholders. Financing cash flows in the first quarter of fiscal 2019 included $0.5 million of debt repayments and $1.4 million of distributions to stockholders. Significant Uses of Cash As of July 31, 2019, 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, including capital lease agreements, during the first three months of fiscal 2020 were $5.1 million and included $1.1 million to complete the Hidden Valley Zip Tour project, $0.8 million on snow making improvement projects at the resorts we acquired in the Snow Time Acquisition and $3.2 million to maintain and enhance our resort properties. We currently anticipate that for the full 2020 fiscal year, we will spend between approximately $11.0 million to $13.0 million on capital expenditures. As of July 31, 2019, 40,000 shares of our Series A Preferred Stock were outstanding, 20,000 of which were issued to Cap 1 in connection with the Snow Time Acquisition which closed in November 2018. 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 nine months from the date of issuance. Accordingly, during August of 2019, dividends began accruing on the 20,000 shares of Series A Preferred Stock issued in November 2018. 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 common stock when there are accrued or unpaid dividends with respect to the Series A Preferred Stock. Series A Preferred Stock dividends equate to approximately $0.8 million per quarter. During the first three months of fiscal 2020, we paid common stock dividends of $1.1 million ($0.07 per share of common stock on May 10, 2019), and declared a cash dividend of $1.1 million ($0.07 per share of common stock to common stockholders of record on July 25, 2019), which we paid on August 9, 2019. 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. The Company agreed in the Merger Agreement to suspend the payment of any future dividends, other than the quarterly cash dividend declared on July 2, 2019 of  $0.07 per outstanding share of its common stock, which was paid on August 9, 2019 to common shareholders of record as of July 25, 2019, and the Series A Preferred Stock dividend of $0.4 million, which was paid on August 9, 2019 to the holder of the Company’s Series A Preferred Stock. Dividends on the Series A Preferred Stock will continue to accrue. 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.

As of July 31, 2019, 40,000 shares of our Series A Preferred Stock were outstanding, 20,000 of which were issued to Cap 1 in connection with the Snow Time Acquisition which closed in November 2018. 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 nine months from the date of issuance. Accordingly, during August of 2019, dividends began accruing on the 20,000 shares of Series A Preferred Stock issued in November 2018. 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 common stock when there are accrued or unpaid dividends with respect to the Series A Preferred Stock. Series A Preferred Stock dividends equate to approximately $0.8 million per quarter.

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