U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Amendment No. 1)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended November 30, 2003
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ______________ to ______________
Commission File No. 0-15030
WINTER SPORTS, INC.
(Exact name of small business issuer as specified in its charter)
Montana 81-0221770
(State of Incorporation) (I.R.S. Employer I.D. No.)
P.O. Box 1400, Whitefish, Montana 59937
(Address of Principal Executive Offices)
Issuer's telephone number, including area code (406) 862-1900
------------------------------------------------------------------------------
Former name, former address & former fiscal year, if changed since last report
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months, and (2) has been
subject to such filing requirements for the past 90 days. Yes |x| No |_|
As of January 2, 2004 the number of shares outstanding of the issuer's common
stock, no par value, was 988,668.
Transition Small Business Disclosure Format Yes |_| No |x|
Page 1 of 28
WINTER SPORTS, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3-4
At:
November 30, 2003(Unaudited)
December 1, 2002(Unaudited)
May 31, 2003
Condensed Consolidated Statements of Operations 5
For The Periods:
September 8, 2003 - November 30 2003(Unaudited)
September 9, 2002 - December 1, 2002(Unaudited)
June 1, 2003 - November 30, 2003(Unaudited)
June 1, 2002 - December 1, 2002(Unaudited)
Condensed Consolidated Statements of Cash Flows 6
For The Periods:
June 1, 2003 - November 30, 2003(Unaudited)
June 1, 2002 - December 1, 2002(Unaudited)
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Conditions 11
Item 3. Controls and Procedures 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
Page 2 of 28
WINTER SPORTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
11/30/03 12/1/02 5/31/03
(Unaudited) (Unaudited) See Note 2
------------ ------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,740,856 $ 1,121,728 $ 475,288
Cash - restricted 0 0 76,595
Receivables 356,929 352,841 209,339
Receivables - related parties 8,927 20,980 65,855
Interest receivable - related parties 116,536 34,286 68,110
Income tax refund receivable 948,707 805,903 290,163
Current deferred tax asset 36,514 30,832 36,514
Inventories 788,940 865,360 560,634
Prepaid expenses 124,697 221,617 450,523
------------ ------------ ------------
TOTAL CURRENT ASSETS 4,122,106 3,453,547 2,233,021
------------ ------------ ------------
PROPERTY AND EQUIPMENT
Property and equipment, at cost 31,062,911 29,489,128 29,996,638
Accumulated depreciation
and amortization (17,510,169) (16,066,192) (17,515,325)
------------ ------------ ------------
13,552,742 13,422,936 12,481,313
Construction in progress 1,273,441 922,802 765,141
Land and development costs 7,177,627 6,283,129 7,157,338
------------ ------------ ------------
NET PROPERTY AND EQUIPMENT 22,003,810 20,628,867 20,403,792
------------ ------------ ------------
INVESTMENT IN LLCs 4,823 (111,854) (239,023)
Goodwill - net of amortization 158,469 158,469 158,469
OTHER ASSETS 941,413 598,173 970,253
------------ ------------ ------------
TOTAL ASSETS $ 27,230,621 $ 24,727,202 $ 23,526,512
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,585,442 $ 1,143,112 $ 556,496
Accounts payable - related parties 13,211 0 4,666
Employee compensation and
related expenses 430,505 276,128 201,403
Taxes other than payroll and income 28,667 23,993 95,009
Interest payable 64,805 81,001 44,903
Interest payable - related parties 73,156 34,062 34,062
Current deferred tax liability 28,314 0 28,314
Current portion long-term debt 45,304 42,890 45,304
Deposits and other unearned income 3,325,952 3,082,865 2,193,551
Other current liabilities 7,388 2,898 2,898
------------ ------------ ------------
TOTAL CURRENT LIABILITIES 5,602,744 4,686,949 3,206,606
LONG-TERM DEBT, less current
portion 9,734,665 7,786,705 7,539,876
OTHER LONG TERM LIABILITIES 100,998 0 0
DEFERRED INCOME TAXES 2,448,191 2,478,928 2,448,191
------------ ------------ ------------
TOTAL LIABILITIES 17,886,598 14,952,582 13,194,673
------------ ------------ ------------
Page 3 of 28
STOCKHOLDERS' EQUITY
Common stock (5,000,000 shares
authorized; no par value;
988,668,shares outstanding) 3,887,676 3,887,676 3,887,676
Retained earnings 5,456,347 5,886,944 6,444,163
------------ ------------ ------------
TOTAL STOCKHOLDERS' EQUITY 9,344,023 9,774,620 10,331,839
------------ ------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 27,230,621 $ 24,727,202 $ 23,526,512
============ ============ ============
The accompanying notes are an integral part of these financial statements.
Page 4 of 28
WINTER SPORTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Second Quarter Year to Date
9/8/03 9/9/02 6/1/03 6/1/02
to to to to
11/30/03 12/1/02 11/30/03 12/1/02
----------- ----------- ----------- -----------
REVENUE
Lifts $ 160,833 $ 79,151 $ 411,196 $ 337,089
Retail 84,812 63,997 288,172 239,366
Equipment rental & repair 18,823 15,634 53,477 51,901
Lodging 28,393 20,729 117,385 81,875
Lease, management & other fees 345,326 428,704 824,356 807,367
Lease, management & other fees
- related parties 199,391 20,616 228,137 44,150
----------- ----------- ----------- -----------
TOTAL REVENUE 837,578 628,831 1,922,723 1,561,748
----------- ----------- ----------- -----------
OPERATING COSTS AND EXPENSES
Direct expenses - lifts 393,138 334,134 646,537 605,326
Cost of retail 67,458 44,602 202,295 151,457
Payroll & related expenses 669,285 607,966 1,738,843 1,321,430
Direct expenses 371,924 296,313 710,010 602,078
Direct expenses - related parties 5,550 2,164 12,357 6,492
Marketing 393,893 269,927 599,334 434,420
Marketing - related parties 0 (750) 0 (2,153)
Depreciation & amortization 13,251 12,907 30,108 29,251
General & administrative 562,610 267,426 1,281,403 550,072
General & administrative
- related parties 16,405 3,137 16,405 11,598
----------- ----------- ----------- -----------
TOTAL OPERATING COSTS
AND EXPENSES 2,493,514 1,837,826 5,237,292 3,709,971
----------- ----------- ----------- -----------
OPERATING INCOME(LOSS) (1,655,936) (1,208,995) (3,314,569) (2,148,223)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest income-related parties 22,097 16,670 49,878 35,500
Interest expense (76,891) (43,619) (125,410) (48,682)
Interest expense-related parties (18,341) (22,721) (39,095) (91,078)
Sale of Land 0 0 0 925,989
Unrecognized gross profit on
Land sale 0 0 0 (862,891)
Cost of land sale 0 0 0 (63,098)
Gain on land sale-previously
unrecognized 1,339,633 0 1,339,633 141,938
Equity in Earnings-LLCs 260,136 192,983 243,846 242,553
Gain (loss) on disposal of assets 852 0 69,052 2,030
Other income (expense) 292 (5,895) 198 (6,858)
----------- ----------- ----------- -----------
TOTAL OTHER INCOME (EXPENSE) 1,527,778 137,418 1,538,102 275,403
----------- ----------- ----------- -----------
INCOME(LOSS) BEFORE INCOME TAXES (128,158) (1,071,577) (1,776,467) (1,872,820)
Provision for(Recovery of)
Income Taxes (42,351) (428,630) (658,544) (749,128)
----------- ----------- ----------- -----------
(LOSS) BEFORE MINORITY INTEREST$ (85,807) $ (642,947) $(1,117,923) (1,123,692)
MINORITY INTEREST IN
SUBSIDIARY LOSS 23,405 0 130,107 0
----------- ----------- ----------- -----------
NET INCOME(LOSS) $ (62,402) $ (642,947) $ (987,816) $(1,123,692)
=========== =========== =========== ===========
EARNINGS(LOSS) PER COMMON SHARE $ (0.06) $ (0.65) $ (1.00) $ (1.14)
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
Page 5 of 28
WINTER SPORTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
6/1/03 6/1/02
to to
11/30/03 12/1/02
----------- -----------
NET CASH PROVIDED BY(USED IN) OPERATING ACTIVITIES: $ 25,090 $ (605,121)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Option Payment (0) (15,000)
Proceeds from restricted cash account 76,595 0
Proceeds from sale of assets 65,185 70,606
Property and equipment acquisitions (1,096,091) (842,087)
----------- -----------
NET CASH PROVIDED BY(USED IN) INVESTING ACTIVITES (954,311) (786,481)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from draws on long-term revolver 4,657,541 2,334,000
Principal payments on long-term revolver (2,462,752) (561,000)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,194,789 1,773,000
----------- -----------
Net increase in cash and cash equivalents 1,265,568 381,398
Cash and cash equivalents at beginning of period 475,288 740,330
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,740,856 $ 1,121,728
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH PAID YEAR-TO-DATE FOR:
Interest (net of capitalized interest) $ 105,509 $ 102,823
Income taxes (net of refunds) $ 0 $ 0
The accompanying notes are an integral part of these financial statements.
Page 6 of 28
WINTER SPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The financial statements included herein are condensed according to 10-QSB
reporting requirements. They do not contain all information required by
generally accepted accounting principles to be included in a set of audited
financial statements. The interim condensed consolidated financial statements
are prepared by management and are unaudited. Accordingly, the financial
statements should be read in conjunction with the Notes to Consolidated
Financial Statements contained in the Company's Annual report for the year ended
May 31, 2003.
In the opinion of Management, the accompanying condensed consolidated financial
statements contain all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of the interim periods presented.
Certain amounts in the December 1, 2002 financial statements have been
reclassified to conform with the November 30, 2003 presentation.
NOTE 2 - May 31, 2003
The balance sheet at May 31, 2003 has been condensed from the audited financial
statements at that date.
NOTE 3 - SEASONAL NATURE OF OPERATIONS
The Company's operations are highly seasonal in nature. Revenues, earnings and
cash flow are generated principally from the winter operations of lifts and
related facilities. It is the Company's practice to recognize substantially all
of the year's depreciation expense in the third and fourth quarters in order to
better match expenses incurred in generating revenues during the Company's main
periods of business. Therefore, the results of operations for the interim and
year-to-date periods ended November 30, 2003 and December 1, 2002 are not
necessarily indicative of the results to be expected for the full year.
NOTE 4 - LEGAL PROCEEDINGS AND CONTINGENCIES
From time to time, the Company has been a defendant in unrelated lawsuits filed
by individuals who are each seeking damages of specified amounts, for alleged
personal injuries resulting from accidents occurring on the Company's property
or while participating in recreational activities. The Company's insurance
carrier provides defense and coverage for these claims and the Company's
participation has been limited to its policy deductible. Such amounts are
charged to General and Administrative expense upon settlement.
NOTE 5 - NOTES PAYABLE
The Company currently has a loan agreement with Bank of America. The agreement
provides for a $13,500,000 revolving reducing line of credit, which matures on
May 31, 2009. The agreement contains covenants that require minimum net worth, a
fixed charge coverage ratio and restricts investment, disposition of assets,
capital expenditures, outside borrowing and payment of dividends. Each May 31,
the amount available under the line reduces by $1,200,000. At November 30, 2003
$5,106,040 was unused of the $13,500,000 available under the instrument. At
December 1, 2002 $348,405 was unused of the then $6,750,000 available under the
instrument. The loan bears interest at or below Bank of America's prime rate.
Page 7 of 28
WINTER SPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company entered into a term loan agreement for $1,428,000, with Whitefish
Credit Union, a related party, during December, 2001. This loan, with a maturity
date of January 1, 2007, has five annual payments of $125,000 each January,
beginning with January 1, 2003. The loan carries an interest rate to be reviewed
annually and set at Wall Street Prime +1%, with a floor of 5% and a cap of 8.5%.
The proceeds from this term loan were used to purchase 120 acres adjacent to the
Company's eastern boundary.
NOTE 6 - BUSINESS SEGMENT INFORMATION
The Company operates in two segments, the operation of a resort area and real
estate investment. Winter Sports is involved in operations in the resort
industry to develop and provide recreational and related services to guests.
Also included in Winter Sports segment reporting is the Company's other wholly
owned subsidiary, Big Mountain Water Company. This entity is the local water
supplier for the resort area. Big Mountain Development Corporation participates
in various LLC activities as described in Note 7. The Company evaluates the
performance of its two segments primarily by evaluating the income from
operations of each segment. The Company must be able to react to weather
conditions and changing traveling habits for the resort segment. The real estate
investment segment, or BMDC, is also evaluated primarily by its income from
operations and also by the income received through the Equity in Earnings - LLCs
(see Note 7).
Financial information by industry segment for the second quarters of 2004 and
2003 are summarized as follows:
Winter Sports BMDC Consolidated
------------ ------------ ------------
Quarter Ended 11/30/03
Total revenue $ 815,352 $ 22,226 $ 837,578
Operating profit (loss) $ (1,630,165) $ (25,771) $ (1,655,936)
Depreciation and amortization $ 8,231 $ 5,020 $ 13,251
Gain on sale of land previously
unrecognized $ 1,339,633 $ 0 $ 1,339,633
Identifiable assets $ 23,513,860 $ 3,716,761 $ 27,230,621
Capital expenditures $ 1,023,095 $ 0 $ 1,023,095
Quarter Ended 12/1/02
Total revenue $ 611,501 $ 17,330 $ 628,831
Operating profit (loss) $ (1,169,199) $ (39,796) $ (1,208,995)
Depreciation and amortization $ 7,864 $ 5,043 $ 12,907
Gain on sale of land previously
unrecognized $ 0 $ 0 $ 0
Identifiable assets $ 21,173,340 $ 3,553,862 $ 24,727,202
Capital expenditures $ 816,077 $ 0 $ 816,077
6/1/03 to 11/30/03
Total revenue $ 1,874,569 $ 48,154 $ 1,922,723
Operating profit (loss) $ (3,235,060) $ (79,509) $ (3,314,569)
Depreciation and amortization $ 18,395 $ 11,713 $ 30,108
Gain on sale of land previously
unrecognized $ 1,339,633 $ 0 $ 1,339,633
Identifiable assets $ 23,513,860 $ 3,716,761 $ 27,230,621
Capital expenditures $ 1,096,091 $ 0 $ 1,096,091
Page 8 of 28
WINTER SPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6/1/02 to 12/1/02
Total revenue $ 1,518,553 $ 43,195 $ 1,561,748
Operating profit (loss) $ (2,059,244) $ (88,979) $ (2,148,223)
Depreciation and amortization $ 17,484 $ 11,767 $ 29,251
Gain on sale of land previously
unrecognized $ 141,938 $ 0 $ 141,938
Identifiable assets $ 21,173,340 $ 3,553,862 $ 24,727,202
Capital expenditures $ 842,087 $ 0 $ 842,087
NOTE 7 - INVESTMENT IN LLCs
The Company's subsidiary, Big Mountain Development Corporation has become a
member of four limited liability companies, Northern Lights LLC, Morning Eagle
LLC, The Glades LLC and Moose Run II LLC. In each of these LLCs, the subsidiary
does not participate in the day-to-day operating activities of these entities,
nor does it guarantee any debt. The manager of each LLC prepares an annual plan
for approval of all members as to the type of development that is envisioned for
the tract of land owned by the LLC. The Company's subsidiary receives a portion
of the profit from each of these entities. The profit is residual, if any, of
the sales of real estate product over the costs of developing that product,
including marketing. The Company's subsidiary is accounting for this investment
under the equity method of accounting, as it will receive 60% of the residual
profit generated in each LLC, except for Morning Eagle LLC in which it will
receive 22% of any residual.
As a result of FIN 46, the Company is evaluating its subsidiary's investment in
each of these limited liability companies to determine whether these entities
meet the definition of Variable Interest Entities under this provision. If the
Company's subsidiary, Big Mountain Development Corporation, is determined to be
the primary beneficiary of any of these LLC's, the Company would then be
required to consolidate that entity, rather than reporting on the equity method
as has been done in the past.
Moose Run II LLC was entered into in November, 2001. This entity sold land to
another developer for a lump sum plus a portion of the gross proceeds of any
sales. The entity had total assets of $32,181 and total liabilities of $511,171
as of November 30, 2003. The Company's maximum exposure is limited to its equity
contribution of $10, its ratable share of any income/loss and the remaining
portion of a note receivable in the amount of $477,090 plus accrued interest.
The Company has initially determined that the Company's subsidiary, Big Mountain
Development Corporation, could be the primary beneficiary of this variable
interest entity. Under the provisions of FIN 46, the Company is not required at
this time to consolidate this entity.
The Glades Development LLC was entered into in April, 2003. This entity is
involved in a project for single family home sites. The total assets of this
entity were $2,000,190 and total liabilities of $1,750,318 as of November 30,
2003. The Company's maximum exposure to loss is the ratable portion of
income/loss. The Company has determined that the Company's subsidiary, Big
Mountain Development Corporation, is not the primary beneficiary of this entity.
Therefore, it will not be consolidated, but rather reported by the equity
method.
Page 9 of 28
WINTER SPORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following information summarizes the activity of the LLCs through November
30, 2003:
ASSETS
Cash $ 3,710,980
Land and construction in progress 4,625,825
Other Assets 205,340
$ 8,542,145
LIABILITIES AND EQUITY
Notes and other payables $ 3,987,223
Equity 4,554,922
-----------
$ 8,542,145
===========
Net Income from sales $ 2,277,814
===========
Page 10 of 28
WINTER SPORTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
All statements, other than statements of historical fact contained herein
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended(the "Securities Act") and Section 27A of the
Securities Exchange Act of 1934, as amended(the "Exchange Act"). These
forward-looking statements are not based on historical facts, but rather reflect
the Company's current expectations concerning future results and events.
Similarly, statements that describe the Company's objectives, plans or goals are
or may be forward-looking statements. Such forward-looking statements involve a
number of risks and uncertainties. The Company has tried wherever possible to
identify such statements by using words such as "anticipate," "assume,"
"believe," "expect," "intend," "plan," and words and terms similar in substance
in connection with any discussion of operating or financial performance. In
addition to factors discussed above, other factors that could cause actual
results, performances or achievements to differ materially from those projected
include, but are not limited to, the following: general business and economic
conditions, both regionally and nationally; weather and snow conditions; the
changes in the visitation habits of travelers as a result of September 11th,
related events thereafter and the Canadian exchange rate; and other factors
listed from time-to-time in the Company's documents filed by the Company with
the Securities and Exchange Commission. The forward-looking statements included
in the document are made only as of the date of this document and under Section
27A of the Securities Act and Section 21E of the Exchange Act, the Company does
not have or undertake any obligations to publicly update any forward-looking
statements to reflect subsequent events or circumstances.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with generally accepted accounting principles.
The Company believes certain accounting policies to be critical due to the
estimation process involved in each. The Company records season pass revenue as
it is earned. The Company has a ticketing system which scans the ticket of each
person who accesses the chair lifts. A portion of the season pass revenue is
recognized as revenue each day that the pass holder accesses the lifts. Property
management associated revenue is recognized when the guest checks out and/or at
the end of each accounting cycle, whichever occurs first on a unit by unit
basis. The Company, under a development agreement with Hines Resorts, will from
time to time sell parcels of land. The Company is recognizing any gain on the
sale of these parcels under the cost recovery method. The Company chose this
method because the sale of land during the current fiscal year has been
accomplished through a note which is subordinate to other loans of the
purchasing entity. Under this method, the gain is unrecognized until such time
as the basis of the land and the associated costs of the sale have been
recovered. Revenue from these entities is being recognized under the equity
method. The Company's subsidiary, Big Mountain Development Corporation, does not
have day-to-day management control of these LLCs and does not guarantee any
borrowings of the LLCs. Depreciation is computed using the straight-line method
for book purposes using the applicable useful life of the asset. For tax
purposes, the Company uses the appropriate tax life as defined in the Internal
Revenue Code. The Company recognizes deferred tax assets and liabilities based
on the differences between the financial statement carrying amounts and the tax
bases of assets and liabilities. The Company regularly reviews its deferred tax
assets
Page 11 of 28
WINTER SPORTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
for recoverability and establishes a valuation allowance based on historical
income, projected future taxable income, and expected timing of the reversal of
existing temporary differences.
The Company adopted FASB 142 at the beginning of the 2003 fiscal year. Under
this FASB, goodwill and intangible assets deemed to have indefinite lives are no
longer amortized, instead being subject to impairment tests at least annually.
Other intangible assets will continue to be amortized over their contractual
lives. An impairment test of the lodging reporting unit reported no impairment
of the goodwill as of the end of the fiscal year 2003.
Statement of Financial Accounting Standards No. 143 was adopted by the Company
in 2003. Under this standard, asset retirement and the obligations associated
with the retirement of tangible long-lived assets will change. This statement
will not have a material effect on the Company's financial statements as
presented.
The Company adopted FASB 144 at the beginning of the 2003 fiscal year. This
standard sets forth guidelines for accounting and reporting for the impairment
of long-lived assets and for long-lived assets to be disposed of. This
pronouncement will not have a material effect on the financial statements as
presented.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS 146 requires that a liability for a cost
that is associated with an exit or disposal activity be recognized when the
liability is incurred. SFAS 146 also establishes that fair value is the
objective for the initial measurement of the liability. SFAS 146 is effective
for exit or disposal activities that are initiated after December 31, 2002. The
Company did not have any such activities during the current year.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),an
interpretation of FASB Statement No. 5, "Accounting for Contingencies." This
interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that it has issued. The initial recognition and initial measurement
provisions of FIN 45 are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002, irrespective of the guarantor's fiscal
year-end. The disclosure requirements of FIN 45 are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
adoption of this standard had no material impact on the Company's financial
statements.
In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest
Entities. FIN 46 explains the concept of a variable interest entity and requires
consolidation by the primary beneficiary where the variable interest entity does
not have sufficient equity at risk to finance its activities without additional
subordinated financial support from other parties. FIN 46 also required an
investor with a majority of the variable interests in a variable interest entity
to consolidate the entity and also requires majority and significant variable
interest investors to provide certain disclosures. This interpretation applies
immediately to variable interest entities created after January 31, 2003, and
applies at the end of the first year or interim period beginning after December
15, 2003 to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. Subsequent to January 31,
2003, the Company's
Page 12 of 28
WINTER SPORTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
subsidiary, Big Mountain Development Corporation, became a member in Glades
Development LLC. The Company believes that Glades Development LLC is a variable
interest entity; however it has determined that the Company is not the primary
beneficiary and under FIN 46, the Company will not consolidate the entity. Prior
to January 31, 2003 the same subsidiary became a member in Moose Run II LLC,
Northern Lights LLC and Morning Eagle LLC. The Company has initially determined
that under FIN 46, Moose Run II LLC is a variable interest entity and the
Company's subsidiary, Big Mountain Development Corporation, could be the primary
beneficiary; therefore, the entity will be consolidated according to the
implementation period as determined by FASB, due to the date of the initial
involvement with this entity. See Note 7 for the required disclosures.
RESULTS OF OPERATIONS, SECOND QUARTER AND YEAR TO DATE
For the Period
6/1/03 6/1/02
to to
11/30/03 12/1/02
------------ ------------
Gross Revenues $ 1,922,723 $ 1,561,748
Net Loss $ (987,816) $ (1,123,692)
Loss per Common Share $ (1.00) $ (1.14)
Total Assets $ 27,230,621 $ 24,727,202
Long-Term Debt less current portion $ 9,734,665 $ 7,786,705
RESULTS OF OPERATIONS, SECOND QUARTER AND YEAR-TO-DATE
Revenues
Revenues for the second quarter ending November 30, 2003 were $837,578, an
increase of 33.2% from $628,831 in the same quarter of the prior year. Lift
revenue totaled $160,833 during the second quarter this fiscal year compared to
$79,151 during the second quarter of the previous year. The Resort experienced
cold temperatures early and so was able to make snow, coupled with great natural
snowfall. Visitation to the Resort was nearly 40% higher than last year at this
time. The Company experienced an increase in Retail of $20,815 or 32.5% from the
quarter ending November 30, 2003 to the quarter ending December 1, 2002. This
increase reflects more shopping by visitors to the Resort at the retail
establishments. The Company purchased 10,000 square feet of retail space in the
Morning Eagle building during the second quarter of this fiscal year. One of the
Company's retail stores moved to this new facility. Interest in the new retail
space is expected to result in increased Retail sales for the Company as well as
an
Page 13 of 28
WINTER SPORTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
increase in Lease, Management and other fees due to the rent generated on the
other retail square footage in the building.
The Company saw a slight decrease in revenue associated with the property
management business during the second quarter of this year, in terms of Lease,
Management & Other Fees. This is expected to be a timing difference as the
second quarter ended at the beginning of the ski season.
The Company experienced an increase in Lease, Management and other fees -
related parties of $178,775 over the same time last year. The Company received a
fee from the sale of lots in a single family home neighborhood to be used
towards the costs of developing a conference center facility at the Resort. This
revenue totaling $173,951 was received from the Glades LLC which is partly owned
by the Company's subsidiary, Big Mountain Development Corporation. This revenue
will continue into the third quarter of this year in approximately the same
amount. It is not expected that this revenue will continue in the fourth
quarter.
Lease, management and other fees - related parties is expected to continue to
increase throughout the current fiscal year as the Company will perform
administrative functions for the Big Mountain Club and also for some of the
homeowner associations which are related parties. Some of the administrative
functions which the Company performs include accounting and human resource
services, property management services as well as maintenance services.
Operating Expenses
Operating costs and expenses increased by $655,688 from December 1, 2002 to
November 30, 2003. This increase is due in part to an increase in General and
Administrative costs of over 100% during the second quarter of this year
compared with the second quarter of the previous year. This increase is due in
part to the increased costs the Company is incurring to effect a reverse stock
split as announced in September, 2003. These costs include fees for consultants,
attorneys and independent public accountants. The Company continues to take
steps to mitigate the effect of increasing insurance premiums by increasing the
level of risk management at the Resort, considering deductible levels and the
effect of being a public company in the insurance market. The Company also
experienced increases in consultants and legal expenses related to researching
the costs/benefits of continuing as a publicly traded company under the
Securities and Exchange Commission.
Marketing costs increased from $269,927 at December 1, 2002 to $393,893 at
November 30, 2003. This increase is expected to be a timing difference as the
costs from printing various collateral pieces were incurred earlier than last
year.
For the first two quarters of the year ending May 31, 2004, total operating
expenses are $5,237,292 compared with $3,709,971 during the first two quarters
of the previous fiscal years. General and administrative expenses increased
during the first quarter of this year due to the recognition of 66 2/3% of the
start-up expenditures for the Big Mountain Club LLC. This entity was organized
as a non-
Page 14 of 28
WINTER SPORTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
equity members club, which has certain privileges at the Resort and also at a
near-by golf club, which is now known as Big Mountain Golf Club. The Company
views these expenditures as one-time non-recurring expenses. The Company has
also incurred additional expenses during the first quarter of this year over
last year in the amount of $79,083 related to insurance costs. The insurance
market continues to harden as a result of September 11, 2001 and the overall
experience ratings of insurance companies. The Company expects this trend to
continue during the next fiscal year.
Direct expenses - related parties is $5,550 for the second quarter of this
fiscal year and $12,357 for the 2004 fiscal year, compared to $2,164 during the
second quarter of last fiscal year and $6,492 for the 2003 fiscal year. These
expenses are homeowner association dues for units owned by the Company that are
managed by the property management company. The expense is expected to increase
during the current fiscal year due to the acquisition of the commercial space in
the Morning Eagle facility, in which condominium association dues will be paid.
General and administrative expenses - related parties is $16,405 during the
second quarter of this fiscal year and for the 2004 fiscal year compared to
$3,137 during the second quarter of last fiscal year and $11,598 for the 2003
fiscal year. During the current fiscal year, the Company is incurring expenses
paid to a related party for services performed during the interim until a
permanent Chief Executive Officer is selected. These expenses totaled $15,000
during the second quarter of this year. Other related party expenses in this
area include charitable donations to entities whose boards include Company Board
members.
Income from Operations
Income from operations for the resort during the second quarter of this fiscal
year was a loss of $(1,655,936) compared with a loss last year at this time of
$(1,208,045). The increased loss experienced during this time was a combination
of additional expenses which have been incurred by the Company in researching
the costs/benefits of continuing as a publicly traded company under the
Securities and Exchange Commission and additional expenses incurred due to the
recognition of start-up expenditures associated with the Big Mountain Club.
Income from operations for the real estate investment segment for the second
quarter ending November 30, 2003 was a loss of $(25,771) compared with a loss
during the second quarter of last year of $(39,796). The decrease was due to the
proportionate share of loss generated from the Glades LLC. It is expected that
during the remaining quarters of fiscal year 2004, the LLCs should generate
income for this segment.
Other Income
The Company's subsidiary, Big Mountain Development Company, is a member of
Morning Eagle LLC, Moose Run II LLC and Northern Lights LLC. In each of these
LLCs, the subsidiary does not participate in the day-to-day operating activities
of these entities, nor does it guarantee any debt of the entities. The manager
of each LLC prepares an annual plan for approval of all members as to the type
of development that is envisioned for the tract of land owned by the LLC. The
Company's subsidiary receives a portion of the profit from each of these
entities. The
Page 15 of 28
WINTER SPORTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
profit is the residual, if any, of the sales of real estate product over the
costs of developing that product, including marketing. The Company's subsidiary
is accounting for this investment under the equity method of accounting, as it
will receive 60% of the residual profit generated in each of these LLCs. As of
November 30, 2003, the Company's subsidiary has recognized income of $243,846,
which is found on the Income Statement labeled, "Equity in Earnings-LLCs".
During the second quarter of fiscal year 2004, the Company recognized a portion
of the gain from the sale of land to Hines Resorts. This gain is being
recognized under the cost recovery method. Under this method, the gain is
unrecognized until such time as the basis of the land and the associated costs
of the sale have been recovered. During the second quarter, the Company
recognized $1,339,633. It is expected that the Company will recognize additional
revenue during the third quarter of fiscal year 2004 as proceeds are received.
During the first quarter of the current year, the Company sold a small tract of
land to the state of Montana as a right of way. The State is purchasing small
tracts of land along the Big Mountain Road, so that in the near future the road
leading to the Resort will become wider, removing many of the hairpin turns
along the way.
Other income in the second quarter and year-to-date for fiscal year 2002 reflect
revenues earned from sales of timber on the Company's base area lands. The
Company also entered into an agreement with a utility company for an easement
and for other utility issues during fiscal year 2002. The revenue received was
of a one-time nature.
Interest income - related parties of $22,097 is comparable to that of the second
quarter of last fiscal year of $16,670. This income is earned from notes
receivable from the limited liability companies which hold the note for the sale
of land to Hines Resorts.
Other Expenses
Interest expense for the quarter ended November 30, 2003 was $76,891, an
increase of $33,272, or 76.3%. Year-to-date interest expense increased by
$76,728 or 157.6% during the first two quarters of 2003 versus the same two
quarters of the prior year. These increases are due to increased borrowings on
the company's line of credit.
Interest expense - related parties decreased from $91,078 at the end of the
second quarter 2003 to $39,095 at the end of the current quarter. This interest
is due to the related party note with the Whitefish Credit Union as described in
Note 5.
During June, 2003, the Company entered into two interest rate swaps. These swaps
were entered into for periods of three and four years, respectively, at one
million dollars each. The objective of the hedge is to eliminate the variability
of cash flows in the interest payments for the debt, the sole source of which is
due to changes in the LIBOR benchmark interest rate. Changes in the cash flows
of the interest rate swap are expected to exactly offset the changes in cash
flows(i.e., changes in interest rate payments) attributable to fluctuations in
the LIBOR.
Page 16 of 28
WINTER SPORTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
The Company filed Form 8K in July, 2003 in which it was announced that another
entity had joined the Big Mountain Club LLC. With the addition of this new
entity, Winter Sports will retain 66 2/3% ownership of the Club and the new
entity will have the remaining percentage. The Minority Interest of $130,107, in
net loss of consolidated subsidiary represents 33% of the interest in the net
loss of the Big Mountain Club LLC, which is owned by another entity unrelated to
the Company.
The second quarter net loss of $(62,402) was $580,545 less than the same quarter
last year. This is due to the recognition of part of the gain on the sale of
land as described above. The year to date net loss of $(987,816) was $137,876 or
12.1% less than during the same time period last year.
A loss for this interim period in any year is not necessarily indicative of the
results to be expected for the entire year, but instead reflects the seasonal
nature of the Company's business. The Company's main periods of business are
from mid-November through mid-April. Historically, the first and second
quarters, especially taken individually, bear little comparative value.
LIQUIDITY AND CAPITAL RESOURCES
Working capital of $(1,480,638) at the end of the second quarter of fiscal 2004
decreased from working capital of $(1,233,402) at December 1, 2002. The change
was due primarily to an increase in the Company's accounts payable in
preparation for the ski season and in employee compensation due to the
resignation of the Company's CEO.
Other long-term liabilities include additional compensation which will be owed
by the Company under the terms of the Separation Agreement with the Company's
former President. It also includes an amount for Minority Interest in the Big
Mountain Club held by another entity unrelated to the Company.
Deposits and other unearned income is $243,087 higher than at the end of the
second quarter of the prior year. The increase is due to an increase in the
Company's in reservation deposits over last year at this time. Total liabilities
of $17,886,598 represents 191% of stockholders' equity at November 30, 2003, up
from $14,952,582 or 153% of stockholders' equity at December 1, 2002.
The Company entered into an agreement with the landowner contiguous to the
Company's eastern boundary during fiscal year 2002. Under this agreement, the
Company obtained an option to purchase approximately 183.5 acres during the next
four years at a specified price. This parcel may be divided into no more than
three separate parcels and may be acquired in as many as three separate
closings. The Company is required to make specified options payments during the
time of this agreement. The first three option payments will be credited
proportionally to parcels as they are purchased. The remaining option payments
will not be applied to the purchase price of any parcel. On December 30, 2002,
the Company entered into a transaction to purchase 52 acres under this Option
Agreement. Under this transaction, the Company entered into a short term loan
agreement with Whitefish Credit Union, a related party, for the net purchase
price of the property. This loan, due in ninety days, carries interest at 7%.
The Company announced this on Form 8-K on December 31, 2002.
Page 17 of 28
WINTER SPORTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
The Company adopted FASB 142 at the beginning of the 2003 fiscal year. Under the
FASB, goodwill will no longer be permitted to be amortized. Instead, goodwill
and other intangibles will be subject to an annual test for impairment of value.
The Company does not expect this statement to have a material effect on the
financial statements.
Statement of Financial Accounting Standards No. 143 was adopted by the Company
during the 2003 fiscal year. Under this standard, asset retirement and the
obligations associated with the retirement of tangible long-lived assets will
change. This did not have an effect on the statements as presented.
The Company also adopted FASB 144 at the beginning of fiscal year 2003. This
standard sets forth guidelines for accounting and reporting for the impairment
of long-lived assets to be disposed of. This standard did not have an effect on
the financial statements as presented.
Management continually evaluates the Company's cash and financing requirements.
Over the years, the Company has obtained favorable financing from financial
institutions when necessary to fund off-season requirements and capital
improvements and acquisitions. The Company has a revolving, reducing credit
agreement that provides financial resources allowing the Company to meet
short-term operating needs and fund capital expenditures. The $13.5 million
agreement reduces available capacity by $1.2 million each June 1. At November
30,2003 $8,393,960 was outstanding with $5,106,040 of unused capacity on the
$13.5 million line of credit.
Subsequent to year-end, the Company's Board of Directors accepted the
resignation of its President and Chief Executive Officer, Michael Collins. His
resignation was effective September 22, 2003. The Board has appointed Dennis
Green as Acting President and Chief Executive Officer until such time as a new
officer can be named. The Board has organized a search committee and has begun
the process to find a new Chief Executive Officer.
The Board of Directors has continued its ongoing discussion regarding the
economic viability of the Company continuing to operate under the rules and
regulations of the Securities and Exchange Commission. In the last 18 months,
following the well publicized corporate scandals, the Securities and Exchange
Commission has implemented numerous regulations that are a significant new
burden on all public companies. In particular, the Sarbanes-Oxley Act of 2002
imposes further public reporting requirements and has had a dramatic effect on
the cost of Director and Officer (D & O) insurance premiums for companies whose
stock is registered under the Exchange Act. Winter Sports, a relatively small
company has the same reporting requirements as companies that are 10-100 times
larger. The Company has experienced a significant cost increase in the D & O
insurance premiums as well as in audit fees and reporting requirements. At this
time the Company anticipates that additional new reporting requirements may be
forth coming and may have a further burden on the Company.
The above costs which can be quantified also do not include the substantial
attention management must devote to compliance with federal securities laws that
would be inapplicable if the Company were to deregister its common stock under
the Exchange Act. The Board of Directors believes the intangible benefits that
would be derived if the management of the Company were allowed to focus
additional attention on operations and financial management would further
enhance Winter
Page 18 of 28
WINTER SPORTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
Sports financial performance and allow the Company to provide improved services
to its guests.
The Company announced on September 24 its intention to request shareholder
approval to enter into a going private transaction for the purposes of
deregistering with the Securities and Exchange Commission at the next annual
meeting. The Company has filed a preliminary proxy and related schedules with
the Securities and Exchange Commission, which is currently reviewing the
documents. The Company expects to set an annual meeting date once the Commission
has completed its review of the documents.
The Company has also purchased approximately 10,000 square feet of retail space
in the Morning Eagle Condominium building located in the center of the Village.
The Company has signed multi-year lease agreements with a candy store,
photography/retail store, snowboard/cafe shop, and a day spa. The Company also
moved its retail store called Big Mountain Sports into that venue and renamed it
Snow Ghost Outfitters. The lessees opened their stores during the first part of
December.
The Company also opened the space where Big Mountain Sports was located and
converted it to a day lodge facility. The space has vending machines as well as
seating areas and small storage areas for the guests to use. As this facility
will be near the Chair 2 and Chair 6 area, it is believed that this facility
will be convenient for guests of all types to use.
Page 19 of 28
Item 3. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. The Company's
Chief Executive Officer and Chief Financial Officer have concluded,
based on their evaluation within 90 days prior to the date of this
report, that the Company's disclosure controls and procedures are
adequate and effective in ensuring that material information
relating to the Company, which is required to be included in the
Company's filings with the SEC under the Securities Exchange Act of
1934, is made known to them.
(b) Changes in internal controls. There were no significant changes in
the Company's internal controls or in other factors that in
management's examination could significantly affect the Company's
disclosure controls and procedures subsequent to the date of the
evaluation, including any corrective actions with regards to
significant deficiencies and material weaknesses.
Page 20 of 28
WINTER SPORTS, INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Note 4 of the Condensed Consolidated Financial
Statements of this form 10-QSB, which is incorporated herein by
reference.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits List
Number Document
------ --------
31.1 Certification of Chief Executive Officer required by Rule
13a-14(a) or Rule 15d-14(a).
31.2 Certification of Chief Financial Officer required by Rule
13a-14(a) or Rule 15d-14(a).
32.1 Certification of Chief Executive Officer required by Rule
13a-14(b) or Rule 15d-14(b) and Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
32.2 Certification of Chief Financial Officer required by Rule
13a-14(b) or Rule 15d-14(b) and Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
(b) Reports on Form 8-K
Two reports on Form 8-K were filed during the quarter ended November 30,
2003.
A Form 8-K was filed on September 24, 2003, reporting the engagement of
Jordahl & Sliter PLLC as independent accountants for the Company's fiscal
year ending May 31, 2004.
A Form 8-K was filed on September 25, 2003, reporting the approval of a
reverse stock split by the Company's board of directors.
Page 21 of 28
WINTER SPORTS, INC.
FORM 10-QSB
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Winter Sports, Inc.
(Registrant)
Date: March 3, 2004 /s/Dennis L. Green
-------------------------------------
Dennis L. Green
President & Chief Executive Officer
(Principal Executive Officer)
Date: March 3, 2004 /s/Jami M. Phillips
-------------------------------------
Jami M. Phillips
Chief Financial Officer & Treasurer
(Principal Financial Officer)
Page 22 of 28