e10vk
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal period ended
December 31,
2009
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number
000-51064
GREAT WOLF RESORTS,
INC.
(Exact name of registrant as
specified in its charter)
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Delaware
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51-0510250
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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122 West Washington Avenue
Madison, Wisconsin 53703
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53703
(Zip Code)
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(Address of principal executive
offices)
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Registrants
telephone number, including area code
608
661-4700
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, par value $0.01 per share
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NASDAQ Global Market
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Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Exchange
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this Annual Report on
Form 10-K
or any amendment to this Annual Report on
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large
accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of June 30, 2009, the aggregate market value of the
voting and non-voting common equity held by non-affiliates was
approximately $63,849,299 based on the closing price on the
NASDAQ National Market for such shares.
The number of shares outstanding of the issuers common
stock was 31,284,122 as of March 2, 2010.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2010 Annual Meeting of
Stockholders are incorporated by reference into Part III. A
definitive Proxy Statement pursuant to Regulation 14A will
be filed with the Commission no later than April 30, 2010.
Great
Wolf Resorts, Inc.
Annual Report on
Form 10-K
For the Year Ended December 31, 2009
INDEX
1
PART I
Overview
and Development
The terms Great Wolf Resorts, us,
we and our are used in this report to
refer to Great Wolf Resorts,
Inc.®
and its consolidated subsidiaries. All dollar amounts used in
this Annual Report on
Form 10-K
are in thousands, except per share amounts and operating
statistics.
We are a family entertainment resort company that provides our
guests with a high-quality vacation at an affordable price. We
are the largest owner, licensor, operator and developer in North
America of drive-to family resorts featuring indoor waterparks
and other family-oriented entertainment activities based on the
number of resorts in operation. Each of our resorts feature
approximately 300 to 600 family suites, each of which sleeps
from six to ten people and includes a wet bar, microwave oven,
refrigerator and dining and sitting area. We provide a
full-service entertainment resort experience to our target
customer base: families with children ranging in ages from 2 to
14 years old that live within a convenient driving distance
of our resorts. We operate and license resorts under our Great
Wolf
Lodge®
and Blue Harbor
Resorttm
brand names and have entered into licensing arrangements with
third parties relating to the operation of resorts under the
Great Wolf Lodge brand name. Our resorts are open year-round and
provide a consistent, comfortable environment where our guests
can enjoy our various amenities and activities.
We provide our guests with a self-contained vacation experience
and focus on capturing a significant portion of their total
vacation spending. Our owned resorts earn revenues through the
sale of rooms (which includes admission to our indoor
waterpark), and other revenue-generating resort amenities. Each
of our resorts features a combination of some or all of the
following revenue-generating amenities: themed restaurants, ice
cream shop and confectionery, full-service adult spa, kid spa,
game arcade, gift shop, miniature golf, interactive game
attraction, family tech center and meeting space. We also
generate revenues from licensing arrangements, management fees
and other fees with respect to our operation or development of
properties owned in whole or in part by third parties.
Each of our Great Wolf Lodge resorts has a Northwoods lodge
theme, designed in a Northwoods cabin motif with exposed timber
beams, massive stone fireplaces, Northwoods creatures including
mounted wolves and an animated two-story Clock Tower that
provides theatrical entertainment for younger guests. All of our
guest suites are themed luxury suites, ranging in size from
approximately 385 square feet to 1,970 square feet.
The indoor waterparks in our existing Great Wolf Lodge resorts
range in size from approximately 34,000 to 84,000 square
feet and include decorative rockwork and plantings. The focus of
each Great Wolf Lodge waterpark is our signature 12-level
treehouse waterfort, an interactive water experience for the
entire family that features over 60 water effects and is capped
by an oversized bucket that dumps between 700 and 1,000 gallons
of water every five minutes. Our waterparks also feature a
combination of high-speed body slides and inner tube
waterslides, smaller slides for younger children, zero-depth
water activity pools with geysers, a water curtain, fountains
and tumble buckets, a lazy river, additional activity pools for
basketball, open swimming and other water activities and large
free-form hot tubs, including hot tubs for adults only.
Financial information regarding our reportable segments during
2009 is included in Note 2 of our Notes to Consolidated
Financial Statements.
Properties
Overview
As innovators in our industry segment, we constantly seek to
improve the facilities, amenities, attractions and features at
our resorts to enhance our guests vacation experience,
generate additional
on-site
revenue and drive repeat and referral business. We refer to our
original resort properties, which include our resorts in
Wisconsin Dells, WI; Sandusky, OH; Traverse City, MI; and Kansas
City, KS as Generation I resorts. The Generation I resorts are
relatively smaller properties with approximately 300 rooms or
less. Since 2004, we have successfully developed seven Great
Wolf Lodge properties which we refer to as Generation II
resorts, which include our properties in Williamsburg, VA;
Pocono Mountains, PA; Niagara Falls, ONT; Mason, OH;
2
Grapevine, TX; Grand Mound, WA; and Concord, NC.
Generation II resorts have approximately 400 rooms or more
and a wider range of amenities than our Generation I resorts.
The following table presents an overview of our portfolio of
resorts. As of December 31, 2009, we operated, managed
and/or have
entered into licensing arrangements relating to the operation of
11 Great Wolf Lodge resorts (our signature Northwoods-themed
resorts) and one Blue Harbor Resort (a nautical-themed
property). We anticipate that most of our future resorts will be
licensed
and/or
developed under our Great Wolf Lodge brand, but we may operate
and/or enter
into licensing arrangements with regard to additional
nautical-themed resorts under our Blue Harbor Resort brand or
other brands in appropriate markets.
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Indoor
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Ownership
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Number of
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Number of
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Entertainment
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Percentage
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Opened
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Guest Suites
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Condo Units(1)
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Area(2)
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(Approx. sq. ft)
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Wisconsin Dells, WI(3)
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1997
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308
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77
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102,000
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Sandusky, OH(3)
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2001
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271
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41,000
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Traverse City, MI
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100
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2003
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280
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57,000
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Kansas City, KS
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100
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2003
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281
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57,000
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Sheboygan, WI
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100
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2004
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182
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64
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54,000
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Williamsburg, VA(4)
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100
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2005
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405
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87,000
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Pocono Mountains, PA(4)
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100
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2005
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401
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101,000
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Niagara Falls, ONT(5)
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2006
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406
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104,000
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Mason, OH(4)
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100
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%
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2006
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401
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105,000
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Grapevine, TX(4)
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100
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2007
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605
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110,000
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Grand Mound, WA(6)
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2008
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398
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74,000
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Concord, NC(4)
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100
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2009
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402
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97,000
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(1) |
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Condominium units are individually owned by third parties and
are managed by us. |
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(2) |
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Our indoor entertainment areas generally include our indoor
waterpark, game arcade, childrens activity room, family
tech center,
MagiQuest®
(an interactive game attraction) and fitness room, as well as
our spa in the resorts that have such amenities. |
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(3) |
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These properties are owned by CNL Lifestyle Properties, Inc.
(CNL), a real estate investment trust focused on leisure and
lifestyle properties. Prior to August 2009, these properties
were owned by a joint venture between CNL and us. In August 2009
we sold our 30.26% joint venture interest to CNL for $6,000. We
currently manage both properties and license the Great Wolf
Lodge brand to these resorts. |
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(4) |
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Five of our properties (Great Wolf Lodge resorts in
Williamsburg, VA; Pocono Mountains, PA; Mason, OH; Grapevine, TX
and Concord, NC) each had a book value of fixed assets equal to
ten percent or more of our total assets as of December 31,
2009. Four of our properties (Great Wolf Lodge resorts in
Williamsburg, VA; Pocono Mountains, PA; Mason, OH and Grapevine,
TX) each had total revenues equal to ten percent or more of our
total revenues for the year ended December 31, 2009. |
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(5) |
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An affiliate of Ripley Entertainment, Inc. (Ripley), our
licensee, owns this resort. We have granted Ripley a license to
use the Great Wolf Lodge name for this resort through April
2016. We managed the resort on behalf of Ripley through April
2009. |
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(6) |
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This property is owned by a joint venture. The Confederated
Tribes of the Chehalis Reservation (Chehalis) owns a 51%
interest in the joint venture, and we own a 49% interest. We
operate the property and license the Great Wolf Lodge brand to
the joint venture under long-term agreements through April 2057,
subject to earlier termination in certain situations. The joint
venture leases the land for the resort from the United States
Department of the Interior, which is trustee for Chehalis. |
Northwoods Lodge Theme. Each of our Great Wolf
Lodge resorts has a Northwoods lodge theme. Our approximately
5,000 to 9,000 square-foot atrium lobbies, that are between
three and five stories high, are designed in a Northwoods cabin
motif with exposed timber beams, massive stone fireplaces,
mounted wolves
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and other Northwoods creatures and an animated two-story Clock
Tower that provides theatrical entertainment for our younger
guests. Throughout the common areas and in each guest suite, we
use sturdy, rustic furniture that complements the Northwoods
theme. We believe that this consistent theme throughout our
resorts creates a comfortable and relaxing environment and
provides a sense of adventure and exploration that the entire
family can enjoy.
Guest Suites. All of our guest suites are
themed luxury suites, ranging in size from approximately
385 square feet to 1,970 square feet. Substantially
all of the rooms in our resorts also include a private deck or
patio, although a lower percentage of rooms in our Grapevine and
Grand Mound resorts include this type of amenity. Our resorts
offer up to 11 room styles to meet the needs and preferences of
our guests, including a selection of rooms with lofts, Jacuzzis
and fireplaces. Our standard rooms include two queen beds and a
third queen bed in the sleeper sofa, a wet bar, microwave oven,
refrigerator and dining and sitting area, and can accommodate up
to six people. Our specialty rooms can accommodate up to seven
people and provide a separate area for children, including our
KidCabin®
suites that feature a log cabin bunk bed room, our Wolf Den
Suitestm
that feature a themed den enclosure with bunk beds and our
KidKamptm
suites that feature bunk beds in a themed tent enclosure. We
also offer larger rooms, such as our Majestic Bear
Suitetm
and Grizzly Bear
Suitetm,
which have separate bedrooms with a king bed, a large dining and
living area and can accommodate up to eight people. For business
travelers we also offer Luxury King Suites that have a king bed,
a 32 television, and wireless Internet access. Our guest
suites have wallpaper, artwork and linens that continue the
Northwoods theme and our resorts provide
pay-per-view
movies and
pay-per-play
video games. Some of our resorts also provide room service
dining. Our Blue Harbor Resort has similar appropriate
nautical-themed named rooms.
Indoor Waterparks. Our existing Great Wolf
Lodge indoor waterparks are maintained at a warm and comfortable
temperature, range in size from approximately 34,000 to
84,000 square feet and have a Northwoods theme and include
decorative rockwork and plantings. The focus of each Great Wolf
Lodge waterpark is our signature 12-level treehouse waterfort.
The waterfort is an interactive water experience for the entire
family that features over 60 water effects, including spray
guns, fountains, valves and hoses, has cargo netting and
suspension bridges and is capped by an oversized bucket that
dumps between 700 and 1,000 gallons of water every five minutes.
Our Blue Harbor Resort has a 43,000 square-foot Breaker Bay
waterpark, including our 12-level Lighthouse Pier
waterfort, which features a 1,000-gallon tipping ship.
Our waterparks also feature high-speed body slides and inner
tube waterslides that wind in and out of the building into a
splash-down pool, smaller slides for younger children,
zero-depth water activity pools with geysers for young children,
a water curtain, fountains and tumble buckets, a lazy river,
additional activity pools for basketball, open swimming and
other water activities and two large free-form hot tubs, one of
which is for adults only. Each waterpark is constructed with a
special nonslip floor surface for maximum traction and has ample
deck space and good sight lines to enhance parental oversight.
On average, approximately one to two million gallons of water is
cycled through each of our waterparks every hour as part of our
water filtration procedures. Our primary operating equipment
includes water pumps, tanks and filters, located in separate
spaces to allow for quick repairs or replacement. Computerized
water and air treatment systems and highly trained technicians
monitor the water and air quality of our waterparks in order to
promote a clean and safe environment. We seek to minimize the
use of chlorine. Most of the water purification is performed by
one or more non-chlorinated water treatment systems, which
ensures the highest water quality and a substantial reduction in
the typical chlorine odor found in indoor pools. In addition,
the water within each area circulates at least every hour to
maximize hygiene. Each waterpark area has its own water system
so that a problem with any one area can be quickly contained and
does not affect the operations of the rest of the waterpark.
We expect recurring annual capital expenditures for each resort
that we own to be approximately 1- 4% of the resorts
revenues, depending on the age of the resort. As much of the
equipment used in our waterparks is designed for outdoor
application and capable of withstanding intense physical use and
the elements year-round, wear and tear is minimal. We believe
our equipment has a long useful life. In addition, our water
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purification system minimizes airborne chemicals, and their
potentially corrosive effects on materials and equipment, and is
designed to help extend the life of our equipment.
The safety of our guests is a primary focus in our waterparks.
Our lifeguards receive one of the highest levels of training and
certification in the industry, provided by Jeff
Ellis & Associates, Inc. (Ellis &
Associates), an international aquatic safety consulting company.
Ellis & Associates conducts quarterly unannounced
safety inspections at each of our resorts to ensure that proper
safety measures and procedures are maintained. All of our
on-duty lifeguards perform daily training exercises under the
supervision of a certified instructor. We also encourage our
lifeguards to obtain EMT certification, and we reimburse them
for the costs of the training.
Our indoor waterparks are generally open from 8:30 a.m.
until 10:00 p.m., seven days a week, and admission is
generally only available to resort guests. Our general
guests-only policy, which is in effect at all of our resorts
other than our Sheboygan resort, allows our guests to avoid the
long lines and other inconveniences of daily admission-based
waterparks.
Amenities. Each of our resorts features a
combination of the following amenities. Some of the amenities
described below have different names at certain of our Great
Wolf Lodge resorts. Our Blue Harbor Resort amenities have
similar appropriate nautical-themed names.
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Themed Restaurants. Our resorts feature one or
more full-service, themed restaurants and a themed bar and
grille that serves alcoholic beverages and sandwiches. Our
themed restaurants include the Gitchigoomie
Grilltm,
with a life-sized sea plane suspended over the dining area,
Lumber Jacks Cook
Shantytm,
the Loose Moose Bar &
Grilltm,
and the Camp Critter Bar &
Grilletm,
which features a two-story realistic tree with a canopy of
leaves and canvas-topped booths with hanging lanterns, giving
guests the impression that they are dining in a Northwoods
forest campsite. Our Blue Harbor Resort features our On the
Rocks Bar & Grille and Rusty
Anchortm
Buffet.
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Ice Cream Shop and Confectionery. Each of our
Great Wolf Lodge resorts has a Bear Claw
Cafétm
or Bear Paw Sweets &
Eatstm
ice cream shop and confectionery that provides sandwiches,
coffee, pastries, ice cream, candies, home-made fudge and other
snacks that families can share together. Our Blue Harbor Resort
has a Sweetshop Landing confectionery.
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Coffee Shop. Some of our resorts have a
separate coffee shop that offers
Starbucks®
or Dunkin
Donuts®
coffee, as well as other pastry items provided by those brands.
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Snack Bar. Each of our waterparks has a snack
bar that offers a variety of sandwiches, pizzas and similar
foods with ample seating so that our guests do not have to leave
the warmth and comfort of the waterpark.
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Gift Shop. Each of our resorts has a Buckhorn
Exchangetm
or Precious Cargo gift shop that provides unique themed gifts,
including Great Wolf Lodge or Blue Harbor Resort logo
merchandise, souvenirs, collectibles and stuffed animals. The
gift shop also offers resort toys, swimwear and personal
necessities. Our resorts also have a Bear
Essentialstm
or Washed Ashore gift shop located in the waterpark.
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Full-Service Spa. Each of our resorts, with
the exception of our Sandusky resort, has an
Elementstm
Spa and Salon that provides a relaxing
get-a-way
with a full complement of massages, facials, manicures,
pedicures and other spa treatments and a wide selection of
Aveda®
products. Each of our spas also includes our
Scooops®
Kid Spa. The furnishings for the kid-friendly spa have the look
of a modern ice cream parlor, with chocolate-colored walls,
retro swivel stools and a pedicure sofa that looks like an
oversized ice cream sundae. While enjoying their treatments,
kids can listen to music with a provided CD player and speakers
or with their own digital music player.
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Game Arcade. Our Youkon Jacks Game
Parlortm
or Northern Lights
Arcadetm
range in size from approximately 3,900 to 7,000 square
feet, generally feature over 70 games and are divided into
distinct areas with video and skill games that appeal to
children of different ages. Tickets won from the skill games may
be exchanged for a wide selection of merchandise that appeals to
our younger guests.
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Cub
Clubtm. Our
Cub Club rooms are professionally staffed childrens
activity rooms with programmed activities, including arts and
crafts, games and nature hikes. Our Blue Harbor Resort features
a Crew
Clubtm
activity room with activities that are similar to our Cub
Clubtm.
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Animated Clock Tower. Each of our Great Wolf
Lodge resorts has a two-story animated Clock Tower located in
the resorts main atrium lobby. The Clock Tower provides
daily theatrical entertainment through talking and singing
trees, animals and Northwoods figures. Our Blue Harbor Resort
features a 2,000-gallon water fountain featuring a hand-blown
glass sculpture and a music and light show located in its main
atrium lobby.
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Outdoor Water Amenities. Outdoor water
amenities complement our indoor waterpark facilities and allow
our guests to take advantage of favorable weather conditions.
Our outdoor water amenities include activity pools and a large
deck or patio area and are generally open from May until
September, longer if the weather is favorable. Our Wisconsin
Dells and Grapevine resorts also have outdoor waterslides.
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Fitness Room. Our fitness rooms contain
aerobic exercise equipment, weight-lifting machines, and
numerous televisions for active viewing.
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Meeting Space. Our resorts offer meeting space
ranging from approximately 3,000 to over 7,000 square feet
that are available for guest meetings, including a 99-seat,
state-of-the-art,
symposium-style room at our Traverse City and Niagara Falls
resorts.
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Conference Facility. Many of our resorts
feature conference facility space. Our Traverse City, Sheboygan,
Williamsburg, Mason, Grapevine, Grand Mound and Concord resorts
feature conference facilities that range in size from
10,000 40,000 square feet. Each of these
conference facilities also feature some, if not all, of the
following additional aspects to their conference facilities:
Grand Ballroom, flexible meeting spaces, executive boardroom,
audio visual systems, and multiple pre-function concourses
including an outdoor patio.
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MagiQuest. Nine of our resorts feature a
MagiQuest attraction. MagiQuest is an interactive, live-action,
fantasy adventure game that guests can play throughout the
resort.
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Minigolf. Five of our resorts feature a
custom-designed, outdoor 18-hole miniature golf course.
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gr8_spacetm.
Five of our resorts feature an approximately 1,000 square
foot interactive family tech center, gr8_space, which features
multiple computer stations offering Internet access, docking
stations for digital music players, as well as multiple gaming
stations. gr8_space also features family events, like rock star
karaoke and family challenge games. In the evening, gr8_space
features dedicated teen time and activities for fun on their
terms.
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Property
Descriptions
We currently operate, manage
and/or have
entered into licensing arrangements relating to the operation of
12 resorts, located in Wisconsin Dells, Wisconsin; Sandusky,
Ohio; Traverse City, Michigan; Kansas City, Kansas; Sheboygan,
Wisconsin; Williamsburg, Virginia; Pocono Mountains,
Pennsylvania; Niagara Falls, Ontario; Mason, Ohio; Grapevine,
Texas; Grand Mound, Washington and Concord, North Carolina.
Great
Wolf Lodge Wisconsin Dells, Wisconsin
Our Great Wolf Lodge, located on 16 acres in Wisconsin
Dells, Wisconsin, was originally constructed in 1997 and
acquired by our predecessor company in 1999. In October 2005, we
sold this resort to a joint venture with CNL. In August 2009, we
sold all of our interest in the joint venture to CNL. We
continue to manage and license this resort under long-term
arrangements.
Wisconsin Dells is a renowned family vacation destination that
features a number of entertainment options, including amusement
parks, museums, live entertainment and other indoor waterparks.
According to the 2009 Travel & Tourism Market Research
Handbook, the Wisconsin Dells area attracts over
2.9 million
6
visitors each year. Wisconsin Dells is within a
one-hour
drive from Madison, Wisconsin; a
two-hour
drive from Milwaukee, Wisconsin; a
three-hour
drive from Chicago, Illinois; a three and one-half-hour drive
from Minneapolis/St. Paul, Minnesota; and a
five-hour
drive from Des Moines, Iowa. According to Applied Geographic
Solutions, Inc., there are approximately 16.4 million
people who live within 180 miles of the resort.
Great Wolf Lodge of Wisconsin Dells has 308 guest suites, with
an additional 77 third-party owned, one to four bedroom
condominium units located adjacent to the resort, on a
six-acre
land parcel, and an approximately 76,000 square-foot indoor
waterpark that includes our signature treehouse waterfort. The
resort offers a number of revenue-enhancing amenities, including
themed restaurants and snack bars, confectionery and ice cream
shop, Cub Club, full-service spa, kids spa, game arcade, gift
shops, MagiQuest, an outdoor recreation area and meeting rooms.
The resort also includes non revenue-generating amenities, such
as an animated two-story Clock Tower and fitness center.
Great
Wolf Lodge Sandusky, Ohio
In March 2001, we opened our Great Wolf Lodge in Sandusky, Ohio.
In October 2005, we sold this resort to our joint venture with
CNL. In August 2009, we sold our interest in that joint venture
to CNL. We currently manage the Sandusky resort under a short
term management agreement that expires on December 31, 2010.
Sandusky is a family destination near Cleveland, Ohio, that is
well known for its amusement parks. According to the
Sandusky/FIB Erie County Visitors and Convention Bureau,
Sandusky attracts approximately 9 million visitors each
year. Sandusky is within a
one-hour
drive from Cleveland and Toledo, Ohio; a
two-hour
drive from Detroit, Michigan; a two and one-half-hour drive from
Columbus, Ohio; and a
three-hour
drive from Pittsburgh, Pennsylvania. According to Applied
Geographic Solutions, Inc., there are approximately
22.9 million people who live within 180 miles of the
resort.
Great Wolf Lodge of Sandusky is located on approximately
15 acres and has 271 guest suites and an approximately
34,000 square-foot indoor waterpark that includes our
signature treehouse waterfort, tube slides, body slides, hot
tubs and a lazy river. The resort offers a number of
revenue-enhancing amenities, including our themed restaurants
and snack bars, confectionary and ice cream shop, Cub Club, game
arcade, gift shops, an outdoor recreation area and meeting
rooms. The resort also includes non revenue-generating amenities
such as our animated two-story Clock Tower and fitness center.
Great
Wolf Lodge Traverse City, Michigan
In March 2003, we opened our Great Wolf Lodge in Traverse City,
Michigan. Traverse City is a traditional family vacation
destination with skiing and lake activities. According to the
Traverse City Convention and Visitors Bureau, Traverse City
attracts approximately 2 million visitors each year.
Traverse City is within a
two-hour
drive from Grand Rapids, Michigan; a
three-hour
drive from the Sault St. Marie, Michigan; and a
four-hour
drive from Detroit and Ann Arbor, Michigan, as well as Windsor,
Ontario. According to Applied Geographic Solutions, Inc., there
are approximately 7.1 million people who live within
180 miles of the resort.
Great Wolf Lodge of Traverse City is located on approximately
48 acres and has 280 guest suites and an approximately
40,000 square-foot indoor waterpark that includes our
signature treehouse waterfort. It also includes a conference
center that is
10,000 square-feet.
The resort offers a number of revenue-enhancing amenities,
including our themed restaurants and snack bars, confectionery
and ice cream shop, Cub Club, full-service spa, kids spa, game
arcade, gift shops, MagiQuest, minigolf, an outdoor recreation
area and approximately 7,000 square feet of meeting space.
The resort also includes non revenue-generating amenities such
as our animated two-story Clock Tower and fitness center.
Great
Wolf Lodge Kansas City, Kansas
In May 2003, we opened our Great Wolf Lodge in Kansas City,
Kansas, as part of the Village West tourism district that
includes a Cabelas superstore, Nebraska Furniture Mart and
the Kansas NASCAR
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Speedway. According to the 2009 Travel & Tourism
Market Research Handbook, Kansas City attracts approximately
8 million visitors each year. Kansas City is within a
one-hour
drive from Topeka, Kansas; a
three-hour
drive from Wichita, Kansas, Des Moines, Iowa and Omaha,
Nebraska; and a
four-hour
drive from St. Louis, Missouri. According to Applied
Geographic Solutions, Inc., there are approximately
6.8 million people who live within 180 miles of the
resort.
Great Wolf Lodge of Kansas City is located on approximately
17 acres and has 281 guest suites and an approximately
40,000 square-foot indoor waterpark that includes our
signature treehouse waterfort. The resort offers a number of
revenue-enhancing amenities, including our themed restaurants
and snack bars, confectionery and ice cream shop, Cub Club,
full-service spa, kids spa, game arcade, gift shops, MagiQuest,
minigolf, an outdoor recreation area and meeting rooms. The
resort also includes non revenue-generating amenities such as
our animated two-story Clock Tower and fitness center.
Blue
Harbor Resort Sheboygan, Wisconsin
In June 2004, we opened our Blue Harbor Resort on an
approximately
12-acre
property on the shores of Lake Michigan in Sheboygan, Wisconsin.
Sheboygan is a family vacation destination featuring lake
activities and golf. Due to the lakefront location, we designed
this resort with a nautical theme rather than our typical
Northwoods lodge theme. This resort is styled as a grand beach
resort and decorated in a manner consistent with that theme,
including a nautical themed lobby and specialty rooms such as
the KidAquarium Suite with bunk beds surrounded by walls of deep
blue sea and schools of fish and the Boathouse Suite with
rowboat bunk beds. Sheboygan is within a
one-hour
drive from Milwaukee and Green Bay, Wisconsin; a
two-hour
drive from Madison, Wisconsin; a
three-hour
drive from Chicago, Illinois; and a
four-hour
drive from Dubuque, Iowa. According to Applied Geographic
Solutions, Inc., there are approximately 18.6 million
people who live within 180 miles of the resort.
Blue Harbor Resort has 182 guest suites, with an additional 64
individually-owned, two and four bedroom condominium units
located adjacent to the resort, and an approximately
43,000 square-foot Breaker Bay indoor waterpark with a
12-level Lighthouse Pier waterfort. The resort offers a
number of revenue-enhancing amenities, including our
nautical-themed restaurants and snack bar, confectionery and ice
cream shop, Crew Club, full-service spa, kids spa, game arcade,
gift shops and an outdoor recreation area. This resort also has
an approximately 21,000 square-foot attached conference
facility that seats 1,000 people. The resort offers non
revenue-generating amenities such as our 2,000 gallon hand-blown
glass water fountain featuring a music and light show and
fitness center.
We currently manage the rental of all of the condominium units
at this resort. We receive a rental management fee of
approximately 38% of gross revenue. In addition, we receive
reimbursement of certain waterpark expenses through the
condominium association.
Great
Wolf Lodge Williamsburg, Virginia
In March 2005, we opened our Great Wolf Lodge in Williamsburg,
Virginia, on an
83-acre
site. Williamsburg is a popular family vacation destination with
amusement parks, waterparks and other entertainment attractions.
According to the 2009 Travel & Tourism Market Research
Handbook, the Williamsburg area attracts 4 million visitors
each year. Williamsburg is a
one-hour
drive from Richmond, Virginia; a two and one-half-hour drive
from Washington, D.C.; a
three-hour
drive from Baltimore, Maryland; a three and one-half-hour drive
from Raleigh, North Carolina; a four and one-half-hour drive
from Wilmington, Delaware; and a
five-hour
drive from Philadelphia, Pennsylvania. According to Applied
Geographic Solutions, Inc., there are approximately
17.4 million people who live within 180 miles of the
resort.
The resort occupies approximately 36 acres of the site. We
have leased a portion of the excess land to an entity who has
opened a restaurant on this site. We may sell or lease a portion
of the remaining excess land as out-lots and retain the
remaining acreage to support future expansion of the resort.
Great Wolf Lodge of Williamsburg has 405 guest suites and an
approximately 67,000 square-foot indoor waterpark that
includes our signature treehouse waterfort. It also includes a
conference center that is
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10,000 square-feet.
The resort offers a number of revenue-enhancing amenities,
including themed restaurants and snack bars, confectionery and
ice cream shop, Cub Club, full-service spa, kids spa, game
arcade, gift shops, MagiQuest, minigolf, gr8_space, an outdoor
recreation area and approximately 11,000 square feet of
meeting rooms. The resort offers non revenue-generating
amenities such as a two-story animated Clock Tower and fitness
center.
Great
Wolf Lodge Pocono Mountains, Pennsylvania
In October 2005, we opened our Great Wolf Lodge in the Pocono
Mountains on a
95-acre site
near Stroudsburg, Pennsylvania. The Pocono Mountains area is a
popular family vacation destination featuring family-oriented
attractions and recreational activities. According to the 2009
Travel & Tourism Market Research Handbook, the Pocono
Mountains region attracts approximately 8 million visitors
each year. The resort is less than a
one-hour
drive from Scranton, Pennsylvania; a
two-hour
drive from Manhattan, New York and Philadelphia, Pennsylvania; a
two and one-half-hour drive from Bridgeport, Connecticut; a
three hour drive from Baltimore, Maryland; and a
five-hour
drive from Pittsburgh, Pennsylvania. According to Applied
Geographic Solutions, Inc., there are approximately
45.2 million people who live within 180 miles of the
resort.
Our Great Wolf Lodge of the Pocono Mountains has 401 guest
suites and an approximately 80,000 square-foot indoor
waterpark that includes our signature treehouse waterfort. The
resort offers a number of revenue-enhancing amenities, including
themed restaurants and snack shops, confectionery and ice cream
shop, Cub Club, full-service spa, kids spa, game arcade, gift
shops, MagiQuest, gr8_space, an outdoor recreation area and
approximately 5,800 square feet of meeting rooms. The
resort also includes non revenue-generating amenities such as a
two-story animated Clock Tower and fitness center.
Great
Wolf Lodge Niagara Falls, Ontario
In January 2004, we entered into a license agreement with
Ripleys that authorized Ripleys to develop and
operate a Great Wolf Lodge resort in Niagara Falls, Ontario. In
addition, the agreement allows Ripleys to use certain
licensed trademarks, such as Cub Club,
KidCabin, and Great Wolf Lodge. The term
of the license agreement is ten years, with the possibility of
up to four successive five-year renewals. Under the license
agreement, Ripleys is required to pay a monthly license
fee and a brand marketing fee that we are obligated to
contribute to a marketing program. We may terminate the license
agreement at any time, upon notice, if Ripleys fails to
meet its material obligations under the agreement. These
obligations require Ripleys to meet payment obligations in
a timely manner, maintain and operate the resort in a manner
consistent with our operating standards and obtain our approval
prior to the use of any of our licensed trademarks. In addition,
these material obligations restrict Ripleys to selling
only products, goods and services that we approve and from
developing or managing a hotel with an indoor waterpark within
the United States until, at the earliest, January 2016.
In April 2006, the Great Wolf Lodge in Niagara Falls, Ontario,
Canada opened. Niagara Falls is a popular family vacation
destination. According to the 2009 Travel & Tourism
Market Research Handbook, Niagara Falls attracts nearly
12 million visitors each year. Niagara Falls is less than a
one hour drive from Buffalo, New York; a one and one-half-hour
drive from Toronto, Ontario; a one and three-quarter-hour drive
from Kitchener, Ontario; a two and one-half-hour drive from
London, Ontario; and a four and one-quarter-hour drive from
Windsor, Ontario. According to Applied Geographic Solutions,
Inc., there are approximately 8 million people in the
United States and 9.6 million people in Canada, who live
within 180 miles of the resort.
Great Wolf Lodge of Niagara Falls has 406 guest suites with an
approximately 82,000 square-foot indoor waterpark. The
resort offers a number of revenue-enhancing amenities, including
themed restaurants and snack bars, confectionery and ice cream
shop, Cub Club, full-service spa, game arcade, gift shops,
minigolf, an outdoor recreation area and meeting space. The
resort also includes non revenue-generating amenities such as a
two-story animated Clock Tower and fitness center.
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Great
Wolf Lodge Mason, Ohio
In December 2006, we opened our Great Wolf Lodge in Mason, Ohio,
on a 39-acre
land parcel adjacent to Kings Island theme park. Mason is a
popular family destination featuring family-oriented attractions
and recreational activities. According to the 2009
Travel & Tourism Market Research Handbook, the
Mason/Cincinnati
metro areas attract 5 million visitors per year. The resort
is located less than a
one-hour
drive from Cincinnati and Dayton, Ohio; a one and one-half hour
drive from Columbus, Ohio; and a
two-hour
drive from Louisville, Kentucky, Indianapolis, Indiana and
Lexington, Kentucky. According to Applied Geographic Solutions,
Inc., there are approximately 16.6 million people who live
within 180 miles of the resort.
Our Great Wolf Lodge of Mason, Ohio, has 401 guest suites and an
approximately 84,000 square-foot indoor waterpark. The
resort offers a number of revenue-enhancing amenities, including
themed restaurants and snack bars, confectionery and ice cream
shop, Cub Club, full-service spa, kids spa, game arcade, gift
shops, MagiQuest and an outdoor recreation area. The resort also
includes non revenue-generating amenities such as a two-story
animated Clock Tower and fitness center. The resort also
includes a
state-of-the-art
40,000 square-foot conference center, including an
expansive Grand Ballroom, flexible meeting spaces, an executive
boardroom, audio and visual systems, and multiple pre-function
concourses including an outdoor patio.
Great
Wolf Lodge Grapevine, Texas
In December 2007, we opened our Great Wolf Lodge in Grapevine,
Texas, on a
51-acre
site. Grapevine is a popular family destination featuring
family-oriented attractions and recreational activities. The
resort is less than a
one-hour
drive from both Dallas and Fort Worth, Texas. The Dallas
and Fort Worth region is the 6th largest market area
in the United States according to Nielsen Media Research Inc.,
and the resort has a higher population within a
60-mile
radius than any other Great Wolf Lodge resort. The resort is
also a
three-hour
drive from Oklahoma City, Oklahoma; a three and one-half-hour
drive from Shreveport, Louisiana and Austin, Texas; and a four
and one-half-hour drive from Houston and San Antonio,
Texas. According to Applied Geographic Solutions, Inc., there
are approximately 10.7 million people who live within
180 miles of the resort. The resort occupies approximately
30 acres of this site. We may sell a portion of the excess
land as one or more out-lots.
Our Great Wolf Lodge of Grapevine, Texas, has 605 guest suites
and an approximately 78,000 square-foot indoor waterpark.
The resort offers a number of revenue-enhancing amenities,
including themed restaurants and snack bars, confectionery and
ice cream shop, Cub Club, full-service spa, kids spa, game
arcade, gift shops, MagiQuest, gr8_space and an outdoor
recreation area. The resort also includes non revenue-generating
amenities such as a two-story animated Clock Tower and fitness
center. In December 2008, we opened an expansion of this resort
which includes 27,000 square feet of additional meeting
space.
Great
Wolf Lodge Grand Mound, Washington
In 2005, we entered into a joint venture with The Confederated
Tribes of the Chehalis Reservation to develop a Great Wolf Lodge
resort and conference center on a
39-acre land
parcel in Grand Mound, Washington. We operate the resort under
the Great Wolf Lodge brand. The Confederated Tribes of the
Chehalis Reservation has leased the land needed for the resort
to the joint venture on favorable terms. Both parties maintain
equity positions in the joint venture. The resort opened in
March 2008. The resort is the first family destination vacation
resort with an indoor waterpark in the Pacific Northwest. The
resort is a less than
one-hour
drive from Olympia, Washington; an hour and half drive from
Seattle, Washington and Portland, Oregon; a
three-hour
drive from Yakima, Washington; a
four-hour
drive from Vancouver, British Columbia; and a
five-hour
drive from Spokane, Washington. According to Applied Geographic
Solutions, Inc., there are approximately 7.8 million people
who live within 180 miles of the resort.
Our Great Wolf Lodge of Chehalis, Washington, has 398 guest
suites and an approximately 60,000 square-foot indoor
waterpark. The resort offers a number of revenue-enhancing
amenities, including
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themed restaurants and snack bars, confectionery and ice cream
shop, Cub Club, a full-service spa, game arcade, gift shops,
MagiQuest, minigolf, gr8_space, an outdoor recreation area and
an approximately 30,000 square-foot conference center. The
resort also includes non revenue-generating amenities such as a
two-story animated Clock Tower and fitness center.
Great
Wolf Lodge Concord, North Carolina
In March 2009, we opened our Great Wolf Lodge in Concord, North
Carolina on a
37-acre
site. Concord is a popular family destination featuring
family-oriented attractions and recreational activities. The
Concord site is located 15 miles from downtown Charlotte at
Exit 49 on Interstate 85. This freeway interchange is well known
throughout the Carolinas mostly due to its main attraction
draws, Lowes Motor Speedway and the Concord Mills shopping
center. The resort is a less than
one-hour
drive from Charlotte, North Carolina; a one and one-half hour
drive from Greensboro/Winston-Salem, North Carolina; a
two-hour
drive from Columbia, South Carolina; and a two and one-half-hour
drive from Raleigh and Asheville, North Carolina. According to
Applied Geographic Solutions, Inc., there are approximately
14.7 million people who live within 180 miles of the
resort.
Great Wolf Lodge of Concord, North Carolina has 402 guest suites
and approximately 97,000 square feet of indoor
entertainment, including an 84,000 square foot indoor
waterpark. The resort offers a number of revenue-enhancing
amenities, including themed restaurants and snack bars,
confectionery and ice cream shop, Cub Club, full-service spa,
game arcade, gift shops, MagiQuest, minigolf, gr8_space an
outdoor recreation area and an approximately
20,000 square-foot conference center. The resort also
includes non revenue-generating amenities such as a two-story
animated Clock Tower and fitness center.
Business
and Growth Strategies
Our primary business objective is to increase long-term
stockholder value by executing our growth strategies, which
include:
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Leveraging Our Competitive Advantages and Increasing Domestic
Geographic Diversification through a Licensing-Based Business
Model and Joint Venture Investments in Target
Markets. We are seeking to grow our business and
diversify our domestic geographic brand footprint in a
capital-efficient manner primarily through a licensing-based
business model. This business model is designed to further
exploit our competitive advantages of being the first-mover in
the indoor waterpark resort business, our strong brand equity
and our waterpark resort management expertise by seeking
opportunities to earn fees through licensing our brand and
managing new resorts that are constructed and developed
primarily by third-party owners. We may also seek to make
minority investments in joint ventures that own most of the
licensed resorts in order to share in any equity appreciation
and profits of those resorts. Our proposed transaction to
license and manage a new Great Wolf Lodge resort near the
Galleria at Pittsburgh Mills is an example of a typical
transaction under this strategy. We expect this business model
to allow us to deploy our capital resources more efficiently,
reduce our overall leverage and diversify our operations
geographically, since we will not be fully responsible for the
construction and ownership of the licensed resorts, and will
generally not be required to incur associated mortgage or
construction debt. In addition, this business model is designed
to allow us to more quickly expand domestically, reducing our
sensitivity to economic conditions affecting any single region.
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Expanding Our Brand Footprint
Internationally. We also expect to use our
licensing-based business model to efficiently expand our
business internationally. Similar to our arrangement with
Ripleys in Niagara Falls, Ontario, we will seek to enter
into license
and/or
management agreements with reputable companies that have local
market knowledge in order to increase revenues and expand the
international footprint of our Great Wolf Lodge brand. We may
also seek to make strategic minority joint venture investments
in the licensed resorts in order to share in the profits and
equity appreciation of the resorts. We believe this model is the
most efficient strategy for international expansion, since it
enables us to leverage the local expertise of our joint venture
partners while minimizing our capital investment.
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Selective Sales of Ownership Interests/Recycling of
Capital. We will selectively consider
opportunities to sell partial or whole interests in one or more
of our owned and operated properties, as we did in our CNL joint
venture. We intend to continue to manage
and/or
license our Great Wolf Lodge branded resorts, and we will
consider transactions that allow us to maintain our
management/licensing agreement at a resort while realizing value
through our selective sales. In those situations, we expect to
recycle capital generated by such transactions for investment in
future growth opportunities.
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Expanding and Enhancing Existing Resorts. We
will seek to continue to focus on growth opportunities at our
existing resorts by adding revenue-enhancing features that drive
ancillary vacation spending and meet our target returns,
including non-water based attractions. We also intend to
continue to evaluate incremental revenue-generating
opportunities, such as expanding the number of rooms at certain
of our resorts.
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Continuing to Innovate. We intend to leverage
our in-house expertise, in conjunction with the knowledge and
experience of our third-party suppliers and designers, to
develop and implement the latest innovations in family
entertainment activities and amenities, including waterpark
attractions. We have received numerous industry awards for our
guests experiences, our operations, innovative
development, sales and marketing initiatives and materials, and
employee retention. We are currently exploring several new
concepts that, we believe, will allow us to generate additional
revenue without requiring significant capital investment. Among
these concepts is an adaptive re-use model, pursuant to which we
would license the right to use entertainment features currently
used in Great Wolf resorts to existing, full-service hotels,
featuring family-oriented activities. While these concepts are
still in the initial stages of development, we are seeking to
innovatively extend our brand and to take these concepts to
market.
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Maximizing Total Resort Revenues. We will
continue to employ aggressive yield management techniques and
effectively direct sales and marketing efforts to maximize
occupancy and room rates at both our owned and managed resorts.
During off-peak times (generally in May and September, and
during the middle of weeks when schools are in session), we will
seek to maintain higher occupancy by holding special events and
targeting group sales and conferences. We will also seek to
maximize other
on-site
revenue, such as food and beverage, entertainment and
merchandise revenue through themed restaurants, ice cream shops,
snack shops, adult and kids spas, gift shops, game arcades,
MagiQuest, mini-golf and teen-themed areas. We have also entered
into a number of co-marketing agreements with strategic partners
and expect to enter into additional co-marketing agreements in
the future in order to increase other revenue.
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Minimizing Total Resort Costs. We will seek to
reduce operating costs by leveraging our purchasing power with
respect to operating supplies, food and beverage, insurance and
employee benefits. By centralizing certain of our services, we
also seek to reduce our
per-unit
costs, increasing our control over those services in order to
deliver a greater quality of service to our customers. Our
centralized reservations system is scalable and, together with
our web-based reservations system, enables us to efficiently
handle high reservation volumes and which we expect to require
only limited additional incremental costs over the next several
years as we increase our portfolio of resorts.
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Building Upon Our Existing Brand Awareness and
Loyalty. Our Great Wolf Lodge brand is
recognizable by our customers because of our distinctive and
easily identifiable theming, from our signature treehouse
waterfort, to our mascots and distinctive logos and merchandise.
We believe we have fostered strong customer and brand loyalty,
which is evidenced by our high levels of repeat and referral
guests. We will continue to focus on ensuring that each of our
guests associates the Great Wolf Lodge brand with a memorable
and consistent family vacation experience.
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Our
Competitive Strengths
We are the market leader for family entertainment resorts that
feature indoor waterparks and other family-oriented amenities in
North America. Our competitive strengths include:
Strong barriers to entry with an established first mover
advantage. We strive to be the first operators of
family entertainment resorts featuring indoor waterparks in our
selected target markets, and our resorts have typically been the
first resorts to open in their respective markets. Our
experience in establishing 12 family-focused resorts and the
economies of scale resulting from our current operation of
multiple resorts provide us with the ability to move into a
selected target market quickly. We believe there are significant
barriers to entry in our industry segment that discourage others
from developing similar resorts, including operational
complexity, substantial capital requirements, availability of
suitable sites in desirable markets and a challenging,
multi-year permitting process. A new Great Wolf Lodge resort
typically costs in excess of $120,000 and takes from one to
three years to develop and permit, and an additional
18 months or more to build. We believe that the combination
of our first mover advantage, existing economies of scale and
the significant barriers to entry in our target markets provide
us with a competitive advantage.
Strong brand name awareness. Our Great Wolf
Lodge brand name is well recognized in our industry. We are the
largest owner, licensor and operator of family entertainment
resorts with indoor waterparks in North America based on the
number of resorts in operation. Our Great Wolf Lodge brand is
symbolized by our distinctive and easily identifiable theming,
from our signature treehouse waterfort, to our mascots and
recognizable logos and merchandise. We believe that our strong
brand awareness has helped foster strong customer and brand
loyalty, which is evidenced by high levels of repeat and
referral guests. We will continue to focus on ensuring that each
of our guests associates the Great Wolf Lodge brand with a
memorable and consistent family vacation experience.
Resilient business model. Our business model
generally targets customers within a
three-hour
driving radius of our resorts. We believe recent vacation trends
favor our business model as families increasingly choose to take
shorter, more frequent vacations within driving distance of
their homes. We are well positioned to continue to take
advantage of these trends. We also believe that our resorts
offer a high-quality vacation at an affordable price, which
appeals to families during all stages of the economic cycle. We
believe our resorts are less affected by changes in the economic
cycle than are other vacation destinations, as drive-to
destinations are generally less expensive and more convenient
than destinations that require air travel. For the year ended
December 31, 2009, Great Wolf Resorts same store
revenue per available room, or RevPAR, decreased 5.2% in
constant dollar terms versus a 16.7% RevPAR decrease for the
overall U.S. hotel industry, according to Smith Travel
Research data. We also believe we have a strong opportunity to
increase group demand from our current levels as we increase
utilization of the meeting space at several of our newer resorts.
Positioned for economic recovery. During the
past two years we have positioned our business to benefit in an
economic recovery. Each of our resorts has completed
construction, and we have no current development exposure. We
have also strengthened our capital structure, extending our
near-term maturing debt so that we have no debt maturities until
mid-2011. Additionally, we have taken steps to sell non-core
assets. In August 2009, we closed on the sale of our 30.26%
interest in the Great Wolf Lodge properties in Wisconsin Dells,
WI and Sandusky, OH. All of these steps have allowed us to focus
on our core operations, eliminate development risk from our
portfolio and improve cash flows.
Extensive customer database through a centralized service
center drives repeat and referral business. Since
1997, we have accumulated an extensive customer database, which
allows us to market directly to our customers and drive repeat
and referral business. Despite the recent economic downturn, our
repeat and referral business has continued to grow, which we
believe is a testament to the quality of our business. For the
year ended December 31, 2009, 61% of our business came from
repeat and referral guests.
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In addition, by centralizing certain of our services, we focus
on decreasing our
per-unit
costs. Centralized services provide operational efficiency,
increasing our control over those services and positioning
ourselves to deliver a higher quality of service to our
customers. For example, our central reservations call center
operates every day of the year and accepts reservations for our
resorts. The call center also has the capacity to efficiently
handle high call volumes and should require limited incremental
costs over the next several years as we grow our portfolio. We
have also increased the efficiency and functionality of our
web-based online reservations system, which we expect to allow
us to further efficiently handle an increasing volume of guest
reservations with limited incremental costs.
Near-term growth from select resort expansions and
openings. In March 2009, we completed
construction of the Great Wolf Lodge in Concord, North Carolina.
The resort features 402 guest suites and approximately
97,000 square feet of indoor entertainment, including an
84,000 square foot indoor waterpark. The resort also offers
a number of revenue-enhancing amenities and an approximately
20,000 square-foot conference center. In addition, our
Grapevine, Texas resort completed an expansion in January 2009
that includes 203 additional guest suites and 27,000 square
feet of additional meeting space. We expect that our results
should benefit in the near term from the stabilization of our
Concord, resort and the additional guest suites and meeting
space at our Grapevine, resort.
Strategic transition to a license and management
model. We anticipate that our future development
projects will be structured as joint ventures or 100% license
and management projects. This strategic shift is designed to
allow more efficient use of capital as we expand our operation
while continuing to leverage our brand, business model and
operating expertise. In addition, we believe that numerous
opportunities exist to partner with owners of existing hotels
and resorts with indoor waterparks that are in need of
management expertise.
Several development projects under letter of
intent. We have entered into non-binding letters
of intent with regard to a number of projects at various stages
of development, including proposed joint venture projects to
develop Great Wolf Resorts with one or two partners while only
contributing a minority of the total equity for the project. If
we choose to move forward with any such projects, we will seek
to construct these resorts through joint ventures and manage
them after opening in return for development, management,
marketing and licensing fees to be paid to us. We plan to pursue
these proposed projects as financing availability permits. We
have previously entered into resort ownership joint ventures
with Paramount Parks, CNL Lifestyle Properties and The
Confederated Tribes of the Chehalis Reservation, and we are
actively exploring potential joint venture arrangements for
future properties.
Significant portfolio of product offerings that increase
ancillary
on-site
revenues. Our resorts feature a number of
proprietary and branded products and entertainment options that
increase ancillary on-site revenues and distinguish our
resorts self-contained vacation experience. These products
include Buckhorn
Exchangetm
gift shop, Elements Spa and Salon, Youkon
Jackstm
Game Parlor, Northern Lights
Arcadetm,
Cub
Clubtm,
Scooops®
Kid Spa, remote control car racing and miniature golf. Nine of
our resorts feature a MagiQuest attraction, an interactive,
live-action, fantasy adventure game that guests can play
throughout the resort. Additionally, four of our resorts feature
an approximately 1,000 square foot interactive family tech
center,
gr8_spacetm,
which features multiple computer stations offering Internet
access, docking stations for digital music players and multiple
gaming stations. We believe that these ancillary products will
continue to drive additional revenues and enhance the guest
experience and brand loyalty.
International growth opportunities. We believe
that our Great Wolf Lodge brand could be successfully leveraged
in certain international markets. We are currently discussing
opportunities with potential international partners to build
Great Wolf Lodge resorts beyond North America. Similar to our
arrangement with Ripleys in Niagara Falls, Ontario, we are
seeking to enter into licensing
and/or
management agreements with experienced companies that have local
market knowledge in order to increase revenues and expand the
reach of our Great Wolf Lodge brand.
Continual innovation. We intend to leverage
our in-house expertise, in conjunction with the knowledge and
experience of our third-party suppliers and designers, to
develop and implement the latest innovations in family
entertainment activities and amenities, including waterpark
attractions. We have
14
received numerous industry awards for our guests
experiences, our operations, innovative development, sales and
marketing initiatives and materials, and employee retention. We
are currently exploring several new concepts that, we believe,
will allow us to generate additional revenue without requiring
significant capital investment. Among these concepts is an
adaptive re-use model, pursuant to which we would license the
right to use entertainment features currently used in Great Wolf
resorts to existing, full-service hotels, featuring
family-oriented activities. While these concepts are still in
the initial stages of development, we are seeking to
innovatively extend our brand and to take these concepts to
market.
Strong management team with skilled resort level
staff. Our senior management team includes five
individuals who are responsible for our strategic direction and
have an average of seven years of experience with Great Wolf
Resorts and eighteen years of industry experience. Our executive
management has significant experience in the hospitality, family
entertainment and real estate development industries and has
significant expertise in operating complex, themed family
entertainment resorts featuring indoor waterparks. In addition,
we have a team of skilled, loyal and committed employees at each
of our resorts. We offer our resort employees a number of
benefits, including what we believe is a positive and rewarding
work environment, career-oriented training, the ability to
obtain consistent year-round work, which is uncommon in the
resort industry, and career growth opportunities. As a result,
we believe our employees are committed to delivering a superb
customer experience and helping to assure that our guests fully
enjoy their family vacations.
Focus on Safety. We invest heavily in safety
measures in the design, construction and operation of our
resorts. For example, we specifically design our waterparks with
attention to sightlines and safety precautions and use one of
the most respected training methods in the water safety industry
to train each of our lifeguards. We design and construct our
indoor waterparks with
state-of-the-art
air quality and water treatment systems. We also maintain and
periodically upgrade our facilities to ensure that we provide
our guests with
best-in-class
safety measures and systems.
Our
History
We were formed in May 2004 to succeed the family entertainment
resort business of our predecessor companies, The Great Lakes
Companies, Inc. and a number of its related entities, which we
refer to collectively as Great Lakes. Our initial public
offereing occurred shortly after our formation, and we are
listed on the NASDAQ Global market under the ticker symbol
WOLF. Great Lakes had developed and operated hotels
since 1995. In 1999, Great Lakes began its resort operations by
purchasing the Great Wolf Lodge in Wisconsin Dells, WI and
developing the Great Wolf Lodge in Sandusky, OH, which opened in
2001.
Industry
Overview
We operate in the family entertainment resort segment of the
travel and leisure industry. The concept of a family
entertainment resort with an indoor waterpark was first
introduced to the United States in Wisconsin Dells, WI, and has
evolved there since 1987. In an effort to boost occupancy and
daily rates, as well as capture off-season demand, hotel
operators in the Wisconsin Dells market began expanding indoor
pools and adding waterslides and other water-based attractions
to existing hotels and resorts. The success of these efforts
prompted several local operators to build new, larger
destination resorts based primarily on this concept, including
the Wilderness Hotel & Golf Resort, Treasure Island,
Raintree Resort, Kalahari and the Great Wolf Lodge (formerly
known as the Black Wolf Lodge), which our predecessor company
purchased in 1999.
We believe that these properties, which typically are themed and
include other resort features such as arcades, retail shops and
full food and beverage service in addition to the indoor
waterpark, have historically outperformed standard hotels in the
market. We believe that the rate premiums and increased market
share in the Wisconsin Dells for hotels and resorts with some
form of an indoor waterpark can be attributed to several
factors, including the ability to provide a year-round vacation
destination without weather-related risks, the wide appeal of
water-based recreation and the favorable trends in leisure
travel discussed below. No operator or developer other than
Great Wolf Resorts has established a national portfolio of
destination family entertainment resorts featuring indoor
waterparks.
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No standard industry definition for a family entertainment
resort featuring an indoor waterpark has developed. A
Hotel & Leisure Advisors, LLC (H&LA) survey as of
June 2009 indicates that there are 139 open indoor waterpark
resort properties in the United States and Canada. Of the total,
48 are considered indoor waterpark destination
resorts offering more than 30,000 square feet of
indoor waterpark space. Of these 48 properties, 11 are Great
Wolf Resorts properties. Most of our resorts are located in
well-established, traditional drive-to family vacation
destinations, allowing us to leverage the popularity of these
destinations by offering a complementary entertainment option to
existing venues and a high-quality family resort alternative. In
addition, many of these destinations offer beaches, theme parks,
waterparks, amusement parks and many other forms of outdoor
activities that are only available on a seasonal basis. Within
our enclosed resort environment, our guests can enjoy a total
resort experience year round, regardless of weather conditions.
Resort
Operations
Each of our resorts employs a general manager who is responsible
for the operations of the particular resort and who typically
has extensive experience in the hospitality or family
entertainment industry. Our general managers on average oversee
a staff of 400 or more resort employees and are assisted by a
management team, including directors for each of aquatics,
finance, food and beverage, front office, housekeeping, human
resources, maintenance, retail and sales and marketing. A
corporate-level liaison for most departments ensures consistency
throughout our resorts while allowing a particular resort to
tailor its operations to best meet the needs of its guests.
Prior to assuming responsibility for a resort, general managers
and assistant general managers undergo a proprietary management
training program designed to familiarize each trainee with
various facets of our management, operations and development
programs. The program also emphasizes our guest service policies
and provides hands-on operating experience at the resort level.
Our management training program is intended to train assistant
general managers to become future general managers.
We strive to provide our guests with a fun and convenient
experience in a warm and family-friendly environment from the
first day a new resort opens. To achieve this, a team of
experienced management members from our existing resorts, along
with corporate liaisons, begins training personnel at our new
resorts approximately one month prior to a resorts opening
and remains on site at the new resort for up to a month after
opening. We believe that this process ensures that the opening
of a new resort is efficient and that our culture of high
quality and friendly customer service is carried over to our new
resorts, including our guests interactions with our front
desk, housekeeping, waterpark, restaurant and other staff
members. In addition, we train our maintenance personnel to
minimize any operational problems that occur during the opening
of a new resort, including the operation of our waterparks. We
believe that these efforts help to minimize any problems
associated with opening a new resort and give our first guests a
favorable, memorable experience that will build brand loyalty.
Training
and Development
We believe that our ability to provide a friendly family
atmosphere where families can relax, play and reconnect begins
with our people and their ability to deliver quality customer
service. We seek to recruit, train and retain employees who will
make sure that our guests enjoy their stay. We seek to promote
from within our company. Each new resort employee undergoes an
extensive orientation program and is paired with a more veteran
employee for an initial period so that the new employee can
learn more about our resorts, our culture and how we strive to
provide the best possible customer service. Our employees are
committed to our success and focused on ensuring a memorable
experience for each of our guests. We believe that our high
level of customer service sets us apart and promotes valuable
referrals and repeat visits.
Sales and
Marketing
We place a significant emphasis on the sales and marketing of
our family-focused resorts. We work together with a third-party
consulting firm to analyze the demographics of our markets and
to identify potential guests for targeted marketing, both within
our primary market areas and beyond those areas to attract
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occasional or seasonal travelers. We market to these potential
customers through a combination of television, radio, newspaper,
electronic mail and direct mail advertising, including
advertising through local chambers of commerce and convention
and visitors bureaus. We also rely upon repeat guests and guest
referrals, as well as brand recognition and the visibility of
the resorts themselves, which are typically located along major
highways in high traffic areas. In addition, our Web site offers
detailed information about our resorts, including virtual tours
and room layouts.
For new resorts, our marketing efforts generally begin before
construction commences. We establish sales offices to generate
advance bookings. Reservations may be made at our resorts,
through our Web site or through our central reservations call
center. Our call center and highly trained staff allow us to
offer consistent specials throughout our resorts, better track
room occupancy levels and room rates and handle the high volume
of calls that are usually associated with the opening of a
resort.
We maintain an in-house sales force and graphic arts department.
Our experienced staff develops products and promotions for use
in merchandising and marketing promotions. We also engage in
cross-marketing, promotions and co-marketing arrangements with
major vendors. We have received numerous awards for our general
advertising, Web site, print media, radio commercials and sales
presentations.
Maintenance
and Inspections
Each of our resorts has an experienced aquatics director who is
extensively trained and experienced in water quality and safety.
On-site
maintenance personnel frequently inspect our waterparks. These
inspections include safety checks of the equipment in the
waterpark, as well as analyses of water and air quality. Our
water quality levels are regularly monitored and tested by
computers and by a full-time aquatics maintenance engineer, who
works with an additional assistant during our busiest months.
Our air quality system is designed to minimize humidity and
moisture
build-up,
which materially reduces maintenance costs. Furthermore, we use
Ellis & Associates as water safety consultants at our
resorts in order to train lifeguards and audit safety procedures.
Our senior management and the individual resort personnel
evaluate the risk aspects of each resorts operation,
including potential risks to the public and employees and staff.
Each resort has full-time maintenance employees on staff who
ensure building quality and full-time aquatics maintenance
employees who ensure the ride safety and air and water quality
inside the resorts indoor waterpark. We use a state of the
art filtration system and ozonators to balance the water and air
quality within the waterpark in order to accommodate fluctuating
quantities of visitors.
Development
Criteria
If and to the extent we are involved in the development process
for new resorts, we choose or suggest sites for the development
of new resorts by considering a number of factors, including:
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Large target customer base. We select
development sites that generally have a minimum of five million
target customers within a convenient driving distance. Because
we offer an affordable vacation experience, we appeal to
families in a variety of income ranges.
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Recognized tourist destination. We generally
focus on drive-to destinations that attract a large number of
tourists, including both emerging and traditional family
vacation markets. We believe we can charge premium rates in
these markets due to the high quality of our resorts and our
family-oriented amenities and activities. In addition, the
indoor nature of many of our amenities and activities allows us
to reduce the impact of seasonality that negatively affects
other attractions in these areas. These areas also often have
active and effective local visitors and convention bureaus that
complement our marketing and advertising efforts at little or no
cost to us.
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Highly visible and large sites. We generally
develop resorts in highly visible locations along major
roadways. Visibility from highways enhances easy drive-to
access, provides marketing benefits due to high volumes of
traffic and often produces synergies from adjacent land uses or
complementary
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developments. We generally choose sites that have enough acreage
to allow for potential expansions and future sales of out-lots.
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Based upon these factors, we have identified over 50 domestic
markets as potential locations for our resorts. However, if we
choose to pursue a development in the future, we will likely
work with a joint venture partner in order to limit our required
equity contribution and enhance our fee revenues, including
development, management and licensing fees.
Once we have identified a market that meets our development
criteria, we search for potential sites to recommend to a
potential licensor or joint venture partner. Acceptable sites
may be difficult to find in some areas. We perform initial
analyses of the permitting process and access to utilities
before acquiring a sufficient amount of land from one or more
landowners. Based upon the target customer base of the market,
we develop initial specifications for the resort, such as the
number of guest suites and size of the indoor waterpark and
other amenities. We also formally begin the potentially lengthy
and difficult process of obtaining the necessary approvals and
permits from the appropriate local governmental bodies,
including the necessary water rights and environmental permits.
Once the permitting process is complete, we or the joint venture
that owns the resort, secures financing for the project and
begin construction on the resort. This overall development
process generally takes from two to four years or longer from
identification of a market to completion of a resort.
Competition
Our resorts compete with other forms of family vacation travel,
including theme parks, waterparks, amusement parks and other
recreational activities, including other resorts located near
these types of attractions. Our business is also subject to
factors that affect the recreation and leisure and resort
industries generally, such as general economic conditions and
changes in consumer spending habits. We believe that the
principal competitive factors of a family entertainment resort
include location, room rates, name recognition, reputation, the
uniqueness and perceived quality of the attractions and
amenities, the atmosphere and cleanliness of the attractions and
amenities, the quality of the lodging accommodations, the
quality of the food and beverage service, convenience, service
levels and reservation systems.
A Hotel & Leisure Advisors, LLC (H&LA) survey as
of June 2009 indicates that there are 139 open indoor waterpark
resort properties in the United States and Canada. Of the total,
48 are considered indoor waterpark destination
resorts offering more than 30,000 square feet of
indoor waterpark space. Of these 48 properties, 11 are Great
Wolf Resorts properties.
As a result of our market presence and our management
teams substantial experience, we believe we have an
opportunity to capitalize on our first-mover advantage in this
industry segment and to achieve significant brand recognition.
While we believe that our first-mover advantage is very
beneficial to us, it does provide our competitors with an
opportunity to monitor our success in our chosen markets. As a
result, a competitor may choose not to enter one of our markets
based on our performance, or may subsequently develop a resort
in our markets that is newer, has additional amenities, is
strategically located or offers more
and/or
larger waterpark attractions than our resorts.
In several of our markets, there are few, if any, other family
entertainment resorts featuring indoor waterparks. However, in
Wisconsin Dells, Wisconsin, where indoor waterpark resorts were
first introduced, there are approximately 16 other resorts and
hotels with some type of indoor water-related activity or
amenity. As a result, we face significant competition from both
lower priced, un-themed, waterparks and larger, more expensive
waterparks with thrill rides and other attractions in the
Wisconsin Dells market. While the Wisconsin Dells market has a
significant number of resorts with indoor waterparks, we believe
the competitive landscape in that small, regional market is not
representative of the competition we may face as we further
expand our portfolio of resorts. The vast majority of indoor
waterpark resorts in Wisconsin Dells are family-owned or
privately operated businesses that have yet to develop
additional resorts outside of Wisconsin Dells. In addition, we
believe our ability to compete effectively in this highly
competitive market will enable us to more effectively compete in
other markets where we may not be the only family entertainment
resort. In addition to Wisconsin Dells, we face direct
competition from other indoor waterpark destination resorts in
the Sandusky, Traverse City, Kansas City, Williamsburg, Pocono
Mountains and Mason areas.
18
We anticipate that competition within some of our markets will
increase in the foreseeable future. We believe that a number of
other resort operators are developing or considering the
development of family entertainment resorts with indoor
waterparks, which will compete with our resorts.
Governmental
Regulation
The ownership and management of our resorts, as well as our
development and construction of new resorts, subjects us to
federal, state and local laws regulating zoning, land
development, land use, building design and construction, and
other real estate-related laws and regulations. In addition, a
number of states regulate the permitting and licensing of
resorts, and some of the individual components of our resorts
such as our spas, waterparks, and others, by requiring
registration, disclosure statements and compliance with specific
standards of conduct. Our failure to maintain or acquire the
requisite licenses, permits and authorizations required by such
laws and regulations, as well as any failure on our part to
comply with registration, disclosure and standards of conduct
required by such laws and regulations could impact the
operation, profitability and success of our current resorts or
the development, completion and success of any resorts we may
develop in the future. We believe that each of our resorts has
the necessary permits and approvals to operate its business and
is in material compliance with all applicable registration,
disclosure and conduct requirements. We intend to continue to
obtain such permits and approvals for any resorts we may develop
in the future or additions or renovations to current resorts and
to ensure that such resorts and additions or renovations comply
with applicable registration, disclosure and conduct
requirements.
We are also subject to laws and regulations governing our
relationship with employees, including minimum wage
requirements, overtime, working conditions and work permit
requirements. An increase in the minimum wage rate, employee
benefit costs or other costs associated with employees could
increase our overall labor costs.
The operation of our waterparks subjects us to state and local
regulations governing the quality of the water we use in our
waterparks, which may include bacteriological, chemical,
physical and radiological standards. In addition to inspections
we conduct on our own, state and local authorities may also
conduct inspections of our waterparks to determine our
compliance with applicable standards. If we are found to be in
violation of such regulations we could be subject to various
penalties, including, but not limited to, monetary fines and the
temporary closure of our waterparks. Changes in state or local
regulations could impose more stringent standards with which we
would have to comply.
We are subject to both federal and state environmental laws and
regulations, including laws and regulations governing the
discharge of water from our waterparks. Specifically, under the
requirements of the Federal Clean Water Act, we must obtain
National Pollutant Discharge Elimination System permits from the
Environmental Protection Agency or from the state environmental
agency to which the permit program has been delegated for
discharges into waterways and comply with the permit terms
regarding wastewater quality and discharge limits. Such permits
must be renewed from
time-to-time,
as required by regulation, and additional capital expenditures
for wastewater treatment systems associated with the renewal of
our water discharge permits may be required. Importantly,
changes in federal or state legislation or regulations could
impose more stringent release standards with which we would have
to comply. Currently, our resort in the Pocono Mountains is our
only property subject to such laws and regulations governing the
discharge of water and we intend to comply with these laws and
regulations as we operate that property.
As a place of public accommodation, our resorts are subject to
the requirements of the Americans with Disabilities Act of 1990,
which we refer to as the ADA. As such, our resorts are required
to meet certain federal requirements related to access and use
by disabled persons. While we believe that our resorts are
substantially in compliance with these requirements, we have not
conducted an audit or investigation of all of our resorts to
determine our compliance. Further, federal legislation or
regulations may amend the ADA to impose more stringent
requirements with which we would have to comply.
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Environmental
Matters
Our operations and properties are subject to federal, state and
local laws and regulations relating to the protection of the
environment, natural resources and worker health and safety,
including laws and regulations governing and creating liability
relating to the management, storage and disposal of hazardous
substances and other regulated materials. Our properties are
also subject to various environmental laws and regulations that
govern certain aspects of our on-going operations. These laws
and regulations control such things as the nature and volume of
our wastewater discharges, quality of our water supply and our
waste management practices. The costs of complying with these
requirements, as they now exist or may be altered in the future,
could adversely affect our financial condition and results of
operations.
Because we own and operate real property, various federal, state
and local laws may impose liability on us for the costs of
removing or remediating various hazardous substances, including
substances that may be currently unknown to us, that may have
been released on or in our property or disposed by us at
third-party locations. The principal federal laws relating to
environmental contamination and associated liabilities that
could affect us are the Resource Conservation and Recovery Act
and the Comprehensive Environmental Response, Compensation and
Liability Act; state and local governments have also adopted
separate but similar environmental laws and regulations that
vary from state to state and locality to locality. These laws
may impose liability jointly and severally, without regard to
fault and whether or not we knew of or caused the release. The
presence of hazardous substances on a property or the failure to
meet environmental regulatory requirements may materially
adversely affect our ability to use or sell the property, or to
use the property as collateral for borrowing, and may cause us
to incur substantial remediation or compliance costs. In
addition, if hazardous substances are located on or released
from one of our properties, we could incur substantial
liabilities through a private party personal injury claim, a
claim by an adjacent property owner for property damage or a
claim by a governmental entity for other damages, such as
natural resource damages. This liability may be imposed on us
under environmental laws or common-law principles.
We obtain environmental assessment reports on the properties we
own or operate as we deem appropriate. These reports have not
revealed any environmental liability or compliance concerns that
we believe would materially adversely affect our financial
condition or results of operations. However, the environmental
assessments that we have undertaken might not have revealed all
potential environmental liabilities or claims for such
liabilities. It is also possible that future laws, ordinances or
regulations or changed interpretations of existing laws and
regulations will impose material environmental liability or
compliance costs on us, that the current environmental
conditions of properties we own or operate will be affected by
other properties in the vicinity or by the actions of third
parties unrelated to us or that our guests could introduce
hazardous or toxic substances into the resorts we own or manage
without our knowledge and expose us to liability under federal
or state environmental laws. The costs of defending these
claims, complying with as yet unidentified requirements,
conducting this environmental remediation or responding to such
changed conditions could adversely affect our financial
condition and results of operations.
Some of our resort properties may have contained, or are
adjacent to or near other properties that have contained or
currently contain underground storage tanks for the storage of
petroleum products or other hazardous or toxic substances. If
hazardous or toxic substances were released from these tanks, we
could incur significant costs or, with respect to tanks on our
property, be liable to third parties with respect to the
releases.
On occasion, we may elect to develop properties that have had a
history of industrial activities
and/or
historical environmental contamination. Where such opportunities
arise, we engage third-party experts to evaluate the extent of
contamination, the scope of any needed environmental
clean-up
work, and available measures (such as creation of barriers over
residual contamination and deed restrictions prohibiting
groundwater use or disturbance of the soil) for ensuring that
planned development and future property uses will not present
unacceptable human health or environmental risks or exposure to
liabilities. If those environmental assessments indicate that
the development opportunities are acceptable, we also work with
appropriate governmental agencies and obtain their approvals of
planned site
clean-up,
development activities, and the proposed future property uses.
We have followed that process in connection with the development
of our Blue Harbor Resort in Sheboygan, Wisconsin, where the
City of Sheboygan has arranged for environmental
20
clean-up
work and ongoing groundwater monitoring and we have agreed to
the use of a barrier preventing contact with residual
contamination and implementation of a deed restriction limiting
site activities. To our knowledge, all work at our Sheboygan
resort has been conducted in accordance with requirements
imposed by the Wisconsin Department of Natural Resources. Based
on these efforts, we are not aware of any environmental
liability or compliance concerns at our Sheboygan resort that we
believe would materially adversely affect our financial
condition or results of operations. It is possible; however,
that our efforts have not identified all environmental
conditions at the property or that environmental condition and
liabilities associated with the property could change in the
future.
Future acquisitions of properties subject to environmental
requirements or affected by environmental contamination could
require us to incur substantial costs relating to such matters.
In addition, environmental laws, regulations, wetlands,
endangered species and other land use and natural resource
issues affecting either currently owned properties or sites
identified as possible future acquisitions may increase costs
associated with future site development and construction
activities or business or expansion opportunities, prevent,
delay, alter or interfere with such plans or otherwise adversely
affect such plans.
Insurance
We believe that our properties are covered by adequate fire,
flood and property insurance, as well as commercial liability
insurance with what we believe are commercially reasonable
deductibles and limits for our industry. Changes in the
insurance market over the past few years may have increased the
risk that affordable insurance may not be available to us in the
future.
While our management believes that our insurance coverage is
adequate, if we were held liable for amounts and claims
exceeding the limits of our insurance coverage or outside the
scope of our insurance coverage, our business, results of
operations and financial condition could be materially and
adversely affected.
Intellectual
Property
We have registered, applied for the registration of or claim
ownership of a variety of service marks, copyrights and
trademarks for use in our business, including Blue Harbor
Resort, Great Wolf Lodge, Great Wolf Resorts, gr8_space,
KidCabin and Scooops Kid Spa in the United States and, where
appropriate, in foreign countries. There can be no assurance
that we can obtain the registration for the marks where
registration has been sought. We are not aware of any facts that
would negatively impact our continuing use of any of the above
trade names, service marks or trademarks. We consider our
intellectual property rights to be important to our business and
actively defend and enforce them.
Employees
As of December 31, 2009, we had approximately 200 corporate
employees, including our central reservations center employees,
and approximately 4,600 resort-level employees, approximately
1,900 of whom were part-time employees. Unlike more seasonal
resorts and attractions, we are open year-round and are able to
attract and retain high quality employees throughout the year.
However, we do have fewer part-time employees during the winter
months. None of our employees are covered by a collective
bargaining agreement. We believe that our relationship with our
employees is generally good.
Offices
We lease approximately 13,800 square feet of office space
for our corporate headquarters office and approximately
9,800 square feet of office space for our central
reservations call center operations in Madison, Wisconsin. We
also lease approximately 1,400 square feet of office space
in Woodbridge, Virginia and approximately 2,700 square feet
of office space in Lorain, Ohio. We believe these facilities are
adequate for our current needs.
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Domestic
and Foreign Operations
We have derived a portion of our revenues from licensing fees,
management fees, construction management fees and central
reservations fees paid by the Great Wolf Lodge resort located in
Niagara Falls, Ontario, Canada. During 2009, 2008 and 2007, the
total revenue we received from U.S. operations was
$262,543, $243,041 and $185,015, respectively, and the total
revenue from Canadian operations was $1,489, $2,497 and $2,565,
respectively. We receive no revenue from any foreign country
other than Canada. We have no long-lived assets located outside
of the United States.
Code
of Business Conduct and Ethics
We have adopted a Code of Business Conduct and Ethics that
applies to all our employees, including our principal executive
officer and senior financial officers. It is available in the
investor relations section of our Web site, which is located at
www.greatwolf.com. In the event that we make changes to
or provide waivers from the provisions of our Code of Business
Conduct and Ethics that the United States Securities Exchange
Commission (SEC) or any other regulatory agency or NASDAQ
requires us to disclose, we intend to disclose these events in
the investor relations section of our Web site.
Available
Information
We maintain a Web site at www.greatwolf.com. Our annual
report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to such reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934 (the Exchange Act), as well as our annual report to
stockholders, proxy statements and Section 16 reports on
Forms 3, 4, and 5, are available free of charge via
EDGAR/IDEA through the SECs Web site at
www.sec.gov. On our Web site we have a page for all of
our filings that is updated automatically when filings are added
to the SECs Web site.
Legal
Proceedings
We are involved in litigation from time to time in the ordinary
course of our business. We do not believe that the outcome of
any such pending or threatened litigation will have a material
adverse effect on our financial condition or results of
operations. However, as is inherent in legal proceedings where
issues may be decided by finders of fact, there is a risk that
unpredictable decisions adverse to us could be reached.
Risks
Related to Our Business Activities
The risk factors set forth below are applicable to Great Wolf
Resorts. You should carefully consider the following factors in
evaluating our company, our properties and our business. The
occurrence of any of the following risks could materially
adversely affect, among other things, our business, financial
condition and results of operations.
Current
economic conditions, including recent disruptions in the
financial markets may adversely affect our industry, business
and results of operations, our ability to obtain financing on
reasonable and acceptable terms and the market price of our
common stock.
The United States economy has undergone a major recession, and
the future economic environment may continue to be less
favorable than that of recent years. This recession has and
could further lead to reduced consumer and commercial spending
in the foreseeable future. The hospitality industry has
experienced significant downturns in connection with declines in
general economic conditions. For example, we believe that lower
than expected occupancy and average daily room rates in recent
periods at our Traverse City, Sandusky and Sheboygan resorts are
due, in part, to the adverse economic conditions in the regions
in which these resorts are located. Declines in consumer and
commercial spending have driven us and our competitors to reduce
pricing, which has had a negative impact on our results of
operations. A continued softening in the economy may adversely
and materially affect our industry, business and results of
operations and we cannot
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accurately predict how severe and prolonged any downturn might
be. Moreover, reduced revenues as a result of a softening of the
economy may also reduce our working capital and interfere with
our long term business strategy.
Our business model is highly dependent on consumer spending, and
a vacation experience at one of our resorts is a discretionary
expenditure for a family. Over the past two years, the slowing
U.S. economy has led to a decrease in credit for consumers
and a related decrease in consumer discretionary spending. This
trend continued through 2009 as consumers experienced several
negative economic impacts, including:
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severe turbulence in the banking and lending sectors, which has
led to a general lessening of the availability of credit to
consumers;
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an increased national unemployment rate;
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a continuing decline in the national average of home prices and
an increase in national foreclosure rates; and
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high volatility in the stock market that led to substantial
declines in stock values and aggregate household savings from
2007 to 2009.
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These and other factors impact the amount of discretionary
income for consumers and consumer sentiment toward discretionary
purchases. As a result, these types of items could negatively
impact consumer spending in future periods. A sustained decrease
in overall consumer discretionary spending could have a
material, adverse effect on our business, financial condition
and results of operations.
The United States equity and credit markets have recently
experienced significant price volatility, dislocations and
liquidity disruptions, which have caused market prices of many
stocks to fluctuate substantially and the spreads on prospective
and outstanding debt financings to widen considerably. These
circumstances have materially impacted liquidity in the
financial markets, making terms for certain financings
materially less attractive, and in certain cases have resulted
in the unavailability of certain types of financing. In
particular, the market for securitized debt (which we have used
in the past for certain financing transactions) has been
dramatically reduced over the past two years. Continued
uncertainty in the equity and credit markets may negatively
impact our ability to access additional short-term and long-term
financing, including future debt securitization transactions and
construction financing, on reasonable terms or at all, which
would negatively impact our liquidity and financial condition. A
continued downturn in the equity or credit markets may cause us
to seek alternative sources of potentially less attractive
financing, and may require us to adjust our business operations
accordingly. These disruptions in the financial markets also may
adversely affect our credit rating and the market value of our
common stock.
In addition, if the current pressures on credit continue or
worsen, we may not be able to refinance, if necessary, our
outstanding debt when due, which could have a material adverse
effect on our business. If our operating results worsen
significantly and our cash flow or capital resources prove
inadequate, or if interest rates increase significantly, we
could face liquidity problems that could materially and
adversely affect our results of operations and financial
condition.
We may
not be able, by ourselves or with others, to develop new resorts
or further develop existing resorts on a timely or cost
efficient basis, which would adversely affect our growth
strategy.
As part of our growth strategy, we currently intend to develop,
or license others to develop, additional resorts or possibly
further expand certain of our existing resorts. Development
involves substantial risks, including the following risks:
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development costs may exceed budgeted or contracted amounts or
may exceed available capital;
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increases in the costs of materials or supplies used in
construction of our resorts;
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changes in applicable building codes, construction materials,
labor costs or construction methodologies may increase
development costs;
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delays in architectural or other design-related services, or in
the commencement or completion of construction;
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failure to obtain all necessary zoning, land use, occupancy,
construction, operating and other required governmental permits
and authorizations;
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changes in real estate, zoning, land use, environmental and tax
laws;
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unavailability of financing on favorable or any terms;
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failure of developed properties to achieve desired revenue or
profitability levels once opened;
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negative changes in the local markets, the local competitive
environment or in local economic conditions that occur between
the commencement of development and the completion of the resort;
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scarcity of suitable development sites, due to existing
development, physical limitation or competition for sites from
competitors that may have greater financial resources or risk
tolerance than we do or other factors; and
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incurrence of substantial costs in the event a development
project is abandoned or modified prior to completion.
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In particular, resort construction projects entail significant
risks, including shortages of design and construction expertise,
materials or skilled labor, unforeseen engineering,
environmental or geological problems, work stoppages, weather
interference, floods and unanticipated cost increases. There are
also a limited number of suppliers and manufacturers of the
equipment we use in our indoor waterparks. We may not be able to
successfully manage any future development to minimize these
risks, and present or future developments may not perform in
accordance with our previous developments or our expectations.
The failure to successfully develop our new resorts could have a
material, adverse effect on our growth strategies and our
business, financial condition and results of operations.
We
compete with other family vacation travel destinations and
resorts.
Our resorts compete with other forms of family vacation travel
and leisure activities, including theme, water and amusement
parks and other recreational activities. Our business is also
subject to factors that affect the recreation and leisure and
resort industries generally, such as general economic conditions
and changes in consumer spending habits. We believe the
principal competitive factors of a family entertainment resort
include:
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location,
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room rates,
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name recognition,
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reputation,
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the uniqueness and perceived quality of the attractions and
amenities,
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the atmosphere and cleanliness of the attractions and amenities,
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the quality and perceived value of the lodging accommodations,
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the quality and perceived value of the food and beverage service,
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convenience,
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service levels and
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reservation systems.
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Many of our markets have become more competitive in the past
five years, including in particular our Wisconsin Dells,
Sandusky, Traverse City, Kansas City, Williamsburg, Pocono
Mountains and Mason markets.
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We anticipate that competition within some of our markets will
increase further in the foreseeable future. A number of other
resort operators are developing family entertainment resorts
with indoor waterparks that will compete with some or all of our
resorts. We compete for guests and for new development sites
with certain of these entities that may have greater financial
resources than we do and better relationships with lenders and
sellers of real estate. These entities may be able to accept
more risk than we can prudently manage and may have greater
marketing and financial resources. Further, new or existing
competitors may significantly reduce their rates, as they have
in the past, or offer greater convenience, services or
amenities, significantly expand or improve resorts, including
the addition of thrill rides, in markets in which we
operate. Such events could materially adversely affect our
business and results of operations.
We
have a history of losses and we may not be able to achieve or
sustain profitability.
We incurred net losses for the previous six fiscal years. We
cannot guarantee that we will become profitable. Even if we do
become profitable, given the increasing competition in our
industry, current economic conditions and capital-intensive
nature of our business, we may not be able to sustain or
increase any profitability we may achieve in the future on a
quarterly or annual basis, and our failure to do so could
adversely affect our business and financial condition.
We may
not be able to achieve or manage our expected growth, which
could adversely affect our operating results.
Since 1999, we have experienced substantial growth as we have
grown from one resort to our current portfolio of 12 resorts at
December 31, 2009. We intend to continue to develop
additional resorts and manage additional licensed resorts owned
either by joint ventures in which we have an equity interest or
by third parties. Our anticipated growth could place a strain on
our management, employees and operations. Our growth has
increased our operating complexity and the level of
responsibility for new and existing management. Our ability to
compete effectively and to achieve
and/or
manage our recent and future growth effectively will depend on
our ability to implement and improve financial and management
information systems on a timely basis and to effect changes in
our business, such as implementing internal controls to handle
the increased size of our operations and hiring, training,
developing and managing an increasing number of experienced
management-level and other employees. Unexpected difficulties
during expansion, the loss of or failure to attract and retain
qualified employees or our inability to respond effectively to
recent growth or plan for future expansion, could adversely
affect our results of operations.
We
currently have one resort located outside of the United States,
and international expansion may cause the proportion of our
international business to expand. Many factors affecting
business activities outside the United States could adversely
impact this business.
We currently have a licensing arrangement with a resort in
Canada, and our international expansion plan is to license
and/or manage additional resorts that are located in foreign
countries and are wholly-owned or principally owned by third
parties.
Factors that could affect our international business will vary
by region and market and generally include:
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instability or changes in social, political
and/or
economic conditions that could disrupt the trade activity in the
countries where our resorts are located;
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the imposition of additional duties, taxes and other charges on
imports and exports;
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changes in foreign laws and regulations;
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any inability to enforce contracts or intellectual property
protections under the laws of the relevant jurisdiction;
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the availability of qualified labor and other resources in the
relevant region;
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potential and actual international terrorism and hostilities;
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the adoption or expansion of trade sanctions or other similar
restrictions;
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tax laws and other regulations that may impede our ability to
receive revenues from international resorts;
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recessions in foreign economies or changes in local economic
conditions; and
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changes in currency valuations in specific countries or markets.
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The occurrence or consequences of any of these risks could
affect our ability to operate in the affected regions, which
could have a material, adverse effect on our growth strategies
and our financial results.
Accidents
or injuries at our resorts, particularly in our waterparks, may
subject us to liability, and accidents or injuries at our
resorts or at competing resorts with waterparks could adversely
affect our safety reputation and ability to attract customers,
which would harm our business, financial condition and results
of operations.
There are inherent risks of accidents or injuries at family
entertainment resorts, including accidents or injuries at
waterparks, particularly for young children if their parents do
not provide appropriate supervision. The lifeguards in our
indoor waterparks and our other resort staff cannot prevent
every accident or injury. Potential waterpark accidents and
injuries include falls, cuts or other abrasions, concussions and
other head injuries, sickness from contaminated water,
chlorine-related irritation, injuries resulting from equipment
malfunctions and drownings. One or more accidents or injuries at
any of our waterparks or at other waterparks could reduce
attendance at our resorts, adversely affect our safety
reputation among our potential customers, decrease our overall
occupancy rates, increase the cost of or make unavailable to us
the appropriate liability insurance policies and increase our
operating costs by requiring us to take additional measures to
make our safety precautions even more visible and effective.
If accidents or injuries occur at any of our resorts, we may be
held liable for costs related to the injuries. We maintain
insurance of the type and in the amounts that we believe are
commercially reasonable and that are available to businesses in
our industry, but we cannot be certain that our liability
insurance will be adequate or available at all times and in all
circumstances to cover any liability for these costs. The
liability insurance carried by Great Lakes prior to our initial
public offering (IPO) may not be adequate or available to cover
any liability related to incidents occurring prior to our IPO.
Our business, financial condition and results of operations
would be adversely affected to the extent claims and associated
expenses resulting from accidents or injuries exceed our
insurance recoveries.
Our
business is seasonal and largely dependent upon family vacation
patterns, which may cause fluctuations in our
revenues.
Since most families with young children choose to take vacations
during school breaks and on weekends, our occupancy is highest
on the weekends and during months with prolonged school breaks,
such as the summer months and spring break weeks in March and
April. Our occupancy is generally lowest during May and
September as children return to school following these prolonged
breaks. As a result of these family vacation patterns, our
revenues may fluctuate. We may be required to enter into
short-term borrowings in slower periods in order to offset such
fluctuations in revenues and to fund our anticipated
obligations. In addition, adverse events occurring during our
peak occupancy periods would have an increased impact on our
results of operations. We may not be able to secure short-term
borrowing on favorable terms, or at all. A failure to compensate
adequately for seasonality could have a material, adverse effect
on our financial condition and business operations and could
severely limit our expansion plans.
We may
not be able to attract a significant number of customers from
our key target markets, which would adversely affect our
business, financial condition and results of
operations.
Our strategy emphasizes attracting and retaining customers from
the local, or drive-to, markets within a convenient driving
distance from each of our resorts. Any resorts we develop or
manage in the future are similarly likely to be dependent
primarily on the markets in the immediate vicinity of such
resorts. Regional economic difficulties, such as the issues
affecting domestic automotive manufacturers and the related
impact in Michigan and surrounding areas, may have a
disproportionately negative impact on our resorts in the
affected markets. In addition, because we are dependent to a
large extent on customers who drive to our locations, a
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significant increase in the price of gasoline in our local
markets or nationally may also increase the real or perceived
cost of a vacation at our resorts and therefore have a negative
effect on our ability to attract customers to our resorts. We
may not be able to continue to attract a sufficient number of
customers in our local markets to make our resort operations
profitable. If we fail to do so, our business, financial
condition and results of operations would be adversely affected.
Because
we concentrate in a single industry segment, we may be adversely
affected by a downturn in that industry segment.
Our assets and operations are concentrated in a single industry
segment family entertainment resorts. Our primary
current strategy is to expand the number of our resorts and
improve our existing resorts. Therefore, a downturn in the
entertainment, travel or vacation industries, in general, and
the family entertainment resort segment, in particular, could
have an adverse effect on our business and financial condition.
Adverse
changes in consumer spending habits may affect our growth,
financial condition and results of operations.
The success of our operations depends to a significant extent
upon a number of factors relating to discretionary consumer
spending, including economic conditions affecting discretionary
consumer spending such as employment, business conditions,
interest rates and taxation. Recently, consumer spending has
been adversely affected by economic conditions. Accordingly, our
growth, financial condition and results of operations have been
adversely impacted. Continued adverse developments affecting the
local economies in our markets, the U.S. national economy
or, as we expand internationally, economies throughout the
world, including a general tightening of the availability of
credit, increasing interest rates, increasing energy costs, acts
of war or terrorism, natural disasters, declining consumer
confidence, continuing high rates of unemployment, further
declines in housing prices or increases in foreclosure rates
(particularly in our local markets), increased local or federal
taxes, decreases in real or perceived wealth or significant
declines in the stock market could lead to a further reduction
in discretionary spending on leisure activities, thereby
materially and adversely affecting our growth strategies and our
business, financial condition and results of operations.
Increases
in operating costs and other expense items could reduce our
operating margins and adversely affect our growth, financial
condition and results of operations.
Increases in operating costs due to inflation and other factors
may not be directly offset by increased room rates and other
revenue. Increases in operating costs may also negatively affect
the profitability of our licensed and managed resorts, which may
therefore have a material, adverse effect on our license fee and
management fee revenues as well as the value of our minority
investments in such resorts. Our most significant operating
costs are our labor, energy, insurance and property taxes. Many,
and in some cases all, of the factors affecting these costs are
beyond our control.
Labor is our primary resort-level operating expense. As of
December 31, 2009, we employed approximately
4,600 hourly-wage and salaried employees in our resorts. If
we face labor shortages or increased labor costs because of
increased competition for employees, higher employee turnover
rates or increases in the applicable minimum wage or other
employee benefits costs (including costs associated with health
insurance coverage), our operating expenses could increase and
our growth could be adversely affected. Our success depends in
part upon our ability to attract, motivate and retain a
sufficient number of qualified employees, including resort
managers, lifeguards, waterpark maintenance professionals and
resort staff, necessary to keep pace with our expansion
schedule. The number of qualified individuals needed to fill
these positions is in short supply in some areas. Any future
inability to recruit and retain sufficient individuals may delay
the planned openings of new resorts. Competition for qualified
employees could also require us to pay higher wages to attract a
sufficient number of employees.
Energy costs also account for a significant portion of our total
resort-level operating expenses. The price of energy is
volatile, and shortages sometimes occur. Significant increases
in the cost of energy, or shortages of energy, could interrupt
or curtail our operations, lower our operating margins, or both.
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The costs for maintaining adequate insurance coverage fluctuate
and are generally beyond our control. If insurance rates
increase and we are not able to pass along those increased costs
to our customers through higher room rates and amenity costs,
our operating margins could suffer.
Most of our resorts are subject to real and personal property
taxes. The real and personal property taxes on our resorts may
increase or decrease as tax rates change and as our resorts are
assessed or reassessed by taxing authorities. If property taxes
increase and we are unable to pass these increased costs along
to our customers through higher room rates and amenity costs,
our financial condition and results of operations may be
adversely affected.
Uninsured
losses or losses in excess of our insurance coverage could
adversely affect our financial condition and our cash flow, and
there are a limited number of insurers that will underwrite
coverage for resorts with indoor waterparks.
We maintain comprehensive liability, fire, flood (where
appropriate) and extended coverage insurance with respect to our
resorts with policy specifications, limits and deductibles that
we believe are commercially reasonable for our operations and
are available to businesses in our industry. Certain types of
losses, however, may be either uninsurable or not economically
insurable, such as losses due to earthquakes, riots, acts of war
or terrorism, or losses related to the award of punitive damages
in a legal action. Should an uninsured loss occur, we could lose
both our investment in, and anticipated cash flow from, a resort
(including cash flows from our license or management
agreements). If any such loss is insured, we may be required to
pay a significant deductible on any claim for recovery of such a
loss prior to our insurer being obligated to reimburse us for
the loss or the amount of the loss may exceed our coverage for
the loss. In addition, we may not be able to obtain insurance in
the future at acceptable rates, or at all, and insurance may not
be available to us on favorable terms or at all, including
insurance for the construction and development of our resorts,
especially since there are a limited number of insurance
companies that underwrite insurance for indoor waterparks.
We or
the principal owners of our licensed and managed resorts will be
required to make certain capital expenditures to maintain the
quality of our resorts, and the failure to make such
expenditures could materially and adversely affect our brand
equity as well as our business, our financial condition and
results of operations.
Our resorts have an ongoing need for renovations and other
capital improvements, including periodic replacement of
furniture, fixtures and equipment. The cost of such capital
improvements could have an adverse effect on our financial
condition and results of operations. Such renovations involve
certain risks, including the possibility of environmental
problems, construction cost overruns and delays, the possibility
that we will not have available cash to fund renovations or that
financing for renovations will not be available on favorable
terms, if at all, uncertainties as to market demand or
deterioration in market demand after commencement of renovation
and the emergence of unanticipated competition from other
entities. The owners of our licensed and managed resorts will
face similar risks and capital expenditure requirements, and
third-party owners or licensees may be unable to access capital
or unwilling to spend available capital when necessary, even if
required by the terms of our management or license agreements.
If we or the owners of our licensed and managed resorts do not
meet those capital expenditure needs, we may not be able to
maintain the quality of our resorts. If we are unable to
maintain the quality of our resorts, our brand equity and
customer satisfaction will be negatively affected, thereby
reducing our ability to grow our business, attract new customers
and drive repeat and referral business, which could have a
material and adverse effect on our business, financial condition
and results of operations.
We may
not be able to adequately protect our intellectual property,
which could harm the value of our brands and adversely affect
our business.
The success of our resorts depends in part on our brands, logos
and branded merchandise. We rely on a combination of service
marks, copyrights, trademarks and similar intellectual property
rights to protect our brands, logos, branded merchandise and
other intellectual property. The success of our growth strategy
depends on our continued ability to use our existing trademarks
and service marks in order to increase brand awareness and
further develop our brand in both domestic and international
markets. We also use our trademarks and other intellectual
property on the Internet. If our efforts to protect our
intellectual property are not adequate, or if any third party
misappropriates or infringes on our intellectual property,
either in print or on the Internet,
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the value of our brands may be harmed, which could have a
material adverse effect on our business, including the failure
of our brands, logos and branded merchandise to achieve and
maintain market acceptance.
We have licensed our Great Wolf Lodge brand and intend to
further license the brand in domestic and international markets.
While we try to ensure that the quality of our brand is
maintained by our current licensees, and will be maintained by
any future licensees, we cannot assure that these licensees will
not take actions that adversely affect the value of our
intellectual property or reputation.
We have registered certain trademarks and have other trademark
registrations pending in the United States and foreign
jurisdictions. There is no guarantee that our trademark
registration applications will be granted. In addition, the
trademarks that we currently use have not been registered in all
of the countries in which we do, or intend to do, business and
may never be registered in all of these countries. We may not be
able to adequately protect our trademarks, and our use of these
trademarks may result in liability for trademark infringement,
trademark dilution or unfair competition.
We may not have taken all the steps necessary to protect our
intellectual property in the United States and foreign
countries. In addition, the laws of some foreign countries do
not protect intellectual property rights to the same extent as
the laws of the United States, and the risks related to foreign
laws will increase as we expand internationally.
Because
nine of our resorts derive a portion of their revenue and EBITDA
from the MagiQuest attraction, if supplies, parts or maintenance
and repair services for that attraction become unavailable,
forcing us to close or reduce the operations of one or more of
the attractions, it could have an adverse effect on our
financial results and/or condition.
The MagiQuest attractions located in nine of our resorts provide
a component of our overall revenue and EBITDA. Replacement
parts, supplies, maintenance and repair services are also
currently available only from a single supplier with whom we
have a longstanding relationship and long-term supplies purchase
agreements. The supplier currently owns patents that would
likely prevent any other party from providing supplies or parts
to us without a license from the supplier.
If the supplier becomes unwilling or unable to provide of these
supplies and services, we may be unable to continue operating
the MagiQuest attractions in one or more of our resorts unless
and until the suppliers unwillingness or inability is
resolved, or another supplier is obtained, if possible,
potentially at higher cost. Any temporary or permanent closure
of the MagiQuest attractions in our resorts could have an
adverse effect on our business, financial condition and result
of operations.
Our
operations may be adversely affected by extreme weather
conditions and the impact of disasters.
We currently operate, and in the future intend to operate, our
resorts in a number of different markets, each of which is
subject to local weather patterns and their effects on our
resorts, especially our guests ability to travel to our
resorts. Extreme weather conditions can from time to time have a
material adverse impact upon individual resorts or particular
regions. Our resorts are also vulnerable to the effects of
destructive forces, such as fire, storms, high winds and
flooding and any other occurrence that could affect the supply
of water, gas, telephone or electricity to our resorts. Although
our resorts are insured against property damage, damages
resulting from acts of God or otherwise may exceed the limits of
our insurance coverage or be outside the scope of that coverage.
A
significant decline in real estate values may have an adverse
impact on our financial condition.
We own significant amounts of real estate throughout the United
States. A significant decline in real estate values could have
an impact on our ability to readily generate cash flow from the
real estate to meet our debt or other obligations or may require
us to use a significant amount of cash to reduce our debt.
If we
fail to maintain effective internal control over financial
reporting or remediate any future material weakness in our
internal control over financial reporting, we may be unable to
accurately report our financial results or prevent fraud, which
could have a material adverse effect on our financial results
and our stock price.
Our internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
for external purposes in accordance
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with generally accepted accounting principles. Effective
internal control over financial reporting is necessary for us to
provide reliable reports and prevent fraud.
We believe that any control system, no matter how well designed
and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met.
Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within a company
have been detected. Failure to maintain effective internal
controls over financial reporting in accordance with
Section 404 of the Sarbanes-Oxley Act of 2002 could have a
material adverse effect on our business and stock price.
Sustained
increases in costs of medical and other employee health and
welfare benefits may reduce our profitability.
With more than 4,800 employees, as of December 31,
2009, our profitability is substantially affected by costs of
current medical benefits. In some recent years, we experienced
significant increases in these costs as a result of factors
beyond our control, including increases in health care costs. At
least some of these factors continue to put upward pressure on
the cost of providing medical benefits. Although we have
actively sought to control increases in these costs, we cannot
be certain that we will succeed in limiting cost increases, and
continued upward pressure could reduce the profitability of our
businesses.
A
failure to maintain good relationships with third-party property
owners and licensees could have a material, adverse effect on
our growth strategies and our business, financial condition and
results of operations.
We manage
and/or
license four of our resort properties in which we have limited
or no ownership interest, and under our license-based growth
strategy, we plan to increase the number of such properties as
we seek to expand our operations both domestically and
internationally. The viability of our management and licensing
business depends on our ability to establish and maintain good
relationships with third-party property owners and licensees.
Third-party developers, property owners and licensees are
focused on maximizing the value of their investment and working
with a management company or licensor that can help them be
successful. The effectiveness of our management, the value of
our brand and the rapport that we maintain with our third-party
property owners and licensees impact our revenue streams from
our management and license agreements. If we are unable to
maintain good relationships with our third-party property owners
and licensees, we may be unable to renew existing agreements or
expand our relationships with these owners. Additionally, our
opportunities for developing new relationships with additional
third parties may be adversely impacted.
The nature of our responsibilities under our management
agreements to manage each resort and enforce the standards
required for our brands under both management and license
agreements may be subject to interpretation and may give rise to
disagreements in some instances. Additionally, some courts have
applied principles of agency law and related fiduciary standards
to managers of third-party hotel properties such as us, which
means, among other things, that property owners may assert the
right to terminate management agreements even where the
agreements do not expressly provide for termination. In the
event of any such termination, we may need to negotiate or
enforce our right to a termination payment that may not equal
expected profitability over the term of the agreement. These
types of disagreements are more likely during an economic
downturn. We seek to resolve any disagreements in order to
develop and maintain positive relations with current and
potential joint venture partners but may not always be able to
do so. Failure to resolve such disagreements may result in
litigation. In addition, the terms of our management agreements
and license agreements for some of our facilities are influenced
by contract terms offered by our competitors, among other
things. Our current arrangements may not continue, and we may
not be able to enter into future collaborations, renew
agreements, or enter into new agreements in the future on terms
that are as favorable to us as those that exist today. Finally,
we are dependent on the cooperation of the owners or principal
owners of our licensed and managed resorts in the development of
new resorts and in the renovation of existing resorts. The
failure to retain or renew management and licensing agreements
or the failure of owners to develop resorts as agreed or on
schedule or to make necessary capital expenditures may cause
disruptions to our business plan and growth strategies and have
a material, adverse effect on our business, financial condition
and results of operations.
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We are
dependent on the owners of the resorts we manage and license to
fund certain operational expenditures related to those resorts,
and if such funds are untimely or not paid, we are required to
bear the cost.
We incur significant expenditures related to the management of
our managed resorts, including salary and other benefit related
costs and business and employee related insurance costs for
which we are reimbursed by the resort owners. In the normal
course of business, we make every effort to pay these costs only
after receiving payment from an owner for such costs. However,
to the extent an owner would not be able to reimburse these
costs, due to a sudden and unexpected insolvency situation or
otherwise, we would be legally obligated to pay these costs
directly until such time as we could make other arrangements.
Although we would make every effort to eliminate these costs
prior to the point at which an owner could not reimburse us and
we would continue to pursue payment through all available legal
means, our results of operations and financial condition could
be adversely affected if we were forced to bear those costs.
Investing
through partnerships or joint ventures may decrease our ability
to manage risk, and our license fee and management fee revenue
streams, as well as any joint venture equity investments, are
subject to property-level indebtedness and other
risks.
In addition to acquiring or developing resorts, we have from
time to time invested, and expect to continue to invest, as a
co-venturer. Joint venturers often have shared control over the
operation of the joint venture assets. Therefore, joint venture
investments may involve risks such as the possibility that the
co-venturer in an investment might become bankrupt or not have
the financial resources to meet its obligations, or have
economic or business interests or goals that are inconsistent
with our business interests or goals, or be in a position to
take action contrary to our instructions or requests or contrary
to our policies or objectives. Consequently, actions by a
co-venturer might subject any resorts owned by the joint venture
to additional risk. Further, we may be unable to take action
without the approval of our joint venture partners.
Alternatively, our joint venture partners could take actions
binding on the joint venture without our consent. Additionally,
should a joint venture partner become bankrupt, we could become
liable for our partners share of joint venture liabilities.
Furthermore, all of our current managed resorts are subject to
mortgage or construction indebtedness, which must be serviced by
the entities owning those resorts. Future licensed or managed
resorts will also likely be subject to such indebtedness. The
principal owner of a licensed or managed resort may cause the
entity owning the resort to incur indebtedness that may exceed
the amount of debt the resort can service. In the event of a
failure to service property-level indebtedness that results in a
sale or foreclosure, our license and management agreements may
be terminated, and any joint venture equity investment we have
made in the owner will likely be lost. The loss of these
agreements or investments could have a material and adverse
effect on our business, financial condition and results of
operations.
Under certain circumstances, our license and management
agreements may be terminated by the property owners due to the
sale of the property or other reasons. The termination of our
current or future license or management agreements would reduce
our revenues and have a material adverse effect on our business,
financial condition and results of operations.
Because
the land used by two of our resorts are subject to ground
leases, termination of these leases by the lessors could cause
us to lose the ability to operate these resorts altogether and
incur substantial costs in restoring the premises.
Our rights to use the land underlying two of our resorts
(Sheboygan, WI and Grand Mound, WA) are based upon our interest
under long-term ground leases. Pursuant to the terms of the
ground leases for these resorts, we are required to pay all rent
due and comply with all other lessee obligations. As of
December 31, 2009, the terms of these ground leases
(including renewal options) range from 48 to 93 years. Any
pledge of our interest in a ground lease may also require the
consent of the applicable lessor and its lenders. As a result,
we may not be able to sell, assign, transfer or convey our
lessees interest in any resort subject to a ground lease
in the future absent consent of such third parties even if such
transactions may be in the best interest of our stockholders.
The lessors may require us, at the expiration or termination of
the ground leases, to surrender or remove any improvements,
alterations or additions to the land at our own expense. The
ground leases also generally require us to restore the premises
following a casualty and to apply in a specified manner any
proceeds
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received in connection therewith. We may have to restore the
premises if a material casualty, such as a fire or an act of
God, occurs and the cost thereof exceeds available insurance
proceeds.
We are
subject to the risks of brand concentration.
We are subject to the potential risks associated with
concentration of our resorts under the Great Wolf Lodge brand
and the brand image associated with each geographic location. A
negative public image or other adverse event which becomes
associated with our Great Wolf Lodge brand could adversely
affect our business and revenues.
A
failure to keep pace with developments in technology could
impair our operations or competitive position.
The hospitality industry continues to demand the use of
sophisticated technology and systems, including those used for
our reservation, revenue management and property management
systems and technologies we make available to our guests. These
technologies and systems must be refined, updated,
and/or
replaced with more advanced systems on a regular basis. If we
are unable to do so as quickly as our competitors or within
budgeted costs and time frames, our business could suffer. We
also may not achieve the benefits that we anticipate from any
new technology or system, and a failure to do so could result in
higher than anticipated costs or could impair our operating
results.
An
increase in the use of third-party Internet reservation services
could adversely impact our revenues.
Some of our resort rooms are booked through Internet travel
intermediaries, such as
Expedia.com®,
Travelocity.com®,
and
Priceline.com®,
serving both the leisure and, increasingly, the corporate travel
and group meeting sectors. These intermediaries attempt to
commoditize hotel rooms by aggressively marketing to
price-sensitive travelers and corporate accounts and increasing
the importance of general indicators of quality (such as
three-star downtown hotel) at the expense of brand
identification. These agencies apparently anticipate that
consumers will eventually develop brand loyalties to their
travel services rather than to our lodging brands. Although we
plan to continue to maintain and even increase the strength of
our brands in the online marketplace, if the amount of sales
made through Internet intermediaries increases significantly,
our business and profitability may be harmed.
The
illiquidity of real estate may make it difficult for us to
dispose of one or more of our resorts.
We may from time to time decide to dispose of one or more of our
real estate assets. Because real estate holdings generally, and
family entertainment resorts like ours in particular, are
relatively illiquid, we may not be able to dispose of one or
more real estate assets on a timely basis or at a favorable
price. The illiquidity of our real estate assets could mean that
we continue to operate a facility that management has identified
for disposition. Failure to dispose of a real estate asset in a
timely fashion, or at all, could adversely affect our business,
financial condition and results of operations.
We
depend on a seasonal workforce.
Our resort operations are dependent in part on a seasonal
workforce. In some cases, we hire documented foreign workers to
fill certain staffing needs each season and utilize visas to
enable the use of foreign workers. In addition, we manage
seasonal wages and the timing of the hiring process to ensure
the appropriate workforce is in place. We cannot guarantee that
material increases in the cost of securing our seasonal
workforce will not be necessary in the future. In addition, we
cannot guarantee that visas necessary to hire foreign workers
who are a source for some of the seasonal workforce will be
available. Increased seasonal wages or an inadequate workforce
could have an adverse impact on our results of operations.
A
regional, national or global outbreak of influenza or other
disease, such as the recent international outbreak of influenza
A (H1N1), could adversely affect our business and results of
operations.
An outbreak of influenza or other communicable disease can
impact places of public accommodation, such as our resorts. On
June 11, 2009 the World Health Organization (WHO) raised
its pandemic alert level, related to influenza A(H1N1), to
Level 6, meaning that the disease has reached pandemic
levels. In many areas, localized public-health measures have
been implemented as a result of outbreaks of influenza A(H1N1),
including travel bans, the closings of schools and businesses,
and cancellations of events. These measures,
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whether implemented in connection with this or another outbreak
of infectious disease, especially if they become more
geographically widespread or sustained over significant time
periods, or if public perception of the safety or desirability
of visiting our resorts is adversely impacted by these measures
or by media coverage of the outbreak, could materially reduce
demand for our rooms and meeting spaces and, correspondingly,
reduce our revenue, negatively affecting our business and
results of operations.
Our
future financial results could be adversely impacted by asset
impairments or other charges.
We are required to test our intangible assets at least yearly
for impairment or when circumstances indicate that the carrying
value of those assets may be impaired. We are also required to
test our long-lived assets (such as resorts) when circumstances
indicate that the carrying value of those assets may not be
recoverable.
Because of triggering events that occurred in the three months
ended September 30, 2009 related to our Sheboygan resort,
including changes in the expectation of how long we will hold
this property, current period and historical operating losses
and the deterioration in the current market conditions, we
performed a recoverability test of this resort to determine if
further assessment for potential impairment was required. Based
on this analysis of undiscounted cash flows, we determined the
carrying value of this resort was not recoverable. As a result,
we recorded a $24,000 impairment charge to decrease the
resorts carrying value to its estimated fair value (net of
estimated disposal costs) as of September 30, 2009.
The amount of any future annual or interim asset impairment
charges could be significant and could have a material adverse
effect on our reported financial results for the period in which
the charge is taken. See Managements Discussion and
Analysis of Financial Condition and Results of
Operations Critical Accounting Policies and
Estimates Investments in Property and
Equipment. Any operating losses resulting from impairment
charges could have an adverse effect on the market price of our
securities.
We
have identified certain material weaknesses in our internal
controls.
During the first quarter 2010, we determined that it was
necessary to restate previously issued financial statements
because of errors that occurred during the computation of the
valuation allowance on certain deferred tax assets recorded as
of September 30, 2009. Due to the errors, we have made
adjustments to restate the previously issued financial
statements for the quarterly period ended September 30,
2009. Our management believes that the errors giving rise to the
restatement occurred because of a variety of factors, including
the complexity of the calculation of the valuation allowance on
certain deferred tax assets and certain spreadsheet errors that
were not detected in the related review and approval process.
This control deficiency resulted in adjustments to the
September 30, 2009 unaudited condensed consolidated
financial statements. Accordingly, management has concluded that
this control deficiency constitutes a material weakness. A
material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material
misstatement of the companys annual or interim financial
statements will not be prevented or detected in a timely basis.
Any future restatement of our financial statements could have a
material adverse effect on our company, the price of our common
stock and our ability to access the capital markets. Additional
scrutiny by regulatory authorities could result from the
restatement of our financial statements. Scrutiny regarding
financial reporting may also result in an increase in
litigation, involving companies with publicly traded securities.
There can be no assurance that any such litigation, either
against us specifically or as part of a class, would not
materially adversely affect our business or the price of our
common stock.
We maintain disclosure controls and procedures designed to
provide reasonable assurance that information in our reports
under the Securities Exchange Act of 1934, as amended is
recorded, processed, summarized and reported within the time
period specified pursuant to the SECs rules and forms. We
carried out an evaluation, under the supervision and with the
participation of our management including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures
as of the end of our 2009 fourth quarter. In making that
evaluation, we considered matters relating to the restatement,
including the related material weakness in our internal control
over financial reporting. We concluded that our disclosure
controls and procedures were not effective as of
December 31, 2009. See Item 9A (Controls and
Procedures) of this Annual report on
Form 10-K
for further discussion of these issues.
33
Risks
Related to Regulation
Compliance
with the Americans with Disabilities Act and other governmental
regulations and changes in governmental rules and regulations
may adversely affect our financial condition and results of
operations.
Under the Americans with Disabilities Act of 1990 and the
regulations promulgated thereunder, or the ADA, all public
accommodations are required to meet certain federal requirements
related to access and use by disabled persons. While we believe
that our resorts are substantially in compliance with these
requirements, we have not conducted an audit or investigation of
all of our resorts to determine our compliance. A determination
that we are not in compliance with the ADA could result in the
imposition of fines or an award of damages to private litigants.
We cannot predict the ultimate cost of compliance with the ADA.
The resort industry is also subject to numerous federal, state
and local governmental regulations including those related to
building and zoning requirements, and we are subject to laws
governing our relationship with our employees, including minimum
wage requirements, overtime, working conditions and work permit
requirements. In addition, changes in governmental rules and
regulations or enforcement policies affecting the use and
operation of our resorts, including changes to building codes
and fire and life safety codes, may occur. If we were required
to make substantial modifications at our resorts to comply with
the ADA, other governmental regulations or changes in
governmental rules and regulations, our financial condition and
results of operations could be adversely affected.
We
face possible liability for environmental cleanup costs and
damages for contamination related to our properties, which could
adversely affect our business, financial condition and results
of operations.
Our operations and properties are subject to federal, state and
local laws and regulations relating to the protection of the
environment, natural resources and worker health and safety,
including laws and regulations governing and creating liability
relating to the management, storage and disposal of hazardous
substances and other regulated materials. Our properties are
also subject to various environmental laws and regulations that
govern certain aspects of our ongoing operations. These laws and
regulations control such things as the nature and volume of our
wastewater discharges, quality of our water supply and our waste
management practices. The costs of complying with these
requirements, and of paying penalties, fines, assessments and
the like related to non-compliance, as they now exist or may be
altered in the future, could adversely affect our financial
condition and results of operations. Specifically, the
wastewater treatment plant at our Pocono Mountains resort is
subject to numerous state, federal and other regulations. The
cost of compliance with such regulations for penalties,
remediation and other costs arising out of non compliance, can
be large, as occurred in 2006 when we agreed to pay an
assessment of approximately $800 and incurred other costs in
excess of $1,000 to remediate wastewater discharges that were
out of compliance with applicable permits and to prevent further
out-of-compliance
discharges. In 2009, 2008 and 2007 we incurred other costs of
$26, $276 and $320, respectively, to remediate wastewater
discharges that were out of compliance with applicable permits
and to prevent further
out-of-compliance
discharges.
Because we own and operate real property, various federal, state
and local laws may impose liability on us for the costs of
removing or remediating various hazardous substances, including
substances that may be currently unknown to us, that may have
been released on or in our property or disposed by us at
third-party locations. The principal federal laws relating to
environmental contamination and associated liabilities that
could affect us are the Resource Conservation and Recovery Act
and the Comprehensive Environmental Response, Compensation and
Liability Act; state and local governments have also adopted
separate but similar environmental laws and regulations that
vary from state to state and locality to locality. These laws
may impose liability jointly and severally, without regard to
fault and whether or not we knew of or caused the release. The
presence of hazardous substances on a property or the failure to
meet environmental regulatory requirements may materially
adversely affect our ability to use or sell the property, or to
use the property as collateral for borrowing, and may cause us
to incur substantial remediation or compliance costs. In
addition, if hazardous substances are located on or released
from one of our properties, we could incur substantial
liabilities through a private party personal injury claim, a
claim by an adjacent property owner for property
34
damage or a claim by a governmental entity for other damages,
such as natural resource damages. This liability may be imposed
on us under environmental laws or common-law principles.
We obtain environmental assessment reports on the properties we
own or operate as we deem appropriate. However, the
environmental assessments that we have undertaken might not have
revealed all potential environmental liabilities or claims for
such liabilities. It is also possible that future laws,
ordinances or regulations or changed interpretations of existing
laws and regulations will impose material environmental
liability or compliance costs on us, that the current
environmental conditions of properties we own or operate will be
affected by other properties in the vicinity or by the actions
of third parties unrelated to us or that our guests could
introduce hazardous or toxic substances into the resorts we own
or manage without our knowledge and expose us to liability under
federal or state environmental laws. The costs of defending
these claims, complying with as yet unidentified requirements,
conducting this environmental remediation or responding to such
changed conditions could adversely affect our financial
condition and results of operations.
Some of our resort properties may have contained, or are
adjacent to or near other properties that have contained or
currently contain underground storage tanks for the storage of
petroleum products or other hazardous or toxic substances. If
hazardous or toxic substances were released from these tanks, we
could incur significant costs or, with respect to tanks on our
property, be liable to third parties with respect to the
releases.
On occasion, we may elect to participate in the development of
properties that have had a history of industrial activities
and/or
historical environmental contamination. Where such opportunities
arise, we engage third-party experts to evaluate the extent of
contamination, the scope of any needed environmental
clean-up
work, and available measures (such as creation of barriers over
residual contamination and deed restrictions prohibiting
groundwater use or disturbance of the soil) for ensuring that
planned development and future property uses will not present
unacceptable human health or environmental risks or exposure to
liabilities. If those environmental assessments indicate that
the development opportunities are acceptable, we also work with
appropriate governmental agencies and obtain their approvals of
planned site
clean-up,
development activities and the proposed future property uses. We
have followed that process in connection with the development of
our Blue Harbor Resort in Sheboygan, Wisconsin, where the City
of Sheboygan has arranged for environmental
clean-up
work and ongoing groundwater monitoring and we have agreed to
the use of a barrier preventing contact with residual
contamination and implementation of a deed restriction limiting
site activities. We are not aware of any environmental liability
or compliance concerns at our Sheboygan resort that we believe
would materially adversely affect our financial condition or
results of operations. It is possible; however, that our efforts
have not identified all environmental conditions at the property
or that environmental condition and liabilities associated with
the property could change in the future.
Future acquisitions of properties subject to environmental
requirements or affected by environmental contamination could
require us to incur substantial costs relating to such matters.
In addition, environmental laws, regulations, wetlands,
endangered species and other land use and natural resource
issues affecting either currently owned properties or sites
identified as possible future acquisitions may increase costs
associated with future site development and construction
activities or business or expansion opportunities, prevent,
delay, alter or interfere with such plans or otherwise adversely
affect such plans.
Regulation
of the marketing and sale of condominiums could adversely affect
our business.
We cannot be certain that prior or future sales of our
condominium units will not be considered offers or sales of
securities under federal law or the state law in the
states where we desire to, or do, conduct sales or in which our
properties are located. If such interests were considered to be
securities, we would be required to comply with applicable state
and federal securities laws, including laws pertaining to
registration or qualification of securities, licensing of
salespeople and other matters. We cannot be certain that we will
be able to comply with the applicable state and federal
securities requirements, and if the offers or sales of our
condominium units are deemed to be (or have been) offers or
sales of securities, such a determination may create liabilities
or contingencies that could have an adverse effect on our
operations and financial results, including possible rescission
rights relating to the units that have been sold, which, if
exercised, could result in losses and would adversely affect our
business, financial condition and results of operations.
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Failure
to maintain the integrity of internal or customer data could
result in faulty business decisions, damage of reputation and/or
subject us to costs, fines or lawsuits.
Our business requires collection and retention of large volumes
of internal and customer data, including credit card numbers and
other personally identifiable information of our customers as
they are entered into, processed by, summarized by, and reported
by our various information systems. We also maintain personally
identifiable information about our employees. The integrity and
protection of that customer, employee, and company data is
critical to us. If that data is not accurate or complete we
could make faulty decisions. Our customers and employees also
have a high expectation that we will adequately protect their
personal information, and the regulatory environment surrounding
information security and privacy is increasingly demanding, both
in the U.S. and other international jurisdictions in which
we operate. A significant theft, loss or fraudulent use of
customer, employee or company data could adversely impact our
reputation and could result in remedial and other expenses,
fines and litigation.
Changes
in privacy law could adversely affect our ability to market our
products effectively.
Our resorts rely on a variety of direct marketing techniques,
including email marketing, and postal mailings. Any further
restrictions in laws such as the Telemarketing Sales Rule,
CANSPAM Act, and various U.S. state laws, or new federal
laws, regarding marketing and solicitation or international data
protection laws that govern these activities could adversely
affect the continuing effectiveness of email and postal mailing
techniques and could force further changes in our marketing
strategy. If this occurs, we may not be able to develop adequate
alternative marketing strategies, which could adversely impact
the amount and timing of our sales.
Risks
Related to Our Capital Structure
We may
issue partnership units in the future that may be dilutive to,
and may have preferential rights over, our common
stockholders.
We have formed a wholly owned operating partnership to serve as
the parent entity of each of our resort-owning entities. We are
the limited partner of the partnership and the sole general
partner of the partnership is a wholly owned subsidiary that we
have formed for that purpose. We formed the operating
partnership to provide flexibility for future transactions as we
execute our growth strategy. We believe that the ability to
issue limited partnership units may enable us to acquire assets
from sellers seeking certain tax treatment, as accepting limited
partnership units may allow a seller to defer the recognition of
gain on a sale of real estate. Any additional operating
partnership interests we issue may include preferred limited
partnership units. Any partnership interests that we issue may
be entitled to distributions of available cash that might
otherwise be allocated to the execution of our business plan or
generally available for future dividends, if any. In addition,
any partnership interests may be convertible into our common
stock, thus having a dilutive impact to our common stockholders,
and may have voting or other preferential rights relative to
those of our common stockholders.
Our
stock price has been volatile in the past and may be volatile in
the future.
On December 20, 2004, we completed our IPO. Trading markets
after an initial public offering have often been extremely
volatile. Since our IPO through December 31, 2009, our
common stock has traded at a high of $25.88 and a low of $0.61.
The following factors could cause the price of our common stock
in the public market to continue to fluctuate significantly:
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variations in our quarterly operating results;
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changes in market valuations of companies in the hospitality or
entertainment industries, generally, and the family
entertainment resort segment, specifically;
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fluctuations in stock market prices and volumes;
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issuances of common stock or other securities in the future;
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the addition or departure of key personnel;
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announcements by us or our competitors of new properties,
acquisitions or joint ventures, or our failure to announce new
properties, acquisitions or joint ventures of a type or in a
quantity deemed desirable by participants in the public
market; and
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expectations about macroeconomic condition.
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Volatility in the market price of our common stock may prevent
investors from being able to sell their common stock at or above
the price an investor pays for our common stock. In the past,
class action litigation has often been brought against companies
following periods of volatility in the market price of those
companies common stock. Litigation is often expensive and
diverts managements attention and company resources and
could have a material adverse effect on our business, financial
condition and operating results.
Provisions
in our certificate of incorporation, bylaws, employment
agreements and Delaware law have anti-takeover effects that
could prevent a change in control that could be beneficial to
our stockholders, which could depress the market price of our
common stock.
Our certificate of incorporation, bylaws, employment agreements
and Delaware corporate law contain provisions that could delay,
defer, increase the costs of or prevent a change in control of
us or our management that could be beneficial to our
stockholders. Certain of these provisions could also discourage
proxy contests and make it more difficult for stockholders to
elect directors and take other corporate actions. As a result,
these provisions could limit the price that investors are
willing to pay in the future for shares of our common stock.
These provisions might also discourage a potential acquisition
proposal or tender offer, even if the acquisition proposal or
tender offer is at a price above the then current market price
for our common stock. These provisions:
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authorize our board of directors to issue blank
check preferred stock and determine the powers,
preferences and privileges of those shares without prior
stockholder approval;
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prohibit the ability of our stockholders to act by written
consent;
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limit the calling of special meetings of stockholders;
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impose a requirement that holders of 50% of the outstanding
shares of common stock are required to amend the provisions
relating to actions by written consent of stockholders and the
limitations of calling special meetings; and
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provide for payments to certain of our executive officers upon
termination of employment within certain time periods before or
after a change of control.
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Our
organizational documents contain no limitations on the amount of
debt we may incur, so we may become too highly
leveraged.
Our organizational documents do not limit the amount of
indebtedness that we may incur. If we increase the level of our
borrowings, then the resulting increase in cash flow that must
be used for debt service would reduce cash available for
distribution and could harm our ability to make payments on our
outstanding indebtedness and our financial condition.
We and
the owners and developers of our licensed and managed resorts
may not be able to obtain additional financing on favorable
terms, if at all.
We expect that we will require additional financing over time,
the amount of which will depend on a number of factors,
including the number of resorts we construct or improve, the
amounts of our investments in joint ventures, additions to our
current resorts and the cash flow generated by our resorts and
management and licensing agreements. The terms of any additional
financing we may be able to procure are unknown at this time.
Our access to third-party sources of capital depends, in part,
on some or all of the following:
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general capital market conditions;
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capital providers perception of our growth potential;
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our then-current debt levels;
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our then-current and expected future earnings;
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our cash flow; and
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the market price per share of our common stock.
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The owners and developers of our licensed and managed resorts
face similar risks, since they will require financing to
construct and improve those resorts. Failure to obtain
sufficient financing could have a material adverse effect on our
growth strategies and on our business, financial condition and
results of operations.
Any future debt financing or issuances of preferred stock that
we may make will be senior to the rights of holders of our
common stock, and any future issuances of common stock will
result in the dilution of the then-existing stockholders
proportionate equity interest.
The
covenants in our mortgage loan agreements impose significant
restrictions on us.
The terms of our mortgage loan agreements impose significant
operating and financial restrictions on us and our subsidiaries
and require us to meet certain financial tests. These
restrictions could also have a negative impact on our business,
financial condition and results of operations by significantly
limiting or prohibiting us from engaging in certain
transactions, including:
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incurring or guaranteeing additional indebtedness;
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transferring or selling assets currently held by us;
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transferring ownership interests in certain of our
subsidiaries; and
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reducing our tangible net worth below specified levels.
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The failure to comply with any of these covenants could cause a
default under a debt agreement. Any of these defaults, if not
waived, could result in the acceleration of all of our debt, in
which case the debt would become immediately due and payable. If
this occurs, we may not be able to repay our debt or borrow
sufficient funds to refinance it on favorable terms, if any.
Our Traverse City and Kansas City mortgage loan requires us to
maintain a minimum debt service coverage ratio (DSCR) of 1.35,
calculated on a quarterly basis. This ratio is defined as the
two collateral properties combined trailing twelve-month
net operating income divided by the greater of (i) the
loans twelve-month debt service requirements and
(ii) 8.5% of the amount of the outstanding principal
indebtedness under the loan. Failure to meet the minimum DSCR is
not an event of default and does not accelerate the due date of
the loan. Not meeting the minimum DSCR, however, subjects the
two properties to a lock-box cash management arrangement, at the
discretion of the loans servicer. We believe that lock-box
arrangement would require substantially all cash receipts for
the two resorts to be moved each day to a lender-controlled bank
account, which the loan servicer would then use to fund debt
service and operating expenses for the two resorts.
For the year ended December 31, 2009, the DSCR for this
loan was 0.73. As a result, the loan servicer may choose to
implement the lock-box cash management arrangement. We believe
that such an arrangement, if implemented, would constitute a
traditional lock-box arrangement as discussed in authoritative
accounting guidance. Based on that guidance, if the loan
servicer were to establish the traditional lock-box arrangement
now permitted under the loan, we believe we would be required to
classify the entire outstanding principal balance of the loan as
a current liability, since the lock-box arrangement would
require us to use the properties working capital to
liquidate the loan and we do not presently have the ability to
refinance this loan to a new, long-term loan.
38
Issues
affecting financial institutions could adversely affect
financial markets generally as well as our ability to raise
capital or access liquidity.
Factors that we cannot control, such as disruption of the
financial markets or negative views about the financial services
industry generally, could impair our ability to raise necessary
funding. The creditworthiness of many financial institutions may
be closely interrelated as a result of credit, derivative,
trading, clearing or other relationships among the institutions.
As a result, concerns about, or a default or threatened default
by, one institution could lead to significant market-wide
liquidity and credit problems, losses or defaults by other
institutions. This may adversely affect the financial
institutions, such as banks and insurance providers, with which
we interact on a daily basis, and therefore could adversely
affect our ability to raise needed funds or access liquidity.
Because
we have guaranteed certain mortgage-related obligations of our
subsidiaries, if one or more of our subsidiaries fail to meet
its obligations under the mortgage, we may be required to
satisfy such obligations and such an undertaking could have an
adverse affect on our financial condition.
We have guaranteed monthly debt service payments for the loan on
our Mason resort property. In addition, we have provided the
lenders for the loan on our Mason resort property with a partial
corporate guaranty and cross-collateralization on our Grapevine
resort property, as additional collateral for the Mason loan.
The cross-collateralization on the Grapevine property will
remain in place until we make a $30,000 principal reduction of
the Mason loan over the remaining life of that loan. Should
there be certain liquidity-producing events, including the sale
of majority-owned equity interests in any of our existing
properties or the refinance of a mortgage loan on an existing
property, we will be required to use 50 percent of the net
proceeds towards the $30,000 mandatory principal reduction.
Great Wolf Resorts, Inc. has provided a $79,900 payment
guarantee of the construction loan secured by our Concord resort
property, which had an outstanding principal amount of $79,900
as of December 31, 2009 and is currently not subject to
amortization. The loan requires monthly amortization payments on
a 25-year
basis beginning on September 30, 2010. The underlying cash
flows from the Concord resort may not be able to satisfy the
debt service obligations under the construction loan. In
addition, the loan agreement contains various customary
financial and operating debt compliance covenants, and the
entity owning the Concord resort may not be able to comply with
those covenants. Furthermore, we may be unable to refinance the
construction loan, which matures in April 2012, on terms
acceptable to us or at all. If the borrowers default under the
loan agreement or if we are unable to refinance the loan prior
to its maturity, Great Wolf Resorts, Inc. would be required to
assume the obligations under the loan, including the payment of
any outstanding debt amounts. While the property itself is
subject to a mortgage to secure the construction loan, even in
the event the property could be sold in a foreclosure to satisfy
all or a portion of the outstanding debt, to the extent the
proceeds of such sale are insufficient to satisfy the
outstanding debt, we would be liable for the remaining
outstanding amount.
Any default or failure to refinance as described above could
therefore have a material, adverse effect on our financial
condition and could materially reduce the amount of cash we have
available to fund capital expenditures and growth initiatives,
which could have a material, adverse effect on our business and
results of operations.
We may
be unable to generate sufficient cash and may not have access to
the cash flow and other assets of our subsidiaries to service
all of our indebtedness and may be forced to take other actions
to satisfy our obligations under such indebtedness, which may
not be successful.
Our ability to make scheduled payments on or to refinance our
debt obligations depends on the financial condition and
operating performance of us and our subsidiaries, which is
subject to prevailing economic and competitive conditions and to
financial, business and other factors beyond our control. We and
our subsidiaries may not be able to maintain a level of cash
flows from operating activities sufficient to permit us to pay
or refinance our indebtedness. If the cash flows and capital
resources of us and our subsidiaries are insufficient to fund
our debt service obligations, we and our subsidiaries could face
substantial liquidity problems and may be forced to reduce or
delay capital expenditures or growth strategies, sell assets,
seek additional capital or restructure or refinance our
indebtedness. These alternative measures may not be successful
and may not permit us to meet our scheduled debt service
obligations.
39
Because
we have guaranteed certain minimum payments related to our
Sheboygan resort, if that resort does not generate sufficient
cash flow to satisfy the minimum required payments, we may be
required to satisfy such obligations and such an undertaking
could have an adverse effect on our financial
condition.
In connection with the construction of our Sheboygan, Wisconsin
resort, Great Lakes entered into agreements with the City of
Sheboygan and The Redevelopment Authority of the City of
Sheboygan, Wisconsin (collectively, the City) whereby the City
funded certain costs of construction. The City funded $4,000
toward the construction of the resort and related public
improvements and $8,200 construction of a convention center
connected to the resort.
In exchange for the $4,000 funding, Great Lakes guaranteed
certain minimum real and personal property tax payments over a
14 year period totaling $16,400. Through transactions
related to our IPO (collectively, the IPO Transactions), we
assumed these guarantees. In exchange for the $8,200 funding,
Great Lakes entered into a lease for the convention center with
the City. Through the IPO Transactions, we assumed the lease.
The initial term of the lease is
251/2
years with fifteen, five-year renewal options. Under the lease,
we will satisfy repayment of the $8,200 funding by making
guaranteed minimum room tax payments totaling $25,900 over the
initial term of the lease. This obligation is also guaranteed by
three former owners of Great Lakes.
The guaranteed minimum payments are calculated annually on a
fiscal year basis throughout the
14-year and
251/2-year
periods described above. For the year ended December 31,
2009, the resort did not generate the required minimum room tax
amounts. As a result, we remitted an additional $400 to satisfy
the minimum payments for that fiscal year. If we are required to
fund similar shortfalls in either minimum room tax payments or
real and personal property tax payments in the future, it may
have an adverse effect on our business, financial condition and
results of operations.
Forward-Looking
Statements
Some of the statements contained in this Annual Report on
Form 10-K,
and other information we file with the Securities and Exchange
Commission, or the SEC, are or may be deemed to be
forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of
the Securities Exchange Act of 1934, as amended, and are subject
to the safe harbor created by the Private Securities Litigation
Reform Act of 1995. All statements, other than statements of
historical facts, including, among others, statements regarding
our future financial results or position, business strategy,
projected levels of growth, projected costs and projected
performance and financing needs, are forward-looking statements.
Those statements include statements regarding the intent, belief
or current expectations of Great Wolf Resorts, Inc. and members
of our management team, as well as the assumptions on which such
statements are based, and generally are identified by the use of
words such as may, might,
will, could, plan,
objective, predict, project,
potential, continue,
ongoing, seeks, anticipates,
believes, estimates,
expects, plans, intends,
should or similar expressions. Forward-looking
statements are not guarantees of future performance and involve
risks and uncertainties that actual results may differ
materially from those contemplated by such forward-looking
statements. Many of these factors are beyond our ability to
control or predict. Such factors include, but are not limited
to, competition in our markets, changes in family vacation
patterns and consumer spending habits, regional or national
economic downturns, our ability to attract a significant number
of guests from our target markets, economic conditions in our
target markets, the impact of fuel costs and other operating
costs, our ability to develop new resorts in desirable markets
or further develop existing resorts on a timely and cost
efficient basis, our ability to manage growth, including the
expansion of our infrastructure and systems necessary to support
growth, our ability to manage cash and obtain additional cash
required for growth, the general tightening in the
U.S. lending markets, potential accidents or injuries at
our resorts, decreases in travel due to pandemic or other
widespread illness, our ability to achieve or sustain
profitability, downturns in our industry segment and extreme
weather conditions, increases in operating costs and other
expense items and costs, uninsured losses or losses in excess of
our insurance coverage, our ability to protect our intellectual
property, trade secrets and the value of our brands, and current
and possible future legal restrictions and requirements.
Important factors currently known to our management that could
cause actual results to differ materially from those in
forward-looking statements include those set forth above under
the section entitled Risk Factors and
Managements Discussion and Analysis of Financial
Condition and results of Operations.
40
We believe these forward-looking statements are reasonable;
however, undue reliance should not be placed on any
forward-looking statements, which are based on current
expectations. All written and oral forward-looking statements
attributable to us or persons acting on our behalf are qualified
in their entirety by these cautionary statements. Further,
forward-looking statements speak only as of the date they are
made, and we undertake no obligation to update or revise
forward-looking statements to reflect changed assumptions, the
occurrence of unanticipated events or changes to future
operating results over time unless required by law. Past
financial or operating performance is not necessarily a reliable
indicator of future performance and you should not use our
historical performance to anticipate results or future period
trends.
You should read this Annual Report on
Form 10-K
and the documents that we reference in this report completely
and with the understanding that our actual future results may be
materially different from what we expect. We qualify all of our
forward-looking statements by each of these cautionary
statements.
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ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
We have nine family entertainment resorts in which we own an
equity interest that are currently operating. Unless otherwise
indicated, we own a 100% fee interest in these properties. We
are organized into a single operating division. Within that
operating division, we have two reportable segments in 2009:
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resort ownership/operation, and
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resort third-party management/licensing.
|
Information on our properties in which we own an equity interest
included in our Resort Ownership/Operation segment is as follows:
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|
Great Wolf Lodge of Traverse City is located on 48 acres in
Traverse City, Michigan, of which 27 acres have been
developed and 21 acres remain undeveloped.
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|
Great Wolf Lodge of Kansas City is located on 17 acres in
Kansas City, Kansas, all of which have been developed.
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|
Blue Harbor Resort of Sheboygan is located on 12 leased acres in
Sheboygan, Wisconsin, all of which have been developed.
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|
Great Wolf Lodge of Williamsburg is located on 84 acres in
Williamsburg, Virginia, of which 48 acres have been
developed (2 of which are leased to another entity) and
36 acres remain undeveloped.
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Great Wolf Lodge of the Pocono Mountains is located on
95 acres in Pocono Township, near Stroudsburg,
Pennsylvania, of which 45 acres are developed and
50 acres remain undeveloped.
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Great Wolf Lodge of Mason is located on 39 acres in Mason,
Ohio. All 39 acres of this property are developed.
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Great Wolf Lodge of Grapevine is located on 51 acres in
Grapevine, Texas, of which 30 acres are developed and
21 acres remain undeveloped.
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|
Great Wolf Lodge of Concord is located on 37 acres in
Concord, North Carolina, of which 34 acres are developed
and 3 acres may be subdivided and developed separately.
|
Information on our properties included in our Resort Third-Party
Management/Licensing segment in which we own an equity interest
is as follows:
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|
Great Wolf Lodge of Grand Mound is located on 39 leased acres in
Grand Mound, Washington. This property is owned by a joint
venture of which we have a 49% minority interest and The
Confederated Tribes of the Chehalis Reservation has a 51%
majority interest.
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41
For additional information regarding our resort properties see
Item 1. Business Property
Descriptions above.
We lease approximately 13,800 square feet of office space
for our corporate headquarters office and approximately
9,800 square feet of office space for our central
reservations call center operations in Madison, Wisconsin. We
also lease approximately 1,400 square feet of office space
in Woodbridge, Virginia and approximately 2,722 square feet
of office space in Lorian, Ohio. We believe these facilities are
adequate for our current needs.
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ITEM 3.
|
LEGAL
PROCEEDINGS
|
We are involved in litigation from time to time in the ordinary
course of our business. We do not believe that the outcome of
any such pending or threatened litigation will have a material
adverse effect on our financial condition or results of
operations. However, as is inherent in legal proceedings where
issues may be decided by finders of fact, there is a risk that
unpredictable decisions adverse to us could be reached.
PART II
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ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Our common stock is listed on The NASDAQ Global Market under the
symbol WOLF. The following table sets forth for the
quarters indicated the high and low per share closing sales
prices as reported by The NASDAQ Global Market. As of
February 19, 2010, we had approximately
200 shareholders of record.
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Stock Price
|
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High
|
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|
Low
|
|
|
Fiscal 2008:
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
9.94
|
|
|
$
|
6.29
|
|
Second Quarter
|
|
$
|
8.38
|
|
|
$
|
4.34
|
|
Third Quarter
|
|
$
|
6.40
|
|
|
$
|
3.00
|
|
Fourth Quarter
|
|
$
|
3.80
|
|
|
$
|
0.61
|
|
Fiscal 2009:
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
3.05
|
|
|
$
|
1.26
|
|
Second Quarter
|
|
$
|
3.80
|
|
|
$
|
1.93
|
|
Third Quarter
|
|
$
|
3.95
|
|
|
$
|
2.04
|
|
Fourth Quarter
|
|
$
|
3.88
|
|
|
$
|
2.27
|
|
Fiscal 2010:
|
|
|
|
|
|
|
|
|
First Quarter through February 26, 2010
|
|
$
|
2.69
|
|
|
$
|
2.09
|
|
The issuance described below were exempt from registration under
the Securities Act, pursuant to Section 4(2) of the
Securities Act and Regulation D promulgated thereunder as
transactions by an issuer not involving a public offering.
In June 2007 we completed a private offering of $28,125 of trust
preferred securities (TPS) through Great Wolf Capital
Trust III (Trust III), a Delaware statutory trust
which is our subsidiary. The securities pay holders cumulative
cash distributions at an annual rate which is fixed at 7.90%
through June 2012 and then floats at LIBOR plus a spread of
300 basis points thereafter. The securities mature in June
2017 and are callable at no premium after June 2012. In
addition, we invested $870 in the Trusts common
securities, representing 3% of the total capitalization of
Trust III. Trust III used the proceeds of the offering
and our investment to purchase from us $28,995 of our junior
subordinated debentures with payment terms that mirror the
distribution terms of the trust securities. The costs of the TPS
offering totaled $932, including $870 of underwriting
commissions and expenses and $62 of costs incurred directly by
Trust III. Trust III paid these costs utilizing an
investment
42
from us. These costs are being amortized over a
10-year
period. The proceeds from our debenture sales, net of the costs
of the TPS offering and our investment in Trust III, were
$27,193.
Dividend
Policy
We have never declared or paid any cash dividends on our capital
stock, and we do not anticipate paying cash dividends in the
foreseeable future. We currently intend to retain our earnings,
if any, for future growth. Future dividends on our common stock,
if any, will be at the discretion of our board of directors and
will depend on, among other things, our operations, capital
requirements and surplus, general financial condition,
contractual restrictions and such other factors as our board of
directors may deem relevant.
Performance
Graph
This performance graph shall not be deemed filed for
purposes of Section 18 of the Securities Exchange Act of
1934, as amended, or otherwise subject to the liabilities under
that Section, and shall not be deemed to be incorporated by
reference into any of our filings under the Securities Act of
1933, as amended, or the Securities Exchange Act of 1934, as
amended.
The following graph depicts a comparison of our total return to
shareholders from January 1, 2005 through December 31,
2009, relative to the performance of (i) the NASDAQ 100
Index, (ii) the Russell 2000 Index and (iii) the Dow
Jones U.S. Hotel Index. All indices shown in the graph
assume an investment of $100 on December 20, 2004 and the
reinvestment of dividends paid since that date. We have never
paid cash dividends on our common stock. The stock price
performance shown in the graph is not necessarily indicative of
future price performance.
43
|
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ITEM 6.
|
SELECTED
FINANCIAL DATA
|
The following summary consolidated financial data should be read
in conjunction with, and are qualified by reference to, our
consolidated financial statements and related notes and
Managements Discussion and Analysis of Financial
Condition and Results of Operations appearing elsewhere in
this annual report on
Form 10-K.
The consolidated statements of operations data for the years
ended December 31, 2009, 2008, 2007, 2006 and 2005, are
derived from our audited condensed consolidated financial
statements.
Our consolidated financial information includes:
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our subsidiary that provides resort development and management
services and licenses certain intellectual property;
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|
our Traverse City, Kansas City, Sheboygan, Williamsburg, Pocono
Mountains, Mason, Grapevine and Concord operating resorts;
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|
for all periods prior to October 2005, the Wisconsin Dells and
Sandusky resorts; and
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equity interests in resorts in which we have ownership interests
but which we do not consolidate.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
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|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
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|
(Dollars in thousands, except per share amounts)
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|
Statement of Operations and Comprehensive Loss:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Rooms
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|
$
|
154,751
|
|
|
$
|
143,395
|
|
|
$
|
112,261
|
|
|
$
|
87,775
|
|
|
$
|
73,207
|
|
Food, beverage and other
|
|
|
81,020
|
|
|
|
74,173
|
|
|
|
56,673
|
|
|
|
43,137
|
|
|
|
36,846
|
|
Sales of condominiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,862
|
|
Management and other fees
|
|
|
1,990
|
|
|
|
2,798
|
|
|
|
2,855
|
|
|
|
2,087
|
|
|
|
494
|
|
Management and other fees-affiliates
|
|
|
4,973
|
|
|
|
5,346
|
|
|
|
4,314
|
|
|
|
3,729
|
|
|
|
482
|
|
Other revenue from managed properties affiliates(1)
|
|
|
17,132
|
|
|
|
19,826
|
|
|
|
11,477
|
|
|
|
11,920
|
|
|
|
2,524
|
|
Other revenue from managed properties(1)
|
|
|
4,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
264,032
|
|
|
|
245,538
|
|
|
|
187,580
|
|
|
|
148,648
|
|
|
|
139,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses by department:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rooms
|
|
|
22,449
|
|
|
|
20,134
|
|
|
|
15,716
|
|
|
|
11,914
|
|
|
|
10,944
|
|
Food, beverage and other
|
|
|
65,341
|
|
|
|
59,949
|
|
|
|
48,300
|
|
|
|
35,923
|
|
|
|
31,407
|
|
Other operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
60,986
|
|
|
|
51,902
|
|
|
|
47,915
|
|
|
|
41,421
|
|
|
|
26,894
|
|
Property operating costs
|
|
|
37,788
|
|
|
|
37,086
|
|
|
|
30,555
|
|
|
|
23,217
|
|
|
|
24,798
|
|
Depreciation and amortization
|
|
|
56,378
|
|
|
|
46,081
|
|
|
|
36,372
|
|
|
|
25,903
|
|
|
|
26,248
|
|
Costs of sales of condominiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,780
|
|
Impairment loss on investment in affiliates
|
|
|
|
|
|
|
18,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill impairment
|
|
|
|
|
|
|
17,430
|
|
|
|
|
|
|
|
50,975
|
|
|
|
|
|
Asset impairment loss
|
|
|
24,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on disposition of property
|
|
|
255
|
|
|
|
19
|
|
|
|
128
|
|
|
|
1,066
|
|
|
|
26,161
|
|
Other expenses from managed properties affiliates(1)
|
|
|
17,132
|
|
|
|
19,826
|
|
|
|
11,477
|
|
|
|
11,920
|
|
|
|
2,524
|
|
Other expenses from managed properties(1)
|
|
|
4,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
288,495
|
|
|
|
271,204
|
|
|
|
190,463
|
|
|
|
202,339
|
|
|
|
165,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss
|
|
|
(24,463
|
)
|
|
|
(25,666
|
)
|
|
|
(2,883
|
)
|
|
|
(53,691
|
)
|
|
|
(26,341
|
)
|
Gain on sales of unconsolidated affiliate
|
|
|
(962
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income affiliates
|
|
|
(1,330
|
)
|
|
|
(2,187
|
)
|
|
|
(667
|
)
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
(642
|
)
|
|
|
(1,424
|
)
|
|
|
(2,758
|
)
|
|
|
(3,105
|
)
|
|
|
(1,623
|
)
|
Interest expense
|
|
|
34,072
|
|
|
|
27,277
|
|
|
|
14,887
|
|
|
|
7,169
|
|
|
|
6,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and equity in unconsolidated affiliates
|
|
|
(55,601
|
)
|
|
|
(49,332
|
)
|
|
|
(14,345
|
)
|
|
|
(57,755
|
)
|
|
|
(31,446
|
)
|
Income tax expense (benefit)
|
|
|
440
|
|
|
|
(11,956
|
)
|
|
|
(5,859
|
)
|
|
|
(8,764
|
)
|
|
|
(7,199
|
)
|
Equity in unconsolidated affiliates, net of tax
|
|
|
2,435
|
|
|
|
3,349
|
|
|
|
1,547
|
|
|
|
761
|
|
|
|
170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(58,476
|
)
|
|
|
(40,725
|
)
|
|
|
(10,033
|
)
|
|
|
(49,752
|
)
|
|
|
(24,417
|
)
|
Net loss attributable to non controlling interest
|
|
|
|
|
|
|
|
|
|
|
(452
|
)
|
|
|
(502
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Great Wolf Resorts, Inc.
|
|
$
|
(58,476
|
)
|
|
$
|
(40,725
|
)
|
|
$
|
(9,581
|
)
|
|
$
|
(49,250
|
)
|
|
$
|
(24,413
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per common share
|
|
$
|
(1.90
|
)
|
|
$
|
(1.32
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
(1.63
|
)
|
|
$
|
(0.81
|
)
|
Diluted loss per common share
|
|
$
|
(1.90
|
)
|
|
$
|
(1.32
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
(1.63
|
)
|
|
$
|
(0.81
|
)
|
Weighted average common shares outstanding Basic(2)
|
|
|
30,749,318
|
|
|
|
30,827,860
|
|
|
|
30,533,249
|
|
|
|
30,299,647
|
|
|
|
30,134,146
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
Diluted(2)
|
|
|
30,749,318
|
|
|
|
30,827,860
|
|
|
|
30,533,249
|
|
|
|
30,299,647
|
|
|
|
30,134,146
|
|
Other comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(58,476
|
)
|
|
|
(40,725
|
)
|
|
|
(10,033
|
)
|
|
|
(49,752
|
)
|
|
|
(24,417
|
)
|
Unrealized (gain) loss on interest rate swaps
|
|
|
|
|
|
|
(387
|
)
|
|
|
387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(58,476
|
)
|
|
$
|
(40,338
|
)
|
|
$
|
(10,420
|
)
|
|
$
|
(49,752
|
)
|
|
$
|
(24,417
|
)
|
Comprehensive loss attributable to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
(452
|
)
|
|
|
(502
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss attributable to Great Wolf
Resorts, Inc.
|
|
$
|
(58,476
|
)
|
|
$
|
(40,338
|
)
|
|
$
|
(9,968
|
)
|
|
$
|
(49,250
|
)
|
|
$
|
(24,413
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
12,215
|
|
|
$
|
33,534
|
|
|
$
|
29,751
|
|
|
$
|
29,723
|
|
|
$
|
17,788
|
|
Investing activities
|
|
|
(36,659
|
)
|
|
|
(144,612
|
)
|
|
|
(206,967
|
)
|
|
|
(107,123
|
)
|
|
|
(65,496
|
)
|
Financing activities
|
|
|
31,126
|
|
|
|
106,712
|
|
|
|
99,035
|
|
|
|
119,396
|
|
|
|
23,081
|
|
Balance Sheet Data (end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
805,744
|
|
|
$
|
840,061
|
|
|
$
|
770,805
|
|
|
$
|
683,439
|
|
|
$
|
605,526
|
|
Total debt
|
|
|
550,071
|
|
|
|
507,051
|
|
|
|
396,302
|
|
|
|
289,389
|
|
|
|
168,328
|
|
Non-GAAP financial Measures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA(3)
|
|
$
|
31,791
|
|
|
$
|
18,181
|
|
|
$
|
32,305
|
|
|
$
|
(28,221
|
)
|
|
$
|
(369
|
)
|
|
|
|
(1) |
|
Reflects reimbursement of payroll, benefits and costs related to
the operations of properties managed by us. |
|
(2) |
|
Included in the total shares outstanding of our common stock are
11,765 shares (in
2008-2009)
and 129,412 shares (in
2005-2007)
held in a trust that holds the assets to pay obligations under
our deferred compensation plan. Under applicable accounting
rules, the shares of common stock held in that trust are treated
as treasury stock for purposes of our earnings per share
computations and are therefore excluded from the basic and
diluted earnings per share calculations. |
|
(3) |
|
EBITDA is a non-GAAP performance measure. We define EBITDA as
net income (loss) attributable to Great Wolf Resorts, Inc. on a
consolidated basis, adjusted to exclude the following items: |
|
|
|
|
|
interest expense, net of interest income,
|
|
|
|
income tax expense or benefit, and
|
|
|
|
depreciation and amortization.
|
Our management uses EBITDA: (i) as a measurement of
operating performance because it assists us in comparing our
operating performance on a consistent basis as it removes the
impact of items directly resulting from our asset base
(primarily depreciation and amortization) from our operating
results; (ii) for planning purposes, including the
preparation of our annual operating budget; (iii) as a
valuation measure for evaluating our operating performance and
our capacity to incur and service debt, fund capital
expenditures and expand our business; and (iv) as one
measure in determining the value of other acquisitions and
dispositions.
We believe that EBITDA is an operating performance measure, and
not a liquidity measure, that provides investors and analysts
with a measure of operating results unaffected by differences in
capital structures, capital investment cycles and ages of
related assets among otherwise comparable companies. We also
present EBITDA because it is used by some investors as a way to
measure our ability to incur and service debt, make capital
expenditures and meet working capital requirements. We believe
EBITDA is useful to an investor in evaluating our operating
performance because: (i) a significant portion of our
assets consists of property and equipment that are depreciated
over their remaining useful lives in accordance with generally
accepted accounting principles (GAAP); (ii) it is widely
used in the hospitality and entertainment industries to measure
operating performance without regard to items such as
depreciation and amortization; and (iii) we believe it
helps investors meaningfully evaluate and compare the results of
our operations from period to period by removing the impact of
items directly resulting from our asset base (primarily
depreciation and amortization) from our operating results.
EBITDA is a measure commonly used in our industry, and we
present EBITDA to
45
enhance your understanding of our operating performance. We use
EBITDA as one criterion for evaluating our performance relative
to that of our peers.
The following table reconciles net loss attributable to Great
Wolf Resorts, Inc. to EBITDA for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net loss attributable to Great Wolf Resorts, Inc.
|
|
$
|
(58,476)
|
|
|
$
|
(40,725
|
)
|
|
$
|
(9,581
|
)
|
|
$
|
(49,250
|
)
|
|
$
|
(24,413
|
)
|
Interest expense, net of interest income
|
|
|
33,430
|
|
|
|
25,853
|
|
|
|
12,129
|
|
|
|
4,064
|
|
|
|
5,105
|
|
Income tax expense (benefit)
|
|
|
459
|
|
|
|
(13,028
|
)
|
|
|
(6,615
|
)
|
|
|
(8,938
|
)
|
|
|
(7,309
|
)
|
Depreciation and amortization
|
|
|
56,378
|
|
|
|
46,081
|
|
|
|
36,372
|
|
|
|
25,903
|
|
|
|
26,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
31,791
|
|
|
$
|
18,181
|
|
|
$
|
32,305
|
|
|
$
|
(28,221
|
)
|
|
$
|
(369
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
This Managements Discussion and Analysis of
Financial Condition and Results of Operations of Great
Wolf Resorts Inc. is a discussion of our financial condition,
results of operations and liquidity and capital resources for
the fiscal years ended December 31, 2009, 2008 and 2007 and
should be read in conjunction with the consolidated financial
statements and the related notes that appear elsewhere herein.
Certain statements we make under this section constitute
forward-looking statements under the Private
Securities Litigation Reform Act of 1995. See
Forward-Looking Statements included elsewhere in
this report. You should consider our forward-looking statements
in light of the risks discussed under the heading Risk
Factors above as well as our consolidated financial
statements, related notes, and other financial information
appearing elsewhere in this report.
All dollar amounts in this discussion, except for per share
data and operating statistics, are in thousands.
Overview
The terms Great Wolf Resorts, us,
we and our are used in this report to
refer to Great Wolf Resorts, Inc. and its consolidated
subsidiaries.
Business. We are a family entertainment resort
company and the largest owner, licensor, operator and developer
in North America of drive-to family resorts featuring indoor
waterparks and other family-oriented entertainment activities
based on the number of resorts in operation. Each of our resorts
features approximately 300 to 600 family suites, each of which
sleeps from six to ten people and includes a wet bar, microwave
oven, refrigerator and dining and sitting area. We provide a
full-service entertainment resort experience to our target
customer base: families with children ranging in ages from 2 to
14 years old that live within a convenient driving distance
of our resorts. We operate and license resorts under our Great
Wolf
Lodge®
and Blue Harbor
Resorttm
brand names and have entered into licensing arrangements with
third-parties to operate resorts under the Great Wolf Lodge
brand name. Our resorts are open year-round and provide a
consistent, comfortable environment where our guests can enjoy
our various amenities and activities.
We provide our guests with a self-contained vacation experience
and focus on capturing a significant portion of their total
vacation spending. We earn revenues through the sale of rooms
(which includes admission to our indoor waterpark), and other
revenue-generating resort amenities. Each of our resorts
features a combination of some or all of the following
revenue-generating amenities: themed restaurants, ice cream shop
and confectionery, full-service adult spa, kid spa, game arcade,
gift shop, miniature golf, interactive game attraction, family
tech center and meeting space. We also generate revenues from
licensing arrangements, management fees and other fees with
respect to our operation or development of properties owned in
whole or in part by third parties.
46
The following table presents an overview of our portfolio of
resorts. As of December 31, 2009, we operate, manage
and/or have
entered into licensing arrangements relating to the operation of
11 Great Wolf Lodge resorts (our signature Northwoods-themed
resorts), and one Blue Harbor Resort (a nautical-themed
property). We anticipate that most of our future resorts will be
licensed
and/or
developed under our Great Wolf Lodge brand, but we may operate
and/or enter
into licensing arrangements with regard to additional
nautical-themed resorts under our Blue Harbor Resort brand or
other brands in appropriate markets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indoor
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Number of
|
|
|
Entertainment
|
|
|
|
Ownership Percentage
|
|
|
Opened
|
|
Guest Suites
|
|
|
Condo Units(1)
|
|
|
Area(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Approx. sq. ft.)
|
|
|
Wisconsin Dells, WI(3)
|
|
|
|
|
|
1997
|
|
|
308
|
|
|
|
77
|
|
|
|
102,000
|
|
Sandusky, OH(3)
|
|
|
|
|
|
2001
|
|
|
271
|
|
|
|
|
|
|
|
41,000
|
|
Traverse City, MI
|
|
|
100
|
%
|
|
2003
|
|
|
280
|
|
|
|
|
|
|
|
57,000
|
|
Kansas City, KS
|
|
|
100
|
%
|
|
2003
|
|
|
281
|
|
|
|
|
|
|
|
57,000
|
|
Sheboygan, WI
|
|
|
100
|
%
|
|
2004
|
|
|
182
|
|
|
|
64
|
|
|
|
54,000
|
|
Williamsburg, VA(4)
|
|
|
100
|
%
|
|
2005
|
|
|
405
|
|
|
|
|
|
|
|
87,000
|
|
Pocono Mountains, PA(4)
|
|
|
100
|
%
|
|
2005
|
|
|
401
|
|
|
|
|
|
|
|
101,000
|
|
Niagara Falls, ONT(5)
|
|
|
|
|
|
2006
|
|
|
406
|
|
|
|
|
|
|
|
104,000
|
|
Mason, OH(4)
|
|
|
100
|
%
|
|
2006
|
|
|
401
|
|
|
|
|
|
|
|
105,000
|
|
Grapevine, TX(4)
|
|
|
100
|
%
|
|
2007
|
|
|
605
|
|
|
|
|
|
|
|
110,000
|
|
Grand Mound, WA(6)
|
|
|
49
|
%
|
|
2008
|
|
|
398
|
|
|
|
|
|
|
|
74,000
|
|
Concord, NC(4)
|
|
|
100
|
%
|
|
2009
|
|
|
402
|
|
|
|
|
|
|
|
97,000
|
|
|
|
|
(1) |
|
Condominium units are individually owned by third parties and
are managed by us. |
|
(2) |
|
Our indoor entertainment areas generally include our indoor
waterpark, game arcade, childrens activity room, family
tech center,
MagiQuest®
(an interactive game attraction) and fitness room, as well as
our spa in the resorts that have such amenities. |
|
(3) |
|
These properties are owned by CNL Lifestyle Properties, Inc.
(CNL), a real estate investment trust focused on leisure and
lifestyle properties. Prior to August 2009, these properties
were owned by a joint venture between CNL and us. In August 2009
we sold our 30.26% joint venture interest to CNL for $6,000. We
currently manage both properties and license the Great Wolf
Lodge brand to these resorts. |
|
(4) |
|
Five of our properties (Great Wolf Lodge resorts in
Williamsburg, VA; Pocono Mountains, PA; Mason, OH; Grapevine, TX
and Concord, NC) each had a book value of fixed assets equal to
ten percent or more of our total assets as of December 31,
2009. Four of our properties (Great Wolf Lodge resorts in
Williamsburg, VA; Pocono Mountains, PA; Mason, OH and Grapevine,
TX) each had total revenues equal to ten percent or more of our
total revenues for the year ended December 31, 2009. |
|
(5) |
|
An affiliate of Ripley Entertainment, Inc. (Ripley), our
licensee, owns this resort. We have granted Ripley a license to
use the Great Wolf Lodge name for this resort through April
2016. We managed the resort on behalf of Ripley through April
2009. |
|
(6) |
|
This property is owned by a joint venture. The Confederated
Tribes of the Chehalis Reservation (Chehalis) owns a 51%
interest in the joint venture, and we own a 49% interest. We
operate the property and license the Great Wolf Lodge brand to
the joint venture under long-term agreements through April 2057,
subject to earlier termination in certain situations. The joint
venture leases the land for the resort from the United States
Department of the Interior, which is trustee for Chehalis. |
Industry Trends. We operate in the family
entertainment resort segment of the travel and leisure industry.
The concept of a family entertainment resort with an indoor
waterpark was first introduced to the United States in Wisconsin
Dells, Wisconsin, and has evolved since 1987. In an effort to
boost occupancy and daily rates, as well as capture off-season
demand, hotel operators in the Wisconsin Dells market began
expanding indoor pools and adding waterslides and other
water-based attractions to existing hotels and resorts. The
success of these efforts prompted several local operators to
build new, larger destination resorts based primarily on the
concept.
47
We believe that these properties, which typically are themed and
include other resort features such as arcades, retail shops and
full food and beverage service in addition to the indoor
waterpark, have historically outperformed standard hotels in the
market. We believe that the rate premiums and increased market
share in the Wisconsin Dells for hotels and resorts with some
form of an indoor waterpark can be attributed to several
factors, including the ability to provide a year-round vacation
destination without weather-related risks, the wide appeal of
water-based recreation and the favorable trends in leisure
travel discussed below.
While no standard industry definition for a family entertainment
resort featuring an indoor waterpark has developed, we generally
consider resorts with at least 200 rooms featuring indoor
waterparks larger than 25,000 square feet, as well as a
variety of water slides and other water-based attractions, to be
competitive with our resorts. A Hotel & Leisure
Advisors, LLC (H&LA) survey as of June 2009 indicates that
there are 139 open indoor waterpark resort properties in the
United States and Canada. Of the total, 48 are considered
indoor waterpark destination resorts offering more
than 30,000 square feet of indoor waterpark space. Of these
48 properties, 11 are Great Wolf Resorts properties.
We believe recent vacation trends favor drive-to family
entertainment resorts featuring indoor waterparks, as the number
of families choosing to take shorter, more frequent vacations
that they can drive to have increased in recent years. We
believe these trends will continue. We believe indoor waterpark
resorts are generally less affected by changes in economic
cycles, as drive-to destinations are generally less expensive
and more convenient than destinations that require air travel.
Outlook. We believe that no other operator or
developer other than us has established a national portfolio of
destination family entertainment resorts that feature indoor
waterparks. Our resorts do, however, compete directly with other
family entertainment resorts in several of our markets. We
intend to continue to expand our portfolio of resorts throughout
the United States and to selectively seek licensing and
management opportunities domestically and internationally.
The resorts we plan to develop, license
and/or
operate in the future require significant industry knowledge and
substantial capital resources. Our external growth strategy
going forward is to seek joint venture, licensing and management
opportunities. We expect each of these joint venture
arrangements would involve us having a minority or no ownership
interest in the new resort. We believe there are opportunities
to capitalize on our existing brand and operational platforms
with lower capital requirements from us than if we were the sole
or majority owner of the new resort.
Our primary business objective is to increase long-term
stockholder value. We believe we can increase stockholder value
by executing our internal and external growth strategies. Our
primary growth strategies are:
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Leveraging our competitive advantages and increasing domestic
geographic diversification through a license-based business
model and joint venture investments in target markets;
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Expanding our brand footprint internationally;
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Selective sales of ownership interests/recycling of capital;
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Expanding and enhancing existing resorts;
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Continuing to innovate;
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Maximizing total resort revenues;
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Minimizing total resort costs; and
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Building upon our existing brand awareness and loyalty.
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In attempting to execute our internal and external growth
strategies, we are subject to a variety of business challenges
and risks. These risks include those described under Risk
Factors Risks Related to Our Business
Activities and Risk Factors Risks
Related to Regulation. We seek to meet these challenges by
providing sufficient management oversight to site selection,
development and resort operations; concentrating on growing and
strengthening awareness of our brand and demand for our resorts;
and maintaining our focus on safety.
48
Our business model is highly dependent on consumer spending,
because the majority of our revenues are earned from leisure
guests and a vacation experience at one of our resorts is a
discretionary expenditure for a family. Over the past two years,
the slowing U.S. economy has led to a decrease in credit
for consumers and a related decrease in consumer discretionary
spending. This trend continued through 2009 as consumers
experienced several negative economic impacts, including:
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severe turbulence in the banking and lending sectors, which has
led to a general lessening of the availability of credit to
consumers;
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an increased national unemployment rate;
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a continuing decline in the national average of home prices and
an increase in the national home foreclosure rate; and
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high volatility in the stock market that led to substantial
declines in stock values and aggregate household savings from
2007 to 2009.
|
These and other factors impact the amount of discretionary
income for consumers and consumer sentiment toward discretionary
purchases. As a result, these types of items could negatively
impact consumer spending in future periods. While we believe the
convenience, quality and overall affordability of a stay at one
of our resorts continues to be an attractive alternative to
other potential family vacations, a sustained decrease in
overall consumer discretionary spending could have a material
adverse effect on our overall results. We develop resorts with
expectations of achieving certain financial returns on a
resorts operation. The economic slowdown of the past two
years has materially and adversely affected our ability to
achieve the operating results on our resorts that we had
expected to achieve when those resorts were first planned and
developed. Also:
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We believe that our Traverse City and Sandusky resorts have been
and will continue to be affected by especially adverse general
economic circumstances in the Michigan/Northern Ohio region
(such as bankruptcies of several major companies
and/or large
announced layoffs by major employers) and increased competition
that has occurred in these markets over the past few years. The
Michigan/Northern Ohio region includes cities that have
historically been the Traverse City and Sandusky resorts
largest source of customers. We believe the adverse general
economic circumstances in the region have negatively impacted
overall discretionary consumer spending in that region over the
past few years and may continue to do so going forward. Although
we have taken steps to reduce our operating costs at these
resorts, we believe the general regional economic downturn has
and may continue to have an impact on the operating performance
of our Traverse City and Sandusky resorts.
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Our Wisconsin Dells property has been significantly impacted by
the abundance of competing indoor waterpark resorts in that
market. The Wisconsin Dells market has approximately 16 indoor
waterpark resorts that compete with us. We believe this large
number of competing properties in a relatively small tourist
destination location has and will likely continue to have an
adverse impact on the operating performance of our Wisconsin
Dells resort.
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We have experienced much lower than expected occupancy and lower
than expected average daily room rates at our Sheboygan,
Wisconsin property since its opening in 2004. We believe this
operating weakness has been primarily attributable to the fact
that the overall development of Sheboygan as a tourist
destination continues to lag materially behind our initial
expectations. We believe this has materially impacted and will
likely continue to impact the consumer demand for our indoor
waterpark resort in that market and the operations of the
resort. As described under Critical Accounting Policies
and Estimates Investments in Property and
Equipment, we recorded a $24,000 impairment charge in 2009
relating to our Sheboygan resort. The impaired long-lived asset
is included in our Resort Ownership/Operation segment.
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Our Mason resort opened its first phase in December 2006 and has
experienced lower than expected occupancy and
lower-than-expected
average daily room rates. We believe this is due, in part, to
the opening of competitive properties in the region.
|
49
Our external growth strategies are based primarily on developing
additional indoor waterpark resorts (in conjunction with joint
venture partners) or by licensing our intellectual property and
proprietary management systems to others. Developing resorts of
the size and scope of our family entertainment resorts generally
requires obtaining financing for a significant portion of a
projects expected construction costs. The general
tightening in U.S. lending markets has dramatically
decreased the overall availability of construction financing.
Although the ultimate effect on our external growth strategy of
the current credit environment is difficult to predict with
certainty, we believe that the availability of construction
financing to us and other investors
and/or
developers may be more restrictive in the future and that terms
of construction financing may be less favorable than we have
seen historically. Although we believe that we and other
investors
and/or
developers may be able to continue to obtain construction
financing sufficient to execute development strategies, we
expect that the more difficult credit market environment is
likely to continue at least through 2010.
Revenue and Key Performance Indicators. We
seek to generate positive cash flows and maximize our return on
invested capital from each of our owned resorts. Our rooms
revenue represents sales to guests of room nights at our resorts
and is the largest contributor to our cash flows and earnings
before interest, taxes, depreciation and amortization, (EBITDA).
Rooms revenue accounted for approximately 66% of our total
consolidated resort revenue for the year ended December 31,
2009. We employ sales and marketing efforts to increase overall
demand for rooms at our resorts. We seek to optimize the
relationship between room rates and occupancies through the use
of yield management techniques that attempt to project demand in
order to selectively increase room rates during peak demand.
These techniques are designed to assist us in managing our
higher occupancy nights to achieve maximum rooms revenue and
include such practices as:
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Monitoring our historical trends for occupancy and estimating
our high occupancy nights;
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Offering the highest discounts to previous guests in off-peak
periods to build customer loyalty and enhance our ability to
charge higher rates in peak periods;
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Structuring rates to allow us to offer our previous guests the
best rate while simultaneously working with a promotional
partner or offering internet specials;
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Monitoring sales of room types daily to evaluate the
effectiveness of offered discounts; and
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Offering specials on standard suites and yielding better rates
on larger suites when standard suites sell out.
|
In addition, we seek to maximize the amount of time and money
spent
on-site by
our guests by providing a variety of revenue-generating
amenities.
We have several key indicators that we use to evaluate the
performance of our business. These indicators include the
following:
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Occupancy;
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Average daily room rate, or ADR;
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Revenue per available room, or RevPAR;
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Total revenue per available room, or Total RevPAR;
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Total revenue per occupied room, or Total RevPOR; and
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Earnings before interest, taxes, depreciation and amortization,
or EBITDA.
|
Occupancy, ADR and RevPAR are commonly used measures within the
hospitality industry to evaluate hotel operations and are
defined as follows:
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Occupancy is calculated by dividing total occupied rooms by
total available rooms.
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ADR is calculated by dividing total rooms revenue by total
occupied rooms.
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50
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RevPAR is the product of occupancy and ADR.
|
Total RevPAR and Total RevPOR are defined as follows:
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Total RevPAR is calculated by dividing total revenue by total
available rooms.
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Total RevPOR is calculated by dividing total revenue by total
occupied rooms.
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Occupancy allows us to measure the general overall demand for
rooms at our resorts and the effectiveness of our sales and
marketing strategies. ADR allows us to measure the effectiveness
of our yield management strategies. While ADR and RevPAR only
include rooms revenue, Total RevPOR and Total RevPAR include
both rooms revenue and other revenue derived from food and
beverage and other amenities at our resorts. We consider Total
RevPOR and Total RevPAR to be key performance indicators for our
business because we derive a significant portion of our revenue
from food and beverage and other amenities. For the year ended
December 31, 2009, approximately 34% of our total
consolidated resort revenues consisted of non-rooms revenue.
We use RevPAR and Total RevPAR to evaluate the blended effect
that changes in occupancy, ADR and Total RevPOR have on our
results. We focus on increasing ADR and Total RevPOR because we
believe those increases can have the greatest positive impact on
our results. In addition, we seek to maximize occupancy, as
increases in occupancy generally lead to greater total revenues
at our resorts, and we believe maintaining certain occupancy
levels is key to covering our fixed costs. Increases in total
revenues as a result of higher occupancy are, however, typically
accompanied by additional incremental costs (including
housekeeping services, utilities and room amenity costs). In
contrast, increases in total revenues from higher ADR and Total
RevPOR are typically accompanied by lower incremental costs and
result generally, in a greater increase in operating cash flow.
We also use EBITDA as a measure of our operational performance
of each of our resorts. EBITDA is a supplemental financial
measure and is not defined by accounting principles generally
accepted in the United States (GAAP). See
Non-GAAP Financial Measures below for further
discussion of our use of EBITDA and a reconciliation to net loss
attributable to Great Wolf Resorts, Inc.
Critical
Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance
with GAAP. The application of GAAP requires us to make estimates
and assumptions that affect the reported values of assets and
liabilities, revenue and expenses and related disclosure of
contingent assets and liabilities. The preparation of our
consolidated financial statements and our financial reporting
process involve the use of accounting estimates based on our
current judgments. Certain accounting estimates are particularly
sensitive because of their significance to our consolidated
financial statements and because of the possibility that future
events affecting them may differ from our current judgments.
Investments in Property and Equipment. We
record investments in property and equipment at cost.
Improvements and replacements are capitalized when they extend
the useful life, increase capacity or improve the efficiency of
the asset. Repairs and maintenance are charged to expense as
incurred.
Depreciation and amortization are recorded on a straight-line
basis over the estimated useful lives of the assets as follows:
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Buildings and improvements
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20-40 years
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Fixtures and equipment, including waterpark equipment
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5-15 years
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We are required to make subjective assessments as to these
useful lives for purposes of determining the amount of
depreciation and amortization to record annually with respect to
our investments in property and equipment. These assessments
have a direct impact on our net loss because if we were to
shorten the expected useful lives of our investments in property
and equipment we would depreciate and amortize such investments
over fewer years, resulting in more depreciation and
amortization expense and a larger net loss on an annual
51
basis. We periodically review the estimated useful lives we have
assigned to our depreciable assets to determine whether those
useful lives are reasonable and appropriate.
When circumstances, such as adverse market conditions, indicate
the carrying values of a long-lived asset may be impaired, we
perform an analysis to review the recoverability of the
assets carrying value. We make estimates of the
undiscounted cash flows (excluding interest charges) from the
expected future operations of the asset. These estimates
consider factors such as expected future operating income,
operating trends and prospects, as well as the effects of
demand, competition and other factors. If the analysis indicates
that the carrying value is not recoverable from future cash
flows, an impairment loss is recognized to the extent that the
carrying value exceeds the estimated fair value. Any impairment
losses are recorded as operating expenses, which reduce net
income.
We have experienced much lower than expected occupancy and lower
than expected average daily room rates at our Sheboygan resort
since its opening in 2004. We believe this operating weakness
has been primarily attributable to the fact that the overall
development of Sheboygan as a tourist destination continues to
lag significantly behind our initial expectations. We believe
this has materially impacted and will likely continue to impact
the consumer demand for our indoor waterpark resort in that
market and the operations of the resort.
Because of triggering events that occurred in 2009 related to
our Sheboygan resort, including changes in the expectation of
how long we will hold this property, current period and
historical operating losses and the deterioration in the current
market conditions, we performed a recoverability test of this
resort to determine if further assessment for potential
impairment was required. Based on this analysis of undiscounted
cash flows, we determined the carrying value of this resort was
not recoverable. As a result, we recorded a $24,000 impairment
charge to decrease the resorts carrying value to its
estimated fair value (net of estimated disposal costs) in 2009.
To determine the estimated fair value for purposes of
calculating the impairment charge, we used a combination of
historical and projected cash flows and other available market
information, such as recent sales prices for similar assets.
Although we believe our estimated fair value for the resort is
reasonable, the actual fair value we ultimately realize from
this resort could differ materially from this estimate. The
impaired long-lived asset is included in our Resort
Ownership/Operation segment.
Goodwill We are required to assess goodwill
for impairment annually, or more frequently if circumstances
indicate impairment may have occurred. To test goodwill for
impairment, we compare the fair value of the individual resort
to which the goodwill is assigned to the carrying value of that
resort. To estimate the resorts fair value we used a
discounted cash flow model. Each of our resorts is considered a
reporting unit. If the analysis indicates that the fair value is
less than the carrying value of the individual resort, we
compare the implied fair value of the resorts goodwill
with the carrying amount of that goodwill. The implied fair
value of the goodwill is determined by allocating the fair value
of the individual resort to all the assets and liabilities of
that resort as if it had been acquired in a business combination
at the assessment date. The excess of the fair value of the
individual resort over the amounts assigned to its assets and
liabilities is the implied fair value of the goodwill. If the
implied fair value of the goodwill is less than its carrying
value, an impairment loss is recognized. Any impairment losses
are recorded as operating expenses, which reduce net income. Our
assessment of the fair value is dependent on the operating
results of the resorts.
In 2008 we wrote off $17,430 of goodwill on our Kansas City and
Mason resorts as the implied fair value of the goodwill, as
discussed above, was deemed less than the carrying value. As of
December 31, 2009 and 2008, we had no remaining goodwill
balance.
52
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2009
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2008
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Balance as of January 1
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Goodwill
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$
|
130,496
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|
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$
|
130,496
|
|
Accumulated impairment losses
|
|
|
(68,405
|
)
|
|
|
(50,975
|
)
|
Goodwill related to sale of affiliate
|
|
|
(62,091
|
)
|
|
|
(62,091
|
)
|
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|
|
|
|
|
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|
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|
|
|
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17,430
|
|
Impairment losses
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|
|
|
|
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(17,430
|
)
|
Balance as of December 31
|
|
|
|
|
|
|
|
|
Goodwill.
|
|
|
130,496
|
|
|
|
130,496
|
|
Accumulated impairment losses
|
|
|
(68,405
|
)
|
|
|
(68,405
|
)
|
Goodwill related to sale of affiliate
|
|
|
(62,091
|
)
|
|
|
(62,091
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets We are required to assess
indefinite-lived intangible assets for impairment annually, or
more frequently if circumstances indicate impairment may have
occurred. To test indefinite-lived intangible assets for
impairment, we compare the fair value of the intangible asset
with its carrying amount. If the fair value of the intangible
asset is less than its carrying value, an impairment loss is
recognized. Any impairment losses are recorded as operating
expenses, which reduce net income. Future adverse changes in the
hospitality and lodging industry, market conditions or poor
operating results of the underlying real estate assets could
result in future losses or the inability to recover the carrying
value of these intangibles. We had no impairment losses related
to intangible assets in any of the periods presented.
Our consolidated balance sheet as of December 31, 2009
reflects approximately $23,829 of intangible assets related to
our Great Wolf Lodge brand name. This brand name intangible
asset has an indefinite life.
Investments in Affiliates When circumstances,
such as adverse market conditions, indicate that the carrying
value of our investments in affiliates may be impaired, we
perform an analysis to review the recoverability of the
assets carrying value. To test investment in affiliates
for impairment, we compare the fair value of the investment in
affiliates with its carrying amount. If the fair value of the
investment in affiliates is less than its carrying value, an
impairment loss is recognized. Any impairment losses are
recorded as operating expenses, which reduce net income. Future
adverse changes in the hospitality and lodging industry, market
conditions or poor operating results of the underlying
investments could result in future losses or the inability to
recover the carrying value of these assets.
In the fourth quarter of 2008, we concluded that continued
adverse current and expected market conditions for our Wisconsin
Dells and Sandusky resorts indicated that our minority
investment in the joint venture that owns these resorts may be
impaired. In early 2009, we concluded that the fair value of our
investment in this joint venture, as discussed above, was less
than its carrying value. As a result, we recorded an $18,777
impairment loss related to our 30.26% interest in the joint
venture that owns the Wisconsin Dells and Sandusky resorts, as
the implied fair value of the investment, as discussed above,
was less than its carrying value. On August 6, 2009, we
sold our 30.26% joint venture interest to CNL for $6,000.
We do not believe current circumstances indicate that the
carrying value of our minority investment in the joint venture
that owns our Grand Mound resort may be impaired. The carrying
value of our 49% interest in our joint venture that owns the
Great Wolf Lodge in Grand Mound is $27,484 as of
December 31, 2009.
Accounting for Income Taxes. We account for
income taxes under the asset and liability method, which
requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have
been included in the financial statements. Under this method,
deferred tax assets and liabilities are determined based on the
differences between the financial statement and tax basis of
assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to reverse. The
effect of a change in tax rates on deferred tax assets and
liabilities is recognized in income in the period that includes
the enactment date.
53
Significant management judgment is required in determining our
provision or benefit for income taxes, our deferred tax assets
and liabilities, and any valuation allowance recorded against
our net deferred tax assets. We record net deferred tax assets
(primarily resulting from net operating loss carryforwards) to
the extent we believe these assets will more likely than not be
realized. In making such determination, we consider all
available positive and negative evidence, including scheduled
reversals of deferred tax liabilities, projected future taxable
income (that could result from a sale of one or more of our
resorts where theres a sales price in excess of tax
basis), tax planning strategies and recent financial operations.
In the event we were to determine that we would not be able to
realize our deferred tax assets, we would establish a valuation
allowance which would increase the provision for income taxes.
Conversely, in the event we were to determine that we would be
able to realize our deferred income tax assets in the future in
excess of their net recorded amount, we would make an adjustment
to the valuation allowance which would reduce the provision for
income taxes.
In 2009 we determined that due to current conditions in the
credit markets, real estate markets and our current financial
position, the tax planning strategy we previously expected to
generate substantial taxable income was no longer feasible. As a
result, we recorded a valuation allowance of $23,008 in 2009,
due to uncertainties related to our ability to utilize some of
our deferred tax assets, primarily consisting of certain net
operating loss carryforwards, before they expire. The valuation
allowance we recorded is based on our estimates of taxable
income solely from the reversal of existing deferred tax
liabilities and the period over which deferred tax assets
reverse. In the event that actual results differ from these
estimates or we adjust these estimates in a future period, we
may need to increase or decrease our valuation allowance, which
could materially impact our consolidated statement of operations.
New
Accounting Pronouncements
In April 2009, the FASB issued guidance on how to determine
whether there has been a significant decrease in the volume and
level of activity for an asset or liability when compared with
normal market activity for the asset or liability. In such
situations, an entity may conclude that transactions or quoted
prices may not be determinative of fair value, and may adjust
the transactions or quoted prices to arrive at the fair value of
the asset or liability. This guidance was effective for interim
and annual reporting periods ending after June 15, 2009,
and shall be applied prospectively. The adoption of this
guidance did not have a material impact on our consolidated
financial statements.
In April 2009, the FASB issued guidance which requires
disclosures about fair value of financial instruments in interim
and annual financial information for periods ending after
June 15, 2009. The adoption of this guidance did not have a
material impact on our consolidated financial statements.
In June 2009, the FASB issued guidance which changes how a
reporting entity determines when an entity that is
insufficiently capitalized or is not controlled through voting
(or similar rights) should be consolidated. The determination of
whether a reporting entity is required to consolidate another
entity is based on, among other things, the other entitys
purpose and design and the reporting entitys ability to
direct the activities of the other entity that most
significantly impact the other entitys economic
performance. The guidance will require a reporting entity to
provide additional disclosures about its involvement with
variable interest entities and any significant changes in risk
exposure due to that involvement. A reporting entity will be
required to disclose how its involvement with a variable
interest entity affects the reporting entitys financial
statements. The adoption of this guidance is effective for
fiscal years beginning after November 15, 2009, and interim
periods within those fiscal years. The adoption of this guidance
is not expected to have a material impact on our consolidated
financial statements.
In June 2009, the FASB issued guidance on codification and the
hierarchy of Generally Accepted Accounting Principles. The
Codification superseded all non-SEC accounting and reporting
standards. All other nongrandfathered non-SEC accounting
literature not included in the Codification will become
nonauthoritative. The guidance is effective for interim
quarterly and annual periods beginning July 1, 2009. The
adoption of this guidance did not have a material impact on our
consolidated financial statements.
In August 2009, the FASB issued guidance on measuring
liabilities at fair value which provides clarification on
measuring liabilities at fair value when a quoted price in an
active market is not available. The
54
guidance was effective for the first reporting period beginning
after issuance. The adoption of this guidance did not have a
material impact on our consolidated financial statements.
In October 2009, the FASB issued guidance for revenue
recognition with multiple deliverables. This guidance eliminates
the residual method under the current guidance and replaces it
with the relative selling price method when
allocating revenue in a multiple deliverable arrangement. The
selling price for each deliverable shall be determined using
vendor specific objective evidence of selling price, if it
exists, otherwise third-party evidence of selling price shall be
used. If neither exists for a deliverable, the vendor shall use
its best estimate of the selling price for that deliverable.
After adoption, this guidance will also require expanded
qualitative and quantitative disclosures. The guidance is
effective for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15,
2010, although early adoption is permitted. We are currently
evaluating the impact of this guidance on our consolidated
financial statements.
Non-GAAP Financial
Measures
We use EBITDA as a measure of our operating performance. EBITDA
is a supplemental non-GAAP financial measure. EBITDA consists of
net income (loss) attributable to Great Wolf Resorts, Inc.,
eliminating (a) interest expense, net of interest income,
(b) income tax expense or benefit and (c) depreciation
and amortization.
EBITDA as calculated by us is not necessarily comparable to
similarly titled measures presented by other companies. In
addition, EBITDA (a) does not represent net income or cash
flows from operations as defined by GAAP; (b) is not
necessarily indicative of cash available to fund our cash flow
needs; and (c) should not be considered as an alternative
to net income, operating income, cash flows from operating
activities or our other financial information as determined
under GAAP.
We believe EBITDA is useful to an investor in evaluating our
operating performance because:
|
|
|
|
|
a significant portion of our assets consists of property and
equipment that are depreciated over their remaining useful lives
in accordance with GAAP. Because depreciation and amortization
are non-cash items, we believe that presentation of EBITDA is a
useful measure of our operating performance;
|
|
|
|
it is widely used in the hospitality and entertainment
industries to measure operating performance without regard to
items such as depreciation and amortization; and
|
|
|
|
we believe it helps investors meaningfully evaluate and compare
the results of our operations from period to period by removing
the impact of items directly resulting from our asset base,
primarily depreciation and amortization, from our operating
results.
|
Our management uses EBITDA:
|
|
|
|
|
as a measurement of operating performance because it assists us
in comparing our operating performance on a consistent basis as
it removes the impact of items directly resulting from our asset
base, primarily depreciation and amortization, from our
operating results;
|
|
|
|
for planning purposes, including the preparation of our annual
operating budget;
|
|
|
|
as a valuation measure for evaluating our operating performance
and our capacity to incur and service debt, fund capital
expenditures and expand our business; and
|
|
|
|
as one measure in determining the value of other acquisitions
and dispositions.
|
Using a measure such as EBITDA has material limitations,
including the following:
|
|
|
|
|
it does not reflect every cash expenditure, future requirements
for capital expenditures or contractual commitment;
|
|
|
|
it does not reflect the significant interest expense or the cash
requirements necessary to service interest or principal payments
on our debt;
|
55
|
|
|
|
|
although depreciation and amortization are non-cash charges, the
assets being depreciated and amortized will often have to be
replaced or require improvements in the future, and our
EBITDA-based measures do not reflect any cash requirements for
such replacements or improvements;
|
|
|
|
it is not adjusted for all non-cash income or expense items that
are reflected in our statements of cash flows;
|
|
|
|
it does not reflect the impact of earnings or charges resulting
from matters we consider not to be indicative of our ongoing
operations;
|
|
|
|
it does not reflect limitations on our costs related to
transferring earnings from our subsidiaries to us; and
|
|
|
|
other companies in our industry may calculate these measures
differently than we do, limiting their usefulness as competitive
measures.
|
Because of these limitations, our EBITDA-based measures should
not be considered as measures of discretionary cash available to
us to invest in the growth of our business or as measures of
cash that will be available to us to meet our obligations. We
compensate for these limitations by using our EBITDA-based
measures along with other comparative tools, together with GAAP
measurements, to assist in the evaluation of operating
performance. Such GAAP measurements include operating income
(loss), net income (loss), cash flows from operations and cash
flow data. We have significant uses of cash flows, including
capital expenditures, interest payments, debt principal
repayments, taxes and other non-recurring charges, which are not
reflected in our EBITDA-based measures.
Our EBITDA-based measures are not intended as alternatives to
net income (loss) as indicators of our operating performance, as
alternatives to any other measure of performance in conformity
with GAAP or as alternatives to cash flow provided by operating
activities as measures of liquidity. You should therefore not
place undue reliance on our EBITDA-based measures or ratios
calculated using these measures. Our GAAP-based measures can be
found in our consolidated financial statements and related Notes
thereto, included elsewhere in this document.
The following table reconciles net loss attributable to Great
Wolf Resorts, Inc. to EBITDA for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Net loss attributable to Great Wolf Resorts, Inc.
|
|
$
|
(58,476
|
)
|
|
$
|
(40,725
|
)
|
|
$
|
(9,581
|
)
|
Interest expense, net of interest income
|
|
|
33,430
|
|
|
|
25,853
|
|
|
|
12,129
|
|
Income tax expense (benefit)
|
|
|
459
|
|
|
|
(13,028
|
)
|
|
|
(6,615
|
)
|
Depreciation and amortization
|
|
|
56,378
|
|
|
|
46,081
|
|
|
|
36,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
31,791
|
|
|
$
|
18,181
|
|
|
$
|
32,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results
of Operations
General
Our financial information includes:
|
|
|
|
|
our subsidiary entity that provides resort development and
management/licensing services;
|
|
|
|
our Traverse City, Kansas City, Sheboygan, Williamsburg, Pocono
Mountains, Mason, Grapevine and Concord wholly-owned
resorts; and
|
|
|
|
our equity interests in the Wisconsin Dells and Sandusky resorts
through August 2009, when we sold our minority ownership
interests in those resorts, and our equity interest in Grand
Mound resort in which we have an ownership interest but which we
do not consolidate.
|
56
Revenues. Our revenues consist of:
|
|
|
|
|
lodging revenue, which includes rooms, food and beverage, and
other department revenues from our resorts;
|
|
|
|
management fee and other revenue from resorts, which includes
fees received under our management, license, development and
construction management agreements; and
|
|
|
|
other revenue from managed properties. We employ the staff at
our managed properties. Under our management agreements, the
resort owners reimburse us for payroll, benefits and certain
other costs related to the operations of the managed properties.
We include the reimbursement of payroll, benefits and costs is
recorded as revenue on our statements of operations, with a
corresponding expense recorded as other expenses from
managed properties.
|
Operating Expenses. Our departmental operating
expenses consist of rooms, food and beverage and other
department expenses.
Our other operating expenses include the following items:
|
|
|
|
|
selling, general and administrative expenses, which are
associated with the operations and management of resorts and
which consist primarily of expenses such as corporate payroll
and related benefits, operations management, sales and
marketing, finance, legal, information technology support, human
resources and other support services, as well as general
corporate expenses;
|
|
|
|
property operation and maintenance expenses, such as utility
costs and property taxes;
|
|
|
|
depreciation and amortization; and
|
|
|
|
other expenses from managed properties.
|
Year
Ended December 31, 2009 compared with Year Ended
December 31, 2008
The following table shows key operating statistics for our
resorts for the years ended December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Properties(a)
|
|
Same Store Comparison(b)
|
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
|
2009
|
|
2009
|
|
2008
|
|
$
|
|
%
|
|
Occupancy
|
|
|
59.0
|
%
|
|
|
58.9
|
%
|
|
|
61.9
|
%
|
|
|
N/A
|
|
|
|
(4.8
|
)%
|
ADR
|
|
$
|
242.07
|
|
|
$
|
235.14
|
|
|
$
|
243.81
|
|
|
$
|
(8.67
|
)
|
|
|
(3.6
|
)%
|
RevPAR
|
|
$
|
142.79
|
|
|
$
|
138.59
|
|
|
$
|
151.02
|
|
|
$
|
(12.43
|
)
|
|
|
(8.2
|
)%
|
Total RevPOR
|
|
$
|
374.21
|
|
|
$
|
359.79
|
|
|
$
|
369.61
|
|
|
$
|
(9.82
|
)
|
|
|
(2.7
|
)%
|
Total RevPAR
|
|
$
|
220.74
|
|
|
$
|
212.07
|
|
|
$
|
228.95
|
|
|
$
|
(16.88
|
)
|
|
|
(7.4
|
)%
|
Non-rooms revenue per occupied room
|
|
$
|
132.14
|
|
|
$
|
124.65
|
|
|
$
|
125.80
|
|
|
$
|
(1.15
|
)
|
|
|
(0.9
|
)%
|
|
|
|
(a) |
|
Includes results for properties that were open for any portion
of the period, for all owned, managed and/or licensed resorts. |
|
(b) |
|
Same store comparison includes properties (other than properties
that had significant expansions) that were open for the full
periods in 2009 and 2008 (that is, our Wisconsin Dells,
Sandusky, Traverse City, Kansas City, Sheboygan, Williamsburg,
Pocono Mountains, Niagara Falls, and Mason resorts). |
We believe that, consistent with other hospitality and
entertainment companies experience in 2009, the decreases
in occupancy, ADR, non-rooms revenue per occupied room and
RevPAR were due in part to the effect of the overall economic
downturn on consumer discretionary spending.
57
Presented below are selected amounts from our consolidated
statements of operations for the years ended December 31,
2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
Revenues
|
|
$
|
264,032
|
|
|
$
|
245,538
|
|
|
$
|
18,494
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Departmental operating expenses
|
|
|
87,790
|
|
|
|
80,083
|
|
|
|
7,707
|
|
Selling, general and administrative
|
|
|
60,986
|
|
|
|
51,902
|
|
|
|
9,084
|
|
Depreciation and amortization
|
|
|
56,378
|
|
|
|
46,081
|
|
|
|
10,297
|
|
Impairment loss on investment in affiliates
|
|
|
|
|
|
|
18,777
|
|
|
|
(18,777
|
)
|
Goodwill impairment
|
|
|
|
|
|
|
17,430
|
|
|
|
(17,430
|
)
|
Asset impairment loss
|
|
|
24,000
|
|
|
|
|
|
|
|
24,000
|
|
Net operating loss
|
|
|
(24,463
|
)
|
|
|
(25,666
|
)
|
|
|
1,203
|
|
Gain on sale of unconsolidated affiliate
|
|
|
(962
|
)
|
|
|
|
|
|
|
(962
|
)
|
Interest expense, net of interest income
|
|
|
33,430
|
|
|
|
25,853
|
|
|
|
7,577
|
|
Income tax expense (benefit)
|
|
|
440
|
|
|
|
(11,956
|
)
|
|
|
12,396
|
|
Net loss attributable to Great Wolf Resorts, Inc.
|
|
|
(58,476
|
)
|
|
|
(40,725
|
)
|
|
|
(17,751
|
)
|
Revenues. Total revenues increased due to the
following:
|
|
|
|
|
An increase in revenue from our Grapevine resort, due primarily
to the completion of its expansion in early 2009; and
|
|
|
|
An increase in revenue from our Concord resort, which opened in
March 2009.
|
This increase was partially offset by decreases in revenues at
our other resorts due to the overall downturn in consumer
discretionary spending and its negative effects on RevPAR,
RevPOR, occupancy and other
on-site
revenues on a same-store basis.
Operating expenses. Total operating expenses
increased primarily due to the opening of our Concord resort in
March 2009, as well as our expansion at our Grapevine resort,
which was completed in January 2009.
|
|
|
|
|
Departmental expenses increased by $7,707 for the year ended
December 31, 2009, as compared to the year ended
December 31, 2008, due primarily to the opening of our
Concord resort.
|
|
|
|
Total selling, general and administrative expenses increased by
$9,084 in the year ended December 31, 2009, as compared to
the year ended December 31, 2008, due primarily to the
opening of our Concord resort in March 2009, the expansion at
our Grapevine resort, which was completed in January 2009, and
lower labor and overhead expenses allocated to properties under
development during the year ended December 31, 2009 than in
the year ended December 31, 2008 due to fewer properties
under development.
|
|
|
|
Total depreciation and amortization increased for the year ended
December 31, 2009, as compared to the year ended
December 31, 2008, primarily due to the expansion of our
Grapevine resort as well as the opening of our Concord resort.
Also, loan fees incurred during the year ended December 31,
2009 were higher than in the year ended December 31, 2008
due to fees incurred in connection with the extensions of our
Mason and Grapevine mortgage loans.
|
|
|
|
For the year ended December 31, 2008, we recorded an
aggregate $18,777 impairment loss related to our 30.26% interest
in the joint venture that owed Wisconsin Dells and Sandusky
resorts. There was no similar charge recorded in the year ended
December 31, 2009.
|
|
|
|
For the year ended December 31, 2008, we recorded a
goodwill impairment charge of $17,430 related to our Kansas City
and Mason resorts. We had no similar charge in the year ended
December 31, 2009.
|
58
|
|
|
|
|
We recorded a $24,000 asset impairment loss related to our
resort in Sheboygan during the year ended December 31,
2009. We had no similar loss in the year ended December 31,
2008.
|
Net operating loss. During the year ended
December 31, 2009, we had net operating loss of $24,463 as
compared to a net operating loss of $25,666 for the year ended
December 31, 2008.
Net loss attributable to Great Wolf Resorts,
Inc. Net loss attributable to Great Wolf Resorts
Inc. increased due to:
|
|
|
|
|
An increase in net interest expense of $7,577, mainly due to
interest expense on our Concord loan, and less interest being
capitalized to development properties in 2009 as compared to
2008; and
|
|
|
|
A decrease in income tax benefit mainly due to $23,008 income
tax expense related to our net operating loss valuation
allowance.
|
These increases were partially offset by a decrease in net
operating loss of $1,203 and the gain on sale of unconsolidated
affiliate in the amount of $962 recorded in the year ended
December 31, 2009. We had no similar gain in the year ended
December 31, 2008.
Year
Ended December 31, 2008 compared with Year Ended
December 31, 2007
The following table shows key operating statistics for our
resorts for the years ended December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Properties(a)
|
|
Same Store Comparison(b)
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
|
2008
|
|
2008
|
|
2007
|
|
$
|
|
%
|
|
Occupancy
|
|
|
62.9
|
%
|
|
|
61.9
|
%
|
|
|
61.5
|
%
|
|
|
N/A
|
|
|
|
0.7
|
%
|
ADR
|
|
$
|
249.92
|
|
|
$
|
243.81
|
|
|
$
|
244.16
|
|
|
$
|
(0.35
|
)
|
|
|
(0.1
|
)%
|
RevPAR
|
|
$
|
157.19
|
|
|
$
|
151.02
|
|
|
$
|
150.16
|
|
|
$
|
0.86
|
|
|
|
0.6
|
%
|
Total RevPOR
|
|
$
|
383.75
|
|
|
$
|
369.61
|
|
|
$
|
370.77
|
|
|
$
|
(1.16
|
)
|
|
|
(0.3
|
)%
|
Total RevPAR
|
|
$
|
241.36
|
|
|
$
|
228.95
|
|
|
$
|
228.02
|
|
|
$
|
0.93
|
|
|
|
0.4
|
%
|
Non-rooms revenue per occupied room
|
|
$
|
133.83
|
|
|
$
|
125.80
|
|
|
$
|
126.61
|
|
|
$
|
(0.81
|
)
|
|
|
(0.6
|
)%
|
|
|
|
(a) |
|
Includes results for properties that were open for any portion
of the period, for all owned and/or managed resorts. |
|
(b) |
|
Same store comparison includes properties that were open for the
full periods in 2008 and 2007 (that is, our Wisconsin Dells,
Sandusky, Traverse City, Kansas City, Sheboygan, Williamsburg,
Pocono Mountains, Niagara Falls, and Mason resorts). |
In December 2007 we opened our resort in Grapevine, Texas. As a
result, total revenue, rooms revenue and other revenue for the
years ended December 31, 2008 and 2007 are not directly
comparable.
The increases in same store occupancy and RevPAR were due in
part to an increase in the number of rooms sold for group
business (as opposed to leisure guests) in 2008 as compared to
2007. As we typically charge lower room rates for group rooms as
compared to leisure, this resulted in a decrease in ADR in 2008
as compared to 2007.
59
Presented below are selected amounts from our consolidated
statements of operations for the years ended December 31,
2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
Revenues
|
|
$
|
245,538
|
|
|
$
|
187,580
|
|
|
$
|
57,958
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Departmental operating expenses
|
|
|
80,083
|
|
|
|
64,016
|
|
|
|
16,067
|
|
Selling, general and administrative
|
|
|
51,902
|
|
|
|
47,915
|
|
|
|
3,987
|
|
Property operating costs
|
|
|
37,086
|
|
|
|
30,555
|
|
|
|
6,531
|
|
Depreciation and amortization
|
|
|
46,081
|
|
|
|
36,372
|
|
|
|
9,709
|
|
Impairment loss on investment in affiliates
|
|
|
18,777
|
|
|
|
|
|
|
|
18,777
|
|
Goodwill impairment
|
|
|
17,430
|
|
|
|
|
|
|
|
17,430
|
|
Net operating loss
|
|
|
(25,666
|
)
|
|
|
(2,883
|
)
|
|
|
(22,783
|
)
|
Interest expense, net of interest income
|
|
|
25,853
|
|
|
|
12,129
|
|
|
|
13,724
|
|
Income tax benefit
|
|
|
(11,956
|
)
|
|
|
(5,859
|
)
|
|
|
(6,097
|
)
|
Net loss attributable to Great Wolf Resorts, Inc.
|
|
|
(40,725
|
)
|
|
|
(9,581
|
)
|
|
|
(31,144
|
)
|
Revenues. Total revenues increased primarily
due to the opening of our Grapevine resort in December 2007; our
construction of 104 additional guest suites at our Williamsburg
resort that opened in March 2007; and other fees and other
revenues from managed properties related to our joint venture
with Chehalis at our resort in Grand Mound, Washington.
Operating expenses. Total operating expenses
increased primarily due to the opening of our Grapevine resort
in December 2007.
|
|
|
|
|
Departmental expenses increased $16,067 for the year ended
December 31, 2008, as compared to the year ended
December 31, 2007, due primarily to the opening of our
Grapevine resort.
|
|
|
|
Total selling, general and administrative expenses increased
$3,987 for the year ended December 31, 2008, as compared to
the year ended December 31, 2007, due primarily to the
opening of our Grapevine resort. This increase was offset by a
decrease in corporate selling, general and administrative
expenses. Corporate selling, general and administrative expenses
decreased due to decreases in bonus expense and restricted stock
expense, primarily due to the resignation of two senior officers
in 2008; and a decrease in stock option expense, as most options
were fully vested as of December 31, 2007.
|
|
|
|
Total property operating costs (exclusive of opening costs)
increased $9,614 for the year ended December 31, 2008, as
compared to the year ended December 31, 2007, due primarily
to the opening of our Grapevine resort, as well as increased
repairs and maintenance expense and increased utilities expense
related to the expansion of our Williamsburg resort. Opening
costs related to our resorts were $6,301 for the year ended
December 31, 2008, as compared to $9,384 for the year ended
December 31, 2007.
|
|
|
|
Total depreciation and amortization increased mainly due to the
opening of our Grapevine resort and the expansion of our
Williamsburg resort as well as the write off of loan fees of
$615 related to our Williamsburg mortgage loan that we paid off
in August 2008. We had no similar loan fee write offs for the
year ended December 31, 2007.
|
|
|
|
For the year ended December 31, 2008, we recorded an
aggregate $18,777 impairment loss related to our 30.32% interest
in the joint venture that owns the Wisconsin Dells and Sandusky
resorts. There was no similar charge recorded in the year ended
December 31, 2007.
|
|
|
|
For the year ended December 31, 2008, we recorded a
goodwill impairment charge of $17,430 related to our Kansas City
and Mason resorts. There was no similar charge recorded in the
year ended December 31, 2007.
|
60
Net operating loss. During the year ended
December 31, 2008, we had a net operating loss of $25,666
as compared to a net operating loss of $2,883 for the year ended
December 31, 2007.
Net loss attributable to Great Wolf Resorts,
Inc.. Net loss attributable to Great Wolf
Resorts, Inc. increased due to the increase in operating loss of
$22,783 and an increase in net interest expense of $13,724
mainly due to interest expense on mortgage debt related to our
Williamsburg and Grapevine resorts, and having less interest
expense capitalized to development projects in 2008 as compared
to 2007, due to fewer development projects in process in 2008 as
compared to 2007.
These increases were partially offset by an increase of $6,097
in income tax benefit recorded for the year ended
December 31, 2008 as compared to the year ended
December 31, 2007.
Segments
We are organized into a single operating division. Within that
operating division, we have three reportable segments:
|
|
|
|
|
Resort ownership/operation revenues derived from our
consolidated owned resorts; and
|
|
|
|
Resort third-party management/licensing revenues
derived from management, license and other related fees from
unconsolidated managed resorts; and
|
|
|
|
Condominium sales revenues derived from sales of
condominium units to third-party owners. This segment had no
activity in 2008 or 2009.
|
See our Segments section in our Summary of Significant
Accounting Policies, in Note 2 to our consolidated
financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Increase (Decrease)
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009 - 2008
|
|
|
2008 - 2007
|
|
|
Resort Ownership/Operation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
235,771
|
|
|
$
|
217,568
|
|
|
$
|
168,934
|
|
|
$
|
18,203
|
|
|
$
|
48,634
|
|
EBITDA
|
|
|
3,350
|
|
|
|
33,756
|
|
|
|
32,179
|
|
|
|
(30,406
|
)
|
|
|
1,577
|
|
Resort Third-Party Management/Licensing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
28,261
|
|
|
|
27,970
|
|
|
|
18,646
|
|
|
|
291
|
|
|
|
9,324
|
|
EBITDA
|
|
|
6,963
|
|
|
|
8,144
|
|
|
|
7,169
|
|
|
|
(1,181
|
)
|
|
|
975
|
|
Condominium Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
|
|
|
|
|
|
|
|
(682
|
)
|
|
|
|
|
|
|
682
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
21,478
|
|
|
|
(23,719
|
)
|
|
|
(6,361
|
)
|
|
|
45,197
|
|
|
|
(17,358
|
)
|
The Other items in the table above represent corporate-level
activities that do not constitute a reportable segment. Total
assets at the corporate level primarily consist of cash, our
investment in affiliates, and intangibles. In 2008 Resort
Ownership/Operation EBITDA includes $16,021 for a goodwill
impairment charge and Other EBITDA includes $1,409 for a
goodwill impairment charge and $18,777 for the write-down of
investment in affiliates. In 2009 Resort Ownership/Operation
EBITDA includes $24,000 for an asset impairment loss.
For a reconciliation of consolidated EBITDA for each of the
periods presented, see the table included in the
Non-GAAP Financial Measures section.
61
Liquidity
and Capital Resources
As of December 31, 2009, we had total indebtedness of
$550,071, summarized as follows:
|
|
|
|
|
Long-Term Debt:
|
|
|
|
|
Traverse City/Kansas City mortgage loan
|
|
$
|
68,773
|
|
Mason mortgage loan
|
|
|
73,800
|
|
Pocono Mountains mortgage loan
|
|
|
95,458
|
|
Williamsburg mortgage loan
|
|
|
63,125
|
|
Grapevine mortgage loan
|
|
|
77,909
|
|
Concord construction loan
|
|
|
78,549
|
|
Junior subordinated debentures
|
|
|
80,545
|
|
Other Debt:
|
|
|
|
|
City of Sheboygan bonds
|
|
|
8,544
|
|
City of Sheboygan loan
|
|
|
3,290
|
|
Other
|
|
|
78
|
|
|
|
|
|
|
|
|
$
|
550,071
|
|
|
|
|
|
|
Traverse City/Kansas City Mortgage Loan This
loan is secured by our Traverse City and Kansas City resorts.
The loan bears interest at a fixed rate of 6.96%, is subject to
a 25-year
principal amortization schedule, and matures in January 2015.
The loan has customary financial and operating debt compliance
covenants. The loan also has customary restrictions on our
ability to prepay the loan prior to maturity. We were in
compliance with all covenants under this loan at
December 31, 2009.
The loan requires us to maintain a minimum debt service coverage
ratio (DSCR) of 1.35, calculated on a quarterly basis. This
ratio is defined as the two collateral properties combined
trailing twelve-month net operating income divided by the
greater of (i) the loans twelve-month debt service
requirements and (ii) 8.5% of the amount of the outstanding
principal indebtedness under the loan. Failure to meet the
minimum DSCR is not an event of default and does not accelerate
the due date of the loan. Not meeting the minimum DSCR, however,
subjects the two properties to a lock-box cash management
arrangement, at the discretion of the loans servicer. We
believe that the lock-box arrangement would require
substantially all cash receipts for the two resorts to be moved
each day to a lender-controlled bank account, which the loan
servicer would then use to fund debt service and operating
expenses for the two resorts.
For the year ended December 31, 2009, the DSCR for this
loan was 0.73. As a result, the loan servicer may choose to
implement the lock-box cash management arrangement. We believe
that such an arrangement, if implemented, would constitute a
traditional lock-box arrangement as discussed in authoritative
accounting guidance. Based on that guidance, if the loan
servicer were to establish the traditional lock-box arrangement
now permitted under the loan, we believe we would be required to
classify the entire outstanding principal balance of the loan as
a current liability, since the lock-box arrangement would
require us to use the properties working capital to
liquidate the loan and we do not presently have the ability to
refinance this loan to a new, long-term loan.
The loan also contains a similar lock-box requirement if we open
any Great Wolf Lodge or Blue Harbor Resort within 100 miles
of either resort, and the two collateral properties
combined trailing twelve-month net operating income is not at
least equal to 1.8 times 8.5% of the amount of the outstanding
principal indebtedness under the loan.
Mason Mortgage Loan This loan is secured by
our Mason resort. During 2009, we extended the loans
maturity date to July 1, 2011. We incurred loan fees of
$1,965 related to the extension of this loan. The loan bears
interest at a floating rate of 90- day LIBOR plus a spread of
425 basis points with an interest rate floor of 6.50%
(effective rate of 6.50% as of December 31, 2009). The loan
requires principal amortization payments of $1,000 per quarter
in 2009 and $2,000 per quarter thereafter. This loan has
customary financial and operating debt compliance covenants
associated with an individual mortgaged property, including a
minimum tangible net worth provision for Great Wolf Resorts,
Inc. We were in compliance with all covenants under this loan
at December 31, 2009.
62
The loan also has a property-level cash trap. During those
months that Property Yield is less than 10%, excess
cash is trapped in an escrow account and applied to any
operating or debt service shortfalls, upon satisfaction of
certain conditions. Twice a year, funds remaining in the escrow
account that are not previously applied to any operating or debt
service shortfalls, are applied to reduce the outstanding
principal balance of the loan. Property Yield is
defined as the ratio of (i) net operating income divided by
(ii) the sum of (a) the outstanding principal balance
of the loan plus (b) any anticipated future funding
(excluding protective advances) plus (c) accrued interest
that remains unpaid for greater than 30 days.
The loan has no restrictions on the repayment of loan principal
and has exit fees payable upon full repayment of the loan or at
maturity. In addition, the owner of the Mason resort is
obligated to pay 50% of the proceeds of certain Liquidity
Events (described below) towards repayment of the Mason
mortgage loan, capped at $30,000, which amount is reduced as
repayments of principal on the Mason mortgage loan are
periodically made. The obligation to pay such proceeds is
uncapped if the Liquidity Event involves a sale of
the Mason resort or of any direct or indirect interest in our
subsidiary that owns the Mason resort. Great Wolf Resorts, Inc.
has guaranteed the entire amount of any required Liquidity Event
paydown obligation, and up to $30,000 of the Liquidity Event
paydown obligation is cross-collateralized by our Grapevine
resort. Liquidity Events include the sale of
(i) any of our Mason, Concord or Grapevine resorts,
(ii) any direct or indrect equity interest in the Mason,
Concord or Grapevine resorts, (iii) a majority equity
interest by Great Wolf Resorts, Inc. or any of its
majority-owned or wholly-owned subsidiaries in (x) any of
such majority-owned or wholly-owned subsidiaries or (y) any
of our existing properties that are wholly-owned or
majority-owned, or the refinancing of a mortgage loan on any of
our majority-owned or wholly-owned existing properties. Great
Wolf Resorts, Inc. has also guaranteed all debt service
obligations under the loan.
We are required to provide interest rate protection on a portion
of the loan amount through the loans maturity date.
Therefore, we executed an interest rate cap payment in the
amount of $106 that caps the loan at 7.00% interest. This
interest rate cap was designated as an ineffective cash flow
hedge. We mark the interest rate cap to market and record the
change to interest expense.
Pocono Mountains Mortgage Loan This loan is
secured by our Pocono Mountains resort. The loan bears interest
at a fixed rate of 6.10% and matures in December 2016. The loan
is currently subject to a
30-year
principal amortization schedule. The loan has customary
covenants associated with an individual mortgaged property. The
loan also has customary restrictions on our ability to prepay
the loan prior to maturity. We were in compliance with all
covenants under this loan at December 31, 2009.
The loan requires us to maintain a minimum DSCR of 1.25,
calculated on a quarterly basis. Subject to certain exceptions,
the DSCR is increased to 1.35 if we open up a waterpark resort
within 75 miles of the property or incur mezzanine debt
secured by the resort. This ratio is defined as the
propertys combined trailing twelve-month net operating
income divided by the greater of (i) the loans
twelve-month debt service requirements and (ii) 7.25% of
the amount of the outstanding principal indebtedness under the
loan. Failure to meet the minimum DSCR is not an event of
default and does not accelerate the due date of the loan. Not
meeting the minimum DSCR, however, subjects the property to a
lock-box cash management arrangement, at the discretion of the
loans servicer. We believe that lock-box arrangement would
require substantially all cash receipts for the resort to be
moved each day to a lender-controlled bank account, which the
loan servicer would then use to fund debt service and operating
expenses for the resort, with excess cash flow being deposited
in a reserve account and held as additional collateral for the
loan. While recourse under the loan is limited to the property
owners interest in the mortgage property, we have provided
limited guarantees with respect to certain customary
non-recourse provisions and environmental indemnities relating
to the loan.
Williamsburg Mortgage Loan This loan is
secured by our Williamsburg resort. The loan bears interest at a
floating rate of
30-day LIBOR
plus a spread of 350 basis points with a minimum rate of
6.25% per annum (effective rate of 6.25% as of December 31,
2009). This loan matures in August 2011 and has a one-year
extension available at our option, assuming the property meets
an operating performance threshold. The loan has no prepayment
fees. The loan has customary covenants associated with an
individual mortgaged property. We were in compliance with all
covenants under this loan at December 31, 2009.
The loan also has a property-level cash trap. Commencing upon
the third payment date after it has been determined that a
Cash Sweep Condition exists, and continuing for two
payment dates thereafter,
63
the borrower must pay, in addition to other amounts due, excess
cash (subject to certain limitations), which must be applied
towards the outstanding principal balance of the loan.
Cash Sweep Conditions include (i) the failure
to maintain a DSCR of 1.50 to 1.00; (ii) the failure of
Great Wolf Resorts, Inc. and its subsidiaries, on a consolidated
basis, to maintain liquidity of at least $10,000; and
(iii) the failure of Great Wolf, Resorts, Inc. and its
subsidiaries, on a consolidated basis, to maintain a minimum
tangible net worth of $85,000.
In conjunction with the closing of this loan, we were required
to provide interest rate protection on a portion of the loan
amount through the loans maturity date. Therefore, we
executed an interest rate cap payment in the amount of $522 that
caps the loan at 8% interest through the loans maturity
date. This interest rate cap was designated as an ineffective
cash flow hedge. We mark the interest rate cap to market and
record the change to interest expense.
Grapevine Mortgage Loan This loan is secured
by our Grapevine resort. During 2009, we extended the
loans maturity date to July 1, 2011. We incurred loan
fees of $1,415 related to the extension of this loan. The loan
bears interest at a floating rate of 90- day LIBOR plus a spread
of 400 basis points with an interest rate floor of 7.00%
(effective rate of 7.00% as of December 31, 2009). The loan
requires principal amortization payments of $800 per quarter
until maturity. Great Wolf Resorts, Inc. has provided a
guarantee of monthly amortization payments. This loan has
customary financial and operating debt compliance covenants
associated with an individual mortgaged property, including a
minimum tangible net worth provision for Great Wolf Resorts,
Inc., as well as the same property yield-based cash trap as the
mortgage loan secured by the Mason resort. The loan has no
restrictions on the repayment of loan principal and has exit
fees that must be paid upon full repayment of the loan or at
maturity. We were in compliance with all covenants under this
loan at December 31, 2009.
We are required to provide interest rate protection on a portion
of the loan amount through the loans maturity date.
Therefore, we executed an interest rate cap payment in the
amount of $205 that caps the loan at 7% interest through
December 2010. This interest rate cap was designated as an
ineffective cash flow hedge. We mark the interest rate cap to
market and record the change to interest expense.
Concord Construction Loan In April 2008 we
closed on a $63,940 construction loan to fund a portion of the
total costs of our Great Wolf Lodge resort in Concord. The loan,
which matures in April 2012, was expanded to its $79,900 maximum
principal amount in January 2009. The loan had an aggregate
outstanding principal amount of $79,900 as of December 31,
2009. The loan requires monthly amortization payments of a
25-year
basis beginning on September 30, 2010. The loan bears
interest at a floating annual rate of LIBOR plus a spread of
310 basis points, with a minimum rate of 6.50% per annum
(effective rate of 6.50% as of December 31, 2009). The loan
requires interest only payments until the one-year anniversary
of the conversion date of the property and then requires monthly
principal payments based on a
25-year
amortization schedule. However, if after the Conversion
Date (that is, after a certificate of occupancy for the
project, but in no event after April 30, 2010) the
resort owners net income available to pay debt service on
this loan for four consecutive quarters is less than
$10 million, or if maximum principal amount of the loan
exceeds 75% of the fair market value of the property, then we
are required to post cash collateral or partially repay the loan
in an amount sufficient to remedy such deficiency. This loan has
customary financial and operating debt compliance covenants
associated with an individual mortgaged property, including a
minimum consolidated tangible net worth provision. We were in
compliance with all covenants under this loan at
December 31, 2009.
Great Wolf Resorts, Inc. has provided a $79,900 payment guaranty
of the loan on our Concord, North Carolina resort property. If
our subsidiary defaults on this obligation we would be required
to assume that obligation, including the payment of any
outstanding debt amounts. If we are required to undertake such
obligation, it may have an adverse affect on our business,
financial condition and results of operations.
Junior Subordinated Debentures In March 2005
we completed a private offering of $50,000 of trust preferred
securities (TPS) through Great Wolf Capital Trust I
(Trust I), a Delaware statutory trust which is our
subsidiary. The securities pay holders cumulative cash
distributions at an annual rate which is fixed at 7.80% through
March 2015 and then floats at LIBOR plus a spread of
310 basis points thereafter. The securities mature in March
2035 and are callable at no premium after March 2010. In
addition, we invested $1,500 in Trust Is common
securities, representing 3% of the total capitalization of
Trust I.
64
Trust I used the proceeds of the offering and our
investment to purchase from us $51,550 of our junior
subordinated debentures with payment terms that mirror the
distribution terms of the TPS. The costs of the TPS offering
totaled $1,600, including $1,500 of underwriting commissions and
expenses and $100 of costs incurred directly by Trust I.
Trust I paid these costs utilizing an investment from us.
These costs are being amortized over a
30-year
period. The proceeds from our debenture sale, net of the costs
of the TPS offering and our investment in Trust I, were
$48,400. We used the net proceeds to retire a construction loan.
In June 2007 we completed a private offering of $28,125 of TPS
through Great Wolf Capital Trust III (Trust III), a
Delaware statutory trust which is our subsidiary. The securities
pay holders cumulative cash distributions at an annual rate
which is fixed at 7.90% through June 2012 and then floats at
LIBOR plus a spread of 300 basis points thereafter. The
securities mature in June 2017 and are callable at no premium
after June 2012. In addition, we invested $870 in the
Trusts common securities, representing 3% of the total
capitalization of Trust III.
Trust III used the proceeds of the offering and our
investment to purchase from us $28,995 of our junior
subordinated debentures with payment terms that mirror the
distribution terms of the trust securities. The costs of the TPS
offering totaled $932, including $870 of underwriting
commissions and expenses and $62 of costs incurred directly by
Trust III. Trust III paid these costs utilizing an
investment from us. These costs are being amortized over a
10-year
period. The proceeds from our debenture sales, net of the costs
of the TPS offering and our investment in Trust III, were
$27,193. We used the net proceeds for development costs.
Issue trusts, like Trust I and Trust III
(collectively, the Trusts), are generally variable interests. We
have determined that we are not the primary beneficiary under
the Trusts, and accordingly we do not include the financial
statements of the Trusts in our consolidated financial
statements.
Based on the foregoing accounting authority, our consolidated
financial statements present the debentures issued to the Trusts
as long-term debt. Our investments in the Trusts are accounted
as cost investments and are included in other assets on our
consolidated balance sheet. For financial reporting purposes, we
record interest expense on the corresponding debentures in our
condensed consolidated statements of operations.
City of Sheboygan Bonds The City of Sheboygan
(the City) bonds represent the face amount of bond anticipation
notes (BANs) issued by the City in November 2003 in conjunction
with the construction of the Blue Harbor Resort in Sheboygan,
Wisconsin. We have recognized as a liability the obligations for
the BANs. We have an obligation to fund certain minimum
guaranteed amounts of room tax payments to be made by the Blue
Harbor Resort through 2028, which obligation is indirectly
related to the payments by the City on the BANs.
City of Sheboygan Loan The City of Sheboygan
loan amount represents a loan made by the City in 2004 in
conjunction with the construction of the Blue Harbor Resort in
Sheboygan, Wisconsin. The loan is noninterest bearing and
matures in 2018. Our obligation to repay the loan will be
satisfied by certain minimum guaranteed amounts of real and
personal property tax payments to be made by the Blue Harbor
Resort through 2018.
Future Maturities Future principal
requirements on long-term debt as of December 31, 2009 are
as follows:
|
|
|
|
|
2010
|
|
$
|
16,126
|
|
2011
|
|
|
206,645
|
|
2012
|
|
|
80,189
|
|
2013
|
|
|
3,675
|
|
2014
|
|
|
3,966
|
|
Thereafter
|
|
|
239,470
|
|
|
|
|
|
|
Total
|
|
$
|
550,071
|
|
|
|
|
|
|
65
Short-Term
Liquidity Requirements
Our short-term liquidity requirements generally consist
primarily of funds necessary to pay operating expenses for the
next 12 months, including:
|
|
|
|
|
recurring maintenance, repairs and other operating expenses
necessary to properly maintain and operate our resorts;
|
|
|
|
recurring capital expenditures we make at our resorts;
|
|
|
|
debt maturities within the next year;
|
|
|
|
property taxes and insurance expenses;
|
|
|
|
interest expense and scheduled principal payments on outstanding
indebtedness;
|
|
|
|
general and administrative expenses; and
|
|
|
|
income taxes.
|
Historically, we have satisfied our short-term liquidity
requirements through a combination of operating cash flows and
cash on hand. We believe that cash provided by our operations,
together with cash on hand, will be sufficient to fund our
short-term liquidity requirements for working capital, capital
expenditures and debt service for the next 12 months.
Long-Term
Liquidity Requirements
Our long-term liquidity requirements generally consist primarily
of funds necessary to pay for the following items for periods
beyond the next 12 months:
|
|
|
|
|
scheduled debt maturities;
|
|
|
|
costs associated with the development of new resorts;
|
|
|
|
renovations, expansions and other non-recurring capital
expenditures that need to be made periodically to our
resorts; and
|
|
|
|
capital contributions and loans to unconsolidated joint ventures.
|
We expect to meet these needs through a combination of:
|
|
|
|
|
existing working capital (deficit),
|
|
|
|
cash provided by operations,
|
|
|
|
proceeds from investing activities, including sales of partial
or whole ownership interests in certain of our resorts; and
|
|
|
|
proceeds from financing activities, including mortgage financing
on properties being developed, additional or replacement
borrowings under future credit facilities, contributions from
joint venture partners, and the issuance of equity instruments,
including common stock, or additional or replacement debt,
including debt securities, as market conditions permit.
|
We believe these sources of capital will be sufficient to
provide for our long-term capital needs. We cannot be certain,
however, that we will have access to financing sufficient to
meet our long-term liquidity requirements on terms that are
favorable to us, or at all.
Our largest long-term expenditures (other than debt maturities)
are expected to be for capital expenditures for development of
future resorts, non-routine capital expenditures for our
existing resorts, and capital contributions or loans to joint
ventures owning resorts under construction or development. Such
expenditures were $49,561 for the year ended December 31,
2009. We expect to have approximately $8,000 of such
expenditures for 2010. As discussed above, we expect to meet
these requirements through a combination of cash provided by
operations and cash on hand.
66
We currently project that the combination of our cash on hand
plus cash provided by operations in 2010 will be sufficient to
meet the short-term liquidity requirements, as described above.
Based on our current projections, however, we do not believe
that we will have sufficient excess amounts of cash available in
2010 in order either to begin development of any resort we would
wholly own, although we expect to have cash available for
minimal capital contributions to new joint ventures that would
develop resorts that we would license
and/or
manage. Also, due to the current state of the capital markets,
which are marked by the general unavailability of debt financing
for large commercial real estate construction projects, we do
not expect to have significant expenditures for development of
new resorts until we have all equity and debt capital amounts
fully committed, including our projected ability to fund our
required equity contribution to a project. We believe this may
result in our not making any significant expenditures in 2010
for development of new resorts or capital contributions to new
joint ventures that develop future resorts.
Off
Balance Sheet Arrangements
In August 2009 we sold our 30.26% joint venture interest in the
joint venture that owns two resorts, Great Wolf Lodge-Wisconsin
Dells, Wisconsin and Great Wolf Lodge-Sandusky, Ohio to CNL
Lifestyle Properties, Inc. We currently manage both properties
and license the Great Wolf Lodge brand to the joint venture.
We have one unconsolidated joint venture arrangement at
December 31, 2009. We account for our unconsolidated joint
venture using the equity method of accounting.
Our joint venture with The Confederated Tribes of the Chehalis
Reservation owns the Great Wolf Lodge resort and conference
center on a
39-acre land
parcel in Grand Mound, Washington. This resort opened in March
2008. This joint venture is a limited liability company. We are
a member of that limited liability company with a 49% ownership
interest. At December 31, 2009, the joint venture had aggregate
outstanding indebtedness to third parties of $101,094. As of
December 31, 2009, we have made combined loan and equity
contributions, net of loan repayments, of $29,700 to the joint
venture to fund a portion of construction costs of the resort.
In January 2009, the other member of the joint venture purchased
$5,991 of our loan at par.
Based on the nature of the activities conducted in the joint
venture, we cannot estimate with any degree of accuracy amounts
that we may be required to fund in the long term. We do not
currently believe that any additional future funding of the
joint venture will have a material adverse effect on our
financial condition, as we currently do not expect to make any
significant future capital contributions to this joint venture.
Contractual
Obligations
The following table summarizes our contractual obligations as of
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Terms
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
Debt obligations(1)
|
|
$
|
613,251
|
|
|
$
|
26,827
|
|
|
$
|
307,701
|
|
|
$
|
27,644
|
|
|
$
|
251,079
|
|
Operating lease obligations
|
|
|
814
|
|
|
|
377
|
|
|
|
369
|
|
|
|
68
|
|
|
|
|
|
Reserve on unrecognized tax benefits
|
|
|
1,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
615,363
|
|
|
$
|
27,204
|
|
|
$
|
308,070
|
|
|
$
|
27,712
|
|
|
$
|
252,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts include interest (for fixed rate debt) and principal.
They also include $8,544 of fixed rate debt recognized as a
liability related to certain bonds issued by the City of
Sheboygan and $3,290 of fixed rate debt recognized as a
liability related to a loan from the City of Sheboygan. These
liabilities will be satisfied by certain future minimum
guaranteed amounts of real and personal property tax payments
and room tax payments to be made by our Sheboygan resort. |
If we develop future resorts where we are the majority owner, we
expect to incur significant additional debt and construction
contract obligations.
67
Working
Capital
We had $20,913 of available cash and cash equivalents and a
working capital deficit of $15,534 (current assets less current
liabilities) at December 31, 2009, compared to the $14,231
of available cash and cash equivalents and a working capital
deficit of $114,768 at December 31, 2008. The primary
reasons for the working capital deficit is the use of cash for
capital expenditures and investments in and advances to
affiliates and for our properties that were under development.
Cash
Flows
Comparison
of Year Ended December 31, 2009 to Year Ended
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Increase
|
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
Net cash provided by operating activities
|
|
$
|
12,215
|
|
|
$
|
33,534
|
|
|
$
|
(21,319
|
)
|
Net cash used in investing activities
|
|
|
(36,659
|
)
|
|
|
(144,612
|
)
|
|
|
107,953
|
|
Net cash provided by financing activities
|
|
|
31,126
|
|
|
|
106,712
|
|
|
|
(75,586
|
)
|
Operating Activities. The decrease in net cash
provided by operating activities resulted primarily from a
decrease in operating income, deferred tax benefit, accounts
payable, accrued expenses and other liabilities during the year
ended December 31, 2009 as compared to December 31,
2008.
Investing Activities. The decrease in net cash
used in investing activities for the year ended
December 31, 2009, as compared to the year ended
December 31, 2008, resulted primarily from a decrease in
contributions to our investments in affiliates, proceeds from
the sale of our interest in a joint venture, as well as an
increase in loan repayments received from our affiliate. This
decrease is also due to a decrease in capital expenditures
related to our properties that are in service and in development.
Financing Activities. The decrease in net cash
provided by financing activities resulted primarily from
receiving fewer loan proceeds during the year ended
December 31, 2009 as compared to the year ended
December 31, 2008.
Comparison
of Year Ended December 31, 2008 to Year Ended
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Increase
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
Net cash provided by operating activities
|
|
$
|
33,534
|
|
|
$
|
29,751
|
|
|
$
|
3,783
|
|
Net cash used in investing activities
|
|
|
(144,612
|
)
|
|
|
(206,967
|
)
|
|
|
62,355
|
|
Net cash provided by financing activities
|
|
|
106,712
|
|
|
|
99,035
|
|
|
|
7,677
|
|
Operating Activities. The increase in net cash
provided by operating activities resulted primarily from an
increase in equity in losses of unconsolidated affiliates,
during the year ended December 31, 2008 as compared to
December 31, 2007.
Investing Activities. The decrease in net cash
used in investing activities for the year ended
December 31, 2008, as compared to the year ended
December 31, 2007, resulted primarily from decreased
capital expenditures for our properties that are in service and
under development, a decrease in cash used to fund our
investments in unconsolidated affiliates, and the receipt of
payments on a loan from one of our joint ventures.
Financing Activities. The increase in net cash
provided by financing activities resulted primarily from the
proceeds from our Williamsburg loan during the year ended
December 31, 2008. The increase from the loan proceeds were
offset partially by an increase in principal payments and loan
costs.
Inflation
Our resort properties are able to change room and amenity rates
on a daily basis, so the impact of higher inflation can often be
passed along to customers. However, a weak economic environment
that decreases
68
overall demand for our products and services could restrict our
ability to raise room and amenity rates to offset rising costs.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Our future income, cash flows and fair values relevant to
financial instruments are dependent, in part, upon prevailing
market interest rates. Market risk refers to the risk of loss
from adverse changes in market prices and interest rates. Our
earnings are also affected by the changes in interest rates due
to the impact those changes have on our interest income from
cash and short-term investments, and our interest expense from
variable-rate debt instruments. We may use derivative financial
instruments to manage or hedge interest rate risks related to
our borrowings. We do not intend to use derivatives for trading
or speculative purposes.
As of December 31, 2009, we had total indebtedness of
approximately $550,071. This debt consisted of:
|
|
|
|
|
$68,773 of fixed rate debt secured by two of our resorts. This
debt bears interest at 6.96%.
|
|
|
|
$73,800 of variable rate debt secured by one of our resorts.
This debt bears interest at a floating rate of
90-day LIBOR
plus a spread of 425 basis points, with a minimum rate of
6.50% per annum. The effective rate was 6.50% at
December 31, 2009.
|
|
|
|
$95,458 of fixed rate debt secured by one of our resorts. This
debt bears interest at 6.10%.
|
|
|
|
$63,125 of variable rate debt secured by one of our resorts.
This debt bears interest at a floating rate of
30-day LIBOR
plus a spread of 350 basis points, with a minimum rate of
6.25% per annum. The effective rate was 6.25% at
December 31, 2009.
|
|
|
|
$77,909 of variable rate debt secured by one of our resorts.
This debt bears interest at a floating rate of
90-day LIBOR
plus a spread of 400 basis points, with a minimum rate of
7.00% per annum. The effective rate was 7.00% at
December 31, 2009.
|
|
|
|
$78,549 of variable rate debt secured by one of our resorts.
This debt bears interest at a floating annual rate of LIBOR plus
a spread of 310 basis points, with a minimum rate of 6.50%
per annum. The effective rate was 6.50% at December 31,
2009.
|
|
|
|
$51,550 of subordinated debentures that bear interest at a fixed
rate of 7.80% through March 2015 and then at a floating rate of
LIBOR plus 310 basis points thereafter. The securities
mature in March 2035.
|
|
|
|
$28,995 of subordinated debentures that bear interest at a fixed
rate of 7.90% through June 2012 and then at a floating rate of
LIBOR plus 300 basis points thereafter. The securities
mature in June 2017.
|
|
|
|
$8,544 of fixed rate debt (effective interest rate of 10.67%)
recognized as a liability related to certain bonds issued by the
City of Sheboygan and $3,290 of noninterest bearing debt
recognized as a liability related to a loan from the City of
Sheboygan. These liabilities will be satisfied by certain future
minimum guaranteed amounts of real and personal property tax
payments and room tax payments to be made by the Sheboygan
resort.
|
|
|
|
$78 related to a capital lease that was entered into in June
2009. The lease matures in May 2012.
|
As of December 31, 2009, we estimate the total fair value
of the indebtedness described above to be $91,646 less than its
total carrying values, due to the terms of the existing debt
being different than those terms we believe would currently be
available to us for indebtedness with similar risks and
remaining maturities.
At December 31, 2009, all of our variable rate debt is
subject to minimum rate floors. If LIBOR were to increase or
decrease by 1% (that is, 100 basis points), there would be
no change in interest expense on our variable rate debt based on
our debt balances outstanding and current interest rates in
effect as of December 31, 2009, as that LIBOR increase or
decrease would have no effect on the minimum rate floors for the
loans.
69
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
The following consolidated financial statements are filed as
part of this Annual Report on
Form 10-K:
|
|
|
|
|
|
|
Page
|
|
|
No.
|
|
Consolidated Financial Statements of Great Wolf Resorts, Inc.
and Subsidiaries:
|
|
|
|
|
|
|
|
71
|
|
|
|
|
73
|
|
|
|
|
74
|
|
|
|
|
75
|
|
|
|
|
76
|
|
|
|
|
77
|
|
70
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Great Wolf Resorts, Inc.
We have audited the accompanying consolidated balance sheets of
Great Wolf Resorts, Inc. (a Delaware Corporation) and
subsidiaries (the Company) as of December 31,
2009 and 2008, and the related consolidated statements of
operations and comprehensive loss, equity and cash flows for
each of the two years in the period ended December 31,
2009. These consolidated financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of the Company as of
December 31, 2009 and 2008, and the consolidated results of
their operations and their cash flows for each of the two years
in the period ended December 31, 2009, in conformity with
accounting principles generally accepted in the United States of
America.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
December 31, 2009, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) and our report dated March 2, 2010
expressed an adverse opinion thereon.
Madison, Wisconsin
March 2, 2010
71
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Great Wolf Resorts, Inc.
Madison, Wisconsin
We have audited the accompanying consolidated statements of
operations and comprehensive loss, equity and cash flows of
Great Wolf Resorts, Inc. and subsidiaries (the
Company) for the year ended December 31, 2007.
These consolidated financial statements are the responsibility
of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements
based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the consolidated results of
operations and cash flows of the Company for the year ended
December 31, 2007, in conformity with accounting principles
generally accepted in the United States of America.
As described in Note 2 to the consolidated financial
statements, on January 1, 2009, the Company adopted new
accounting guidance related to noncontrolling interests and
retrospectively adjusted the consolidated financial statements
for the changes.
/s/ DELOITTE &
TOUCHE, LLP
Milwaukee, Wisconsin
March 5, 2008, except the retrospective adoption of new
accounting guidance related to noncontrolling interests
described in for Note 2, as to which the date is
February 24, 2010
72
GREAT
WOLF RESORTS, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(dollars in thousands,
|
|
|
|
except per share amounts)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
20,913
|
|
|
$
|
14,231
|
|
Escrows
|
|
|
5,938
|
|
|
|
2,555
|
|
Accounts receivable, net of allowance for doubtful accounts of
$101 and $114
|
|
|
2,192
|
|
|
|
2,167
|
|
Accounts receivable affiliates, net of allowance for
doubtful accounts of $1,201 in 2008
|
|
|
2,614
|
|
|
|
925
|
|
Inventory
|
|
|
4,791
|
|
|
|
4,265
|
|
Other current assets
|
|
|
4,252
|
|
|
|
3,055
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
40,700
|
|
|
|
27,198
|
|
Property and equipment, net
|
|
|
676,405
|
|
|
|
716,173
|
|
Investment in and advances to affiliates
|
|
|
27,484
|
|
|
|
43,855
|
|
Notes receivable
|
|
|
8,268
|
|
|
|
3,248
|
|
Other assets
|
|
|
29,058
|
|
|
|
25,758
|
|
Intangible assets
|
|
|
23,829
|
|
|
|
23,829
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
805,744
|
|
|
$
|
840,061
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
16,126
|
|
|
$
|
81,464
|
|
Accounts payable
|
|
|
5,078
|
|
|
|
23,217
|
|
Accrued expenses
|
|
|
21,970
|
|
|
|
22,565
|
|
Accrued expenses affiliates
|
|
|
|
|
|
|
1,806
|
|
Advance deposits
|
|
|
7,114
|
|
|
|
7,498
|
|
Gift certificates payable
|
|
|
5,946
|
|
|
|
5,416
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
56,234
|
|
|
|
141,966
|
|
Mortgage debt
|
|
|
441,724
|
|
|
|
333,259
|
|
Other long-term debt
|
|
|
92,221
|
|
|
|
92,328
|
|
Deferred compensation liability
|
|
|
809
|
|
|
|
568
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
590,988
|
|
|
|
568,121
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 250,000,000 shares
authorized, 31,278,889 and 30,982,646 shares issued and
outstanding at December 31, 2009 and 2008
|
|
|
313
|
|
|
|
310
|
|
Preferred stock, $0.01 par value, 10,000,000 shares
authorized, no shares issued or outstanding at December 31,
2009 and 2008
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
400,930
|
|
|
|
399,641
|
|
Accumulated deficit
|
|
|
(186,287
|
)
|
|
|
(127,811
|
)
|
Deferred compensation
|
|
|
(200
|
)
|
|
|
(200
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
214,756
|
|
|
|
271,940
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
805,744
|
|
|
$
|
840,061
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Rooms
|
|
$
|
154,751
|
|
|
$
|
143,395
|
|
|
$
|
112,261
|
|
Food and beverage
|
|
|
42,643
|
|
|
|
38,808
|
|
|
|
29,588
|
|
Other hotel operations
|
|
|
38,377
|
|
|
|
35,365
|
|
|
|
27,085
|
|
Management and other fees
|
|
|
1,990
|
|
|
|
2,798
|
|
|
|
2,855
|
|
Management and other fees affiliates
|
|
|
4,973
|
|
|
|
5,346
|
|
|
|
4,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
242,734
|
|
|
|
225,712
|
|
|
|
176,103
|
|
Other revenue from managed properties-affiliates
|
|
|
17,132
|
|
|
|
19,826
|
|
|
|
11,477
|
|
Other revenue from managed properties
|
|
|
4,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
264,032
|
|
|
|
245,538
|
|
|
|
187,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses by department:
|
|
|
|
|
|
|
|
|
|
|
|
|
Rooms
|
|
|
22,449
|
|
|
|
20,134
|
|
|
|
15,716
|
|
Food and beverage
|
|
|
33,217
|
|
|
|
30,990
|
|
|
|
25,196
|
|
Other
|
|
|
32,124
|
|
|
|
28,959
|
|
|
|
23,104
|
|
Other operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
60,986
|
|
|
|
51,902
|
|
|
|
47,915
|
|
Property operating costs
|
|
|
37,788
|
|
|
|
37,086
|
|
|
|
30,555
|
|
Depreciation and amortization
|
|
|
56,378
|
|
|
|
46,081
|
|
|
|
36,372
|
|
Impairment loss on investment in affiliates
|
|
|
|
|
|
|
18,777
|
|
|
|
|
|
Goodwill impairment
|
|
|
|
|
|
|
17,430
|
|
|
|
|
|
Asset impairment loss
|
|
|
24,000
|
|
|
|
|
|
|
|
|
|
Loss on disposition of property
|
|
|
255
|
|
|
|
19
|
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
267,197
|
|
|
|
251,378
|
|
|
|
178,986
|
|
Other expenses from managed properties-affiliates
|
|
|
17,132
|
|
|
|
19,826
|
|
|
|
11,477
|
|
Other expenses from managed properties
|
|
|
4,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
288,495
|
|
|
|
271,204
|
|
|
|
190,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss
|
|
|
(24,463
|
)
|
|
|
(25,666
|
)
|
|
|
(2,883
|
)
|
Gain on sale of unconsolidated affiliate
|
|
|
(962
|
)
|
|
|
|
|
|
|
|
|
Investment income affiliates
|
|
|
(1,330
|
)
|
|
|
(2,187
|
)
|
|
|
(667
|
)
|
Interest income
|
|
|
(642
|
)
|
|
|
(1,424
|
)
|
|
|
(2,758
|
)
|
Interest expense
|
|
|
34,072
|
|
|
|
27,277
|
|
|
|
14,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and equity in unconsolidated affiliates
|
|
|
(55,601
|
)
|
|
|
(49,332
|
)
|
|
|
(14,345
|
)
|
Income tax expense (benefit)
|
|
|
440
|
|
|
|
(11,956
|
)
|
|
|
(5,859
|
)
|
Equity in unconsolidated affiliates, net of tax
|
|
|
2,435
|
|
|
|
3,349
|
|
|
|
1,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss.
|
|
|
(58,476
|
)
|
|
|
(40,725
|
)
|
|
|
(10,033
|
)
|
Net loss attributable to noncontrolling interest, net of tax.
|
|
|
|
|
|
|
|
|
|
|
(452
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Great Wolf Resorts, Inc.
|
|
$
|
(58,476
|
)
|
|
$
|
(40,725
|
)
|
|
$
|
(9,581
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per common share
|
|
$
|
(1.90
|
)
|
|
$
|
(1.32
|
)
|
|
$
|
(0.31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per common share
|
|
$
|
(1.90
|
)
|
|
$
|
(1.32
|
)
|
|
$
|
(0.31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
30,749,318
|
|
|
|
30,827,860
|
|
|
|
30,533,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
30,749,318
|
|
|
|
30,827,860
|
|
|
|
30,533,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss.
|
|
$
|
(58,476
|
)
|
|
$
|
(40,725
|
)
|
|
$
|
(10,033
|
)
|
Unrealized (gain) loss on interest rate swap
|
|
|
|
|
|
|
(387
|
)
|
|
|
387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
(58,476
|
)
|
|
|
(40,338
|
)
|
|
|
(10,420
|
)
|
Comprehensive loss attributable to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
(452
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss attributable to Great Wolf Resorts, Inc.
|
|
$
|
(58,476
|
)
|
|
$
|
(40,338
|
)
|
|
$
|
(9,968
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Common
|
|
|
Paid- in
|
|
|
Accumulated
|
|
|
Deferred
|
|
|
Accumulated Other
|
|
|
Noncontrolling
|
|
|
Total
|
|
|
|
Shares
|
|
|
Stock
|
|
|
Capital
|
|
|
Deficit
|
|
|
Compensation
|
|
|
Comprehensive Loss
|
|
|
Interest
|
|
|
Equity
|
|
|
Balance, January 1, 2007
|
|
|
30,509,320
|
|
|
$
|
305
|
|
|
$
|
396,909
|
|
|
$
|
(77,505
|
)
|
|
$
|
(2,200
|
)
|
|
$
|
|
|
|
$
|
5,757
|
|
|
$
|
323,266
|
|
Issuance of non-vested equity shares
|
|
|
189,363
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
2,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,850
|
|
Unrealized loss on interest rate swap, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(387
|
)
|
|
|
|
|
|
|
(387
|
)
|
Net loss attributable to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(452
|
)
|
|
|
(452
|
)
|
Net loss attributable to Great Wolf Resorts, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,581
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,581
|
)
|
Purchase of noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,305
|
)
|
|
|
(5,305
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
30,698,683
|
|
|
|
307
|
|
|
|
399,759
|
|
|
|
(87,086
|
)
|
|
|
(2,200
|
)
|
|
|
(387
|
)
|
|
|
|
|
|
|
310,393
|
|
Issuance of non-vested equity shares
|
|
|
283,963
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Sale of common stock deferred compensation plan
|
|
|
|
|
|
|
|
|
|
|
(2,000
|
)
|
|
|
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
1,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,882
|
|
Unrealized gain on interest rate swap, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
387
|
|
|
|
|
|
|
|
387
|
|
Net loss attributable to Great Wolf Resorts, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40,725
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40,725
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
30,982,646
|
|
|
|
310
|
|
|
|
399,641
|
|
|
|
(127,811
|
)
|
|
|
(200
|
)
|
|
|
|
|
|
|
|
|
|
|
271,940
|
|
Issuance of non-vested equity shares
|
|
|
296,243
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
1,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,289
|
|
Net loss attributable to Great Wolf Resorts, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(58,476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(58,476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
31,278,889
|
|
|
$
|
313
|
|
|
$
|
400,930
|
|
|
$
|
(186,287
|
)
|
|
$
|
(200
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
214,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
75
GREAT
WOLF RESORTS, INC. AND SUBSIDIARIES
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss.
|
|
$
|
(58,476
|
)
|
|
$
|
(40,725
|
)
|
|
$
|
(10,033
|
)
|
Adjustments to reconcile net loss to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
56,378
|
|
|
|
46,081
|
|
|
|
36,372
|
|
Bad debt expense
|
|
|
680
|
|
|
|
1,305
|
|
|
|
154
|
|
Impairment loss on investment in affiliates
|
|
|
|
|
|
|
18,777
|
|
|
|
|
|
Goodwill impairment
|
|
|
|
|
|
|
17,430
|
|
|
|
|
|
Non-cash employee and director compensation
|
|
|
1,138
|
|
|
|
250
|
|
|
|
5,080
|
|
Loss on disposition of property
|
|
|
255
|
|
|
|
19
|
|
|
|
128
|
|
Asset impairment loss
|
|
|
24,000
|
|
|
|
|
|
|
|
|
|
Gain on sale of unconsolidated affiliate
|
|
|
(962
|
)
|
|
|
|
|
|
|
|
|
Equity in losses of unconsolidated affiliates
|
|
|
2,416
|
|
|
|
4,421
|
|
|
|
2,616
|
|
Deferred tax expense (benefit)
|
|
|
131
|
|
|
|
(14,072
|
)
|
|
|
(7,417
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable and other assets
|
|
|
(8,865
|
)
|
|
|
(1,916
|
)
|
|
|
(4,399
|
)
|
Accounts payable, accrued expenses and other liabilities
|
|
|
(4,480
|
)
|
|
|
1,964
|
|
|
|
7,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
12,215
|
|
|
|
33,534
|
|
|
|
29,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures for property and equipment
|
|
|
(49,258
|
)
|
|
|
(134,967
|
)
|
|
|
(171,884
|
)
|
Loan repayment from unconsolidated affiliate
|
|
|
9,225
|
|
|
|
3,168
|
|
|
|
|
|
Investment in unconsolidated affiliates
|
|
|
(303
|
)
|
|
|
(10,430
|
)
|
|
|
(24,058
|
)
|
Proceeds from sale of interest in unconsolidated affiliate
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
Investment in development
|
|
|
834
|
|
|
|
(2,255
|
)
|
|
|
(10,276
|
)
|
Issuance of notes receivable
|
|
|
|
|
|
|
|
|
|
|
(3,263
|
)
|
Proceeds from sale of assets
|
|
|
66
|
|
|
|
|
|
|
|
|
|
Decrease in restricted cash
|
|
|
160
|
|
|
|
55
|
|
|
|
2,289
|
|
(Increase) decrease in escrows
|
|
|
(3,383
|
)
|
|
|
(183
|
)
|
|
|
225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(36,659
|
)
|
|
|
(144,612
|
)
|
|
|
(206,967
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments on long-term debt
|
|
|
(8,031
|
)
|
|
|
(57,294
|
)
|
|
|
(1,350
|
)
|
Proceeds from issuance of long-term debt
|
|
|
51,051
|
|
|
|
168,042
|
|
|
|
108,263
|
|
Payment of loan costs
|
|
|
(11,894
|
)
|
|
|
(4,036
|
)
|
|
|
(978
|
)
|
Purchase of noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
(6,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
31,126
|
|
|
|
106,712
|
|
|
|
99,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
6,682
|
|
|
|
(4,366
|
)
|
|
|
(78,181
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
14,231
|
|
|
|
18,597
|
|
|
|
96,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
20,913
|
|
|
$
|
14,231
|
|
|
$
|
18,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest, net of capitalized interest
|
|
$
|
33,458
|
|
|
$
|
26,749
|
|
|
$
|
13,404
|
|
Cash paid for income taxes, net of refunds
|
|
$
|
411
|
|
|
$
|
597
|
|
|
$
|
(312
|
)
|
Non-cash items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction in process accruals
|
|
$
|
20
|
|
|
$
|
6,969
|
|
|
$
|
9,728
|
|
Guarantee on loan for unconsolidated affiliate
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,180
|
|
See accompanying notes to consolidated financial statements.
76
GREAT
WOLF RESORTS, INC. AND SUBSIDIARIES
(dollars in thousands, except per share amounts)
The terms Great Wolf Resorts, us,
we and our are used in this report to
refer to Great Wolf Resorts,
Inc.®
and its consolidated subsidiaries.
Business
Summary
We are a family entertainment resort company and the largest
owner, licensor, operator and developer in North America of
drive-to family resorts featuring indoor waterparks and other
family-oriented entertainment activities based on the number of
resorts in operations. Our resorts feature approximately 300 to
600 family suites, each of which sleeps from six to ten people
and includes a wet bar, microwave oven, refrigerator and dining
and sitting area. We provide a full-service entertainment resort
experience to our target customer base: families with children
ranging in ages from 2 to 14 years old that live within a
convenient driving distance of our resorts. We operate and
license resorts under our Great Wolf
Lodge®
and Blue Harbor
Resorttm
brand names and have entered into licensing arrangements with
third-parties to operate resorts under the Great Wolf Lodge
brand name. Our resorts are open year-round and provide a
consistent, comfortable environment where our guests can enjoy
our various amenities and activities.
We provide our guests with a self-contained vacation experience
and focus on capturing a significant portion of their total
vacation spending. We earn revenues through the sale of rooms
(which includes admission to our indoor waterpark), and other
revenue-generating resort amenities. Each of our resorts
features a combination of some or all of the following
revenue-generating amenities: themed restaurants, ice cream shop
and confectionery, full-service adult spa, kid spa, game arcade,
gift shop, miniature golf, interactive game attraction, family
tech center and meeting space. We also generate revenues from
licensing arrangements, management fees and other fees with
respect to our operation or development of properties owned in
whole or in part by third parties.
The following table presents an overview of our portfolio of
resorts. As of December 31, 2009, we operate, manage
and/or have
entered into licensing arrangements relating to the operation of
11 Great Wolf Lodge resorts (our signature Northwoods-themed
resorts), and one Blue Harbor Resort (a nautical-themed
property). We anticipate that most of our future resorts will be
licensed
and/or
developed under our Great Wolf Lodge brand, but we may operate
and/or enter
into licensing arrangements with regard to additional
nautical-themed resorts under our Blue Harbor Resort brand or
other brands in appropriate markets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Indoor
|
|
|
|
Ownership
|
|
|
|
|
|
Number of
|
|
|
Condo
|
|
|
Entertainment
|
|
|
|
Percentage
|
|
|
Opened
|
|
|
Guest Suites
|
|
|
Units(1)
|
|
|
Area(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Approx. sq. ft.)
|
|
|
Wisconsin Dells, WI(3)
|
|
|
|
|
|
|
1997
|
|
|
|
308
|
|
|
|
77
|
|
|
|
102,000
|
|
Sandusky, OH(3)
|
|
|
|
|
|
|
2001
|
|
|
|
271
|
|
|
|
|
|
|
|
41,000
|
|
Traverse City, MI
|
|
|
100
|
%
|
|
|
2003
|
|
|
|
280
|
|
|
|
|
|
|
|
57,000
|
|
Kansas City, KS
|
|
|
100
|
%
|
|
|
2003
|
|
|
|
281
|
|
|
|
|
|
|
|
57,000
|
|
Sheboygan, WI
|
|
|
100
|
%
|
|
|
2004
|
|
|
|
182
|
|
|
|
64
|
|
|
|
54,000
|
|
Williamsburg, VA(4)
|
|
|
100
|
%
|
|
|
2005
|
|
|
|
405
|
|
|
|
|
|
|
|
87,000
|
|
Pocono Mountains, PA(4)
|
|
|
100
|
%
|
|
|
2005
|
|
|
|
401
|
|
|
|
|
|
|
|
101,000
|
|
Niagara Falls, ONT(5)
|
|
|
|
|
|
|
2006
|
|
|
|
406
|
|
|
|
|
|
|
|
104,000
|
|
Mason, OH(4)
|
|
|
100
|
%
|
|
|
2006
|
|
|
|
401
|
|
|
|
|
|
|
|
105,000
|
|
Grapevine, TX(4)
|
|
|
100
|
%
|
|
|
2007
|
|
|
|
605
|
|
|
|
|
|
|
|
110,000
|
|
Grand Mound, WA(6)
|
|
|
49
|
%
|
|
|
2008
|
|
|
|
398
|
|
|
|
|
|
|
|
74,000
|
|
Concord, NC
|
|
|
100
|
%
|
|
|
2009
|
|
|
|
402
|
|
|
|
|
|
|
|
97,000
|
|
77
GREAT
WOLF RESORTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(1) |
|
Condominium units are individually owned by third parties and
are managed by us. |
|
(2) |
|
Our indoor entertainment areas generally include our indoor
waterpark, game arcade, childrens activity room, family
tech center,
MagiQuest®
(an interactive game attraction) and fitness room, as well as
our spa in the resorts that have such amenities. |
|
(3) |
|
These properties are owned by CNL Lifestyle Properties, Inc.
(CNL), a real estate investment trust focused on leisure and
lifestyle properties. Prior to August 2009, these properties
were owned by a joint venture between CNL and us. In August 2009
we sold our 30.26% joint venture interest to CNL for $6,000. We
currently manage both properties and license the Great Wolf
Lodge brand to these resorts. |
|
(4) |
|
Five of our properties (Great Wolf Lodge resorts in
Williamsburg, VA; Pocono Mountains, PA; Mason, OH; Grapevine, TX
and Concord, NC) each had a book value of fixed assets equal to
ten percent or more of our total assets as of December 31,
2009. Four of our properties (Great Wolf Lodge resorts in
Williamsburg, VA; Pocono Mountains, PA; Mason, OH and Grapevine,
TX) each had total revenues equal to ten percent or more of our
total revenues for the year ended December 31, 2009. |
|
(5) |
|
An affiliate of Ripley Entertainment, Inc. (Ripley), our
licensee, owns this resort. We have granted Ripley a license to
use the Great Wolf Lodge name for this resort through April
2016. We managed the resort on behalf of Ripley through April
2009. |
|
(6) |
|
This property is owned by a joint venture. The Confederated
Tribes of the Chehalis Reservation (Chehalis) owns a 51%
interest in the joint venture, and we own a 49% interest. We
operate the property and license the Great Wolf Lodge brand to
the joint venture under long-term agreements through April 2057,
subject to earlier termination in certain situations. The joint
venture leases the land for the resort from the United States
Department of the Interior, which is trustee for Chehalis. |
|
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Principles of Consolidation The accompanying
consolidated financial statements include all of the accounts of
Great Wolf Resorts and our consolidated subsidiaries. All
significant intercompany balances and transactions have been
eliminated in the consolidated financial statements.
Reclassifications 2008 amounts have been
reclassified to conform to the 2009 presentation. A
reclassification of notes receivable and escrows which were
initially included in other assets occurred in our consolidated
balance sheet.
Cash and Cash Equivalents Cash and cash
equivalents consist of highly liquid investments with an
original maturity of three months or less when acquired. Cash is
invested with federally insured institutions that are members of
the FDIC. Cash balances with institutions may be in excess of
federally insured limits or may be invested in time deposits
that are not insured by the institution, the FDIC or any other
government agency. Cash and cash equivalents does not include
cash escrowed under loan agreements or cash restricted in
connection with deferred compensation payable.
Accounts receivable Accounts receivable
primarily represents receivables from resort guests who occupy
rooms and utilize resort amenities. We provide an allowance for
doubtful accounts when we determine that it is more likely than
not a specific account will not be collected. Bad debt expense
for the years ended December 31, 2009, 2008, and 2007 was
$680, $1,305, and $154, respectively. Writeoffs of accounts
receivable for the years ended December 31, 2009, 2008, and
2007 were $1,894, $103, and $246, respectively.
Inventory Inventories are comprised primarily
of retail and food and beverage inventories and are recorded at
the lower of cost on an average cost basis or market.
78
GREAT
WOLF RESORTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Property and Equipment Investments in
property and equipment are recorded at cost. These assets are
depreciated using the straight-line method over their estimated
useful lives as follows:
|
|
|
|
|
Buildings and improvements
|
|
|
20-40 years
|
|
Fixtures and equipment, including waterpark equipment
|
|
|
5-15 years
|
|
We periodically review the estimated useful lives we have
assigned to our depreciable assets to determine whether those
useful lives are reasonable and appropriate.
Improvements and replacements are capitalized when they extend
the useful life, increase capacity or improve the efficiency of
the asset. Repairs and maintenance expenditures are expensed as
incurred. Construction in process includes costs such as site
work, permitting and construction related to resorts under
development. Interest is capitalized on construction in process
balances during the construction period. Interest capitalized
totaled $1,761, $4,714, and $9,277 for the years ended
December 31, 2009, 2008, and 2007, respectively.
Loan Fees Loan fees are capitalized and
amortized over the term of the loan using a method that
approximates the effective interest method. Loan fees, net of
accumulated amortization, were $11,671 and $6,462 as of
December 31, 2009 and 2008, respectively. Amortization of
loan fees was $6,684, $2,502, and $872 for the years ended
December 31, 2009, 2008, and 2007, respectively. Included
in loan fee amortization for the year ended December 31,
2008 was $615 of loan fees that were written off due to
repayments of debt.
Partially-Owned Entities In determining
whether we had controlling interest in a partially-owned entity
and the requirement to consolidate the accounts of that entity,
we consider factors such as ownership interest, board
representation, management representation, authority to make
decisions, and contractual and substantive participating rights
of the partners/members as well as whether the entity is a
variable interest entity in which we will absorb the majority of
the entitys expected losses, if they occur, or receive the
majority of the expected residual returns, if they occur, or
both.
Investments In and Advances to Unconsolidated
Affiliates We use the equity method to account
for our investments in unconsolidated joint ventures, as we do
not have a controlling interest. Net income or loss is allocated
between the partners in the joint ventures based on the
hypothetical liquidation at book value method (HLBV). Under the
HLBV method, net income or loss is allocated between the
partners based on the difference between each partners
claim on the net assets of the partnership at the end and
beginning of the period, after taking into account contributions
and distributions. Each partners share of the net assets
of the partnership is calculated as the amount that the partner
would receive if the partnership were to liquidate all of its
assets at net book value and distribute the resulting cash to
creditors and partners in accordance with their respective
priorities. Periodically we may make advances to our affiliates.
Notes Receivable We record our notes
receivable at par. Included in our notes receivable are
unamortized loan origination costs. We amortize loan origination
costs over the term of the loan using a method that approximates
the effective interest method. Our note receivable is due in
April 2012 and earns interest at 10% per annum. Per the terms of
the agreement, we have the right to convert the principal due on
this note into ownership interests in the company that the note
is with.
Intangible Assets Our intangible assets
consist of the value of our Great Wolf Lodge brand name. This
intangible asset has an indefinite useful life. We do not
amortize this intangible, but instead test it for possible
impairment at least annually or when circumstances warrant by
comparing the fair value of the intangible asset with its
carrying amount. Our assessment was performed as of
December 31, 2009 and determined that no such impairment
had occurred. Future adverse changes in the hospitality and
lodging industry, market conditions or poor operating results of
the underlying real estate assets could result in future losses
or the inability to recover the carrying value of these
intangibles.
79
GREAT
WOLF RESORTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Goodwill The excess of the purchase price of
entities that are considered to be purchases of businesses over
the estimated fair value of tangible and identifiable intangible
assets acquired is recorded as goodwill. We are required to
assess goodwill for impairment annually, or more frequently if
circumstances indicate impairment may have occurred. We assess
goodwill for such impairment by comparing the carrying value of
our reporting units to their fair values. We determine our
reporting units fair values using a discounted cash flow
model. As of December 31, 2009 and 2008, all goodwill has
been written off.
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Balance as of January 1
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
130,496
|
|
|
$
|
130,496
|
|
Accumulated impairment losses
|
|
|
(68,405
|
)
|
|
|
(50,975
|
)
|
Goodwill related to sale of affiliate
|
|
|
(62,091
|
)
|
|
|
(62,091
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,430
|
|
Impairment losses
|
|
|
|
|
|
|
(17,430
|
)
|
Balance as of December 31
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
130,496
|
|
|
|
130,496
|
|
Accumulated impairment losses
|
|
|
(68,405
|
)
|
|
|
(68,405
|
)
|
Goodwill related to sale of affiliate
|
|
|
(62,091
|
)
|
|
|
(62,091
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of Long-Lived Assets When
circumstances, such as adverse market conditions, indicate that
the carrying value of a long lived asset may be
impaired, we perform an analysis to review the recoverability of
the assets carrying value. We make estimates of the
undiscounted cash flows (excluding interest charges) from the
expected future operations of the asset. These estimates
consider factors such as expected future operating income,
operating trends and prospects, as well as the effects of
demand, competition and other factors. If the analysis indicates
that the carrying value is not recoverable from future cash
flows, an impairment loss is recognized to the extent that the
carrying value exceeds the estimated fair value. Any impairment
losses are recorded as operating expenses, which reduce net
income.
Because of triggering events that occurred in the three months
ended September 30, 2009, related to our resort in
Sheboygan, including changes in the expectation of how long we
will hold this property, current period and historical operating
losses and the deterioration in the current market conditions,
we performed a recoverability test of this resort to determine
if further assessment for potential impairment was required.
Based on this analysis of undiscounted cash flows, we determined
the carrying value of this resort was not recoverable. As a
result, we recorded a $24,000 impairment charge to decrease the
resorts carrying value to its estimated fair value (net of
estimated disposal costs) as of September 30, 2009. To
determine the estimated fair value for purposes of calculating
the impairment charge, we used a combination of historical and
projected cash flows and other available market information,
such as recent sales prices for similar assets. Although we
believe our estimated fair value for the resort is reasonable,
the actual fair value we ultimately realize from this resort
could differ materially from this estimate. The impaired
long-lived asset is included in our Resort Ownership/Operation
segment.
Revenue Recognition We earn revenues from our
resort operations and management of resorts and other related
services.
We recognize revenue from rooms, food and beverage, and other
operating departments at the resorts as earned at the time of
sale or rendering of service. Cash received in advance of the
sale or rendering of services is recorded as advance deposits on
the consolidated balance sheets. We recognize resort management,
license and other related fees as they are contractually earned.
We recognize development and construction
80
GREAT
WOLF RESORTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
management fees as earned under the completed contract method
for projects with a short duration, and the percentage of
completion method (based on
contract-to-date
services performed or costs incurred compared to services
performed or total expected costs) for longer-term projects.
Other Revenue and Other Expenses From Managed
Properties We employ the staff at some of our
managed properties. Under our management agreements, the resort
owners reimburse us for payroll, benefits and certain other
costs related to the staff we employ at the managed properties.
The reimbursement of payroll, benefits and costs is recorded as
other revenue from managed properties on our
statements of operations, with a corresponding expense recorded
as other expenses from managed properties.
Noncontrolling Interests We record the
non-owned equity interests of our consolidated subsidiaries as a
separate component of our consolidated stockholders equity
on our consolidated balance sheets. The net earnings
attributable to the controlling and noncontrolling interests are
included on the face of our statements of operations. Prior to
June 2007, we had a consolidated subsidiary with a
noncontrolling interest. In June 2007 we purchased the remaining
noncontrolling interest, and now own 100% of the subsidiary.
Certain prior year amounts were reclassified on the Consolidated
Financial Statements to reflect our adoption of accounting
principles related to the presentation of noncontrolling
interests, which was effective for us on January 1, 2009.
Income Taxes We account for income taxes
under the asset and liability method, which requires the
recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been
included in the financial statements. Under this method,
deferred tax assets and liabilities are determined based on the
differences between the financial statement and tax basis of
assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to reverse. The
effect of a change in tax rates on deferred tax assets and
liabilities is recognized in income in the period that includes
the enactment date.
Significant management judgment is required in determining our
provision or benefit for income taxes, our deferred tax assets
and liabilities, and any valuation allowance recorded against
our net deferred tax assets. We record net deferred tax assets
(primarily resulting from net operating loss carryforwards) to
the extent we believe these assets will more likely than not be
realized. In making such determination, we consider all
available positive and negative evidence, including scheduled
reversals of deferred tax liabilities, projected future taxable
income (that could result from a sale of one or more of our
resorts where theres a sales price in excess of tax
basis), tax planning strategies and recent financial operations.
In the event we were to determine that we would not be able to
realize our deferred tax assets, we would establish a valuation
allowance which would increase the provision for income taxes.
Conversely, in the event we were to determine that we would be
able to realize our deferred income tax assets in the future in
excess of their net recorded amount, we would make an adjustment
to the valuation allowance which would reduce the provision for
income taxes.
We recorded a valuation allowance of $23,008 in 2009, due to
uncertainties related to our ability to utilize some of our
deferred tax assets, primarily consisting of certain net
operating loss carryforwards, before they expire. In 2009 we
determined that due to current conditions in the credit markets,
real estate markets and our current financial position, the tax
planning strategy we previously expected to generate substantial
taxable income was no longer feasible. The valuation allowance
we recorded is based on our estimates of taxable income solely
from the reversal of existing deferred tax liabilities and the
period over which deferred tax assets reverse. In the event that
actual results differ from these estimates or we adjust these
estimates in a future period, we may need to increase or
decrease our valuation allowance, which could materially impact
our statement of operations.
A tax benefit from an uncertain tax position may be recognized
when it is more likely than not that the position will be
sustained upon examination, including resolutions of any related
appeals or litigation processes, based on the technical merits.
Income tax positions must meet a more-likely-than-not
recognition.
81
GREAT
WOLF RESORTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
This interpretation also provides guidance on measurement,
derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.
We and our subsidiaries file income tax returns in the
U.S. federal jurisdiction, and various states and foreign
jurisdictions. All of the tax years since the date of our
initial public offering (IPO) are open in all jurisdictions. Our
policy is to recognize interest related to unrecognized tax
benefits as interest expense and penalties as income tax
expense. We believe that we have appropriate support for the
income tax positions taken and to be taken on our tax returns
and that our accruals for tax liabilities are adequate for all
open years based on an assessment of many factors including
interpretations of tax law applied to the facts of each matter.
Earnings per share We calculate our basic
earnings per common share by dividing net income (loss)
available to common shareholders by the weighted average number
of shares of common stock outstanding. Our diluted earnings per
common share assumes the issuance of common stock for all
potentially dilutive stock equivalents outstanding. In periods
in which we incur a net loss, we exclude potentially dilutive
stock equivalents from the computation of diluted weighted
average shares outstanding, as the effect of those potentially
dilutive items is anti-dilutive.
Derivatives Derivative instruments are
recorded on the balance sheet as either an asset or liability
measured at fair value. If the derivative is designated as a
fair value hedge, the changes in the fair value of the
derivative are recognized in earnings. To the extent the hedge
is effective; there is an offsetting adjustment to the basis of
the item hedged. If the derivative is designated as a cash flow
hedge, the effective portions of the changes in fair value or
the derivative are recorded as a component of accumulated other
comprehensive loss and recognized in the consolidated statements
of operations when the hedged item affects earnings. Ineffective
portions of changes in the fair value of hedges are recognized
in earnings. Our policy is to execute derivative financial
instruments with creditworthy banks and not to enter into such
instruments for speculative purposes.
Share-based compensation We account for
share-based compensation based on the fair value of the award at
the date of grant.
Advertising Advertising costs are expensed as
incurred. Advertising expense for the years ended
December 31, 2009, 2008, and 2007 was $19,231, $13,321, and
$12,323, respectively.
Comprehensive Income Comprehensive income
consists of the net income and other gains and losses affecting
stockholders equity that, under accounting principles
generally accepted in the United States, are excluded from net
income. Other comprehensive loss as presented in the
consolidated statements of stockholders equity for 2008
consisted of the unrealized gain, net of tax, on our cash flow
hedge which expired in November 2008.
Segments We are organized into a single
operating division. Within that operating division, we have
three reportable segments:
|
|
|
|
|
Resort ownership/operation revenues derived from our
consolidated owned resorts; and
|
|
|
|
Resort third-party management/licensing revenues
derived from management, license and other related fees from
unconsolidated managed resorts; and
|
|
|
|
Condominium sales revenues derived from sales of
condominium units to third-party owners. This segment had no
activity in 2008 or 2009.
|
82
GREAT
WOLF RESORTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following summarizes significant financial information
regarding our segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resort Third-
|
|
|
|
|
|
|
|
|
|
|
|
|
Resort
|
|
|
Party
|
|
|
|
|
|
|
|
|
Totals per
|
|
|
|
Ownership/
|
|
|
Management/
|
|
|
Condominium
|
|
|
|
|
|
Financial
|
|
|
|
Operation
|
|
|
Licensing
|
|
|
Sales
|
|
|
Other
|
|
|
Statements
|
|
|
Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
235,771
|
|
|
$
|
28,261
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
264,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(55,596
|
)
|
|
|
|
|
|
|
|
|
|
|
(782
|
)
|
|
$
|
(56,378
|
)
|
Asset impairment loss
|
|
|
(24,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(24,000
|
)
|
Net operating income (loss)
|
|
|
(52,246
|
)
|
|
|
6,963
|
|
|
|
|
|
|
|
20,820
|
|
|
$
|
(24,463
|
)
|
Gain on sale of unconsolidated affiliate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(962
|
)
|
|
|
(962
|
)
|
Investment income affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,330
|
)
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(642
|
)
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and equity in unconsolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(55,601
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to long-lived assets
|
|
|
48,768
|
|
|
|
|
|
|
|
|
|
|
|
490
|
|
|
$
|
49,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
707,472
|
|
|
|
2,942
|
|
|
|
|
|
|
|
95,330
|
|
|
$
|
805,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resort Third-
|
|
|
|
|
|
|
|
|
|
|
|
|
Resort
|
|
|
Party
|
|
|
|
|
|
|
|
|
Totals per
|
|
|
|
Ownership/
|
|
|
Management/
|
|
|
Condominium
|
|
|
|
|
|
Financial
|
|
|
|
Operation
|
|
|
Licensing
|
|
|
Sales
|
|
|
Other
|
|
|
Statements
|
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
217,568
|
|
|
$
|
27,970
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
245,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(45,042
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,039
|
)
|
|
$
|
(46,081
|
)
|
Impairment loss on investment in affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,777
|
)
|
|
$
|
(18,777
|
)
|
Goodwill impairment
|
|
|
(16,021
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,409
|
)
|
|
$
|
(17,430
|
)
|
Net operating income (loss)
|
|
|
(11,286
|
)
|
|
|
8,144
|
|
|
|
|
|
|
|
(22,524
|
)
|
|
$
|
(25,666
|
)
|
Investment income affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,187
|
)
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,424
|
)
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and equity in unconsolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(49,332
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to long-lived assets
|
|
|
134,167
|
|
|
|
|
|
|
|
|
|
|
|
800
|
|
|
$
|
134,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
738,119
|
|
|
|
2,314
|
|
|
|
|
|
|
|
99,628
|
|
|
$
|
840,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
GREAT
WOLF RESORTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resort Third-
|
|
|
|
|
|
|
|
|
|
|
|
|
Resort
|
|
|
Party
|
|
|
|
|
|
|
|
|
Totals per
|
|
|
|
Ownership/
|
|
|
Management/
|
|
|
Condominium
|
|
|
|
|
|
Financial
|
|
|
|
Operation
|
|
|
Licensing
|
|
|
Sales
|
|
|
Other
|
|
|
Statements
|
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
168,934
|
|
|
$
|
18,646
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
187,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(35,767
|
)
|
|
|
|
|
|
|
|
|
|
|
(605
|
)
|
|
$
|
(36,372
|
)
|
Net operating income (loss)
|
|
|
(3,588
|
)
|
|
|
7,169
|
|
|
|
(682
|
)
|
|
|
(5,782
|
)
|
|
$
|
(2,883
|
)
|
Investment income affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(667
|
)
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,758
|
)
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes, noncontrolling interest, and equity in
unconsolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(14,345
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to long-lived assets
|
|
|
171,197
|
|
|
|
|
|
|
|
|
|
|
|
687
|
|
|
$
|
171,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
653,367
|
|
|
|
4,384
|
|
|
|
|
|
|
|
113,054
|
|
|
$
|
770,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Other items in the table above represent corporate-level
activities that do not constitute a reportable segment. Total
assets at the corporate level primarily consist of cash, our
investment in affiliates, and intangibles.
Use of Estimates To prepare financial
statements in conformity with accounting principles generally
accepted in the United States of America, we must make estimates
and assumptions. These estimates and assumptions affect the
reported amounts in the financial statements, and the disclosure
of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates.
New Accounting Pronouncements In April 2009,
the FASB issued guidance on how to determine whether there has
been a significant decrease in the volume and level of activity
for an asset or liability when compared with normal market
activity for the asset or liability. In such situations, an
entity may conclude that transactions or quoted prices may not
be determinative of fair value, and may adjust the transactions
or quoted prices to arrive at the fair value of the asset or
liability. This guidance was effective for interim and annual
reporting periods ending after June 15, 2009, and shall be
applied prospectively. The adoption of this guidance did not
have a material impact on our consolidated financial statements.
In April 2009, the FASB issued guidance which requires
disclosures about fair value of financial instruments in interim
and annual financial information for periods ending after
June 15, 2009. The adoption of this guidance did not have a
material impact on our consolidated financial statements.
In May 2009, the FASB issued guidance on the accounting for and
disclosure of events that occur after the balance sheet date.
This guidance was effective for interim and annual financial
periods ending after June 15, 2009. This guidance was
amended in February 2010. It requires an entity that is a SEC
filer to evaluate subsequent events through the date that the
financial statements are issued. The adoption of this guidance
did not have an impact on our consolidated financial statements.
In June 2009, the FASB issued guidance which changes how a
reporting entity determines when an entity that is
insufficiently capitalized or is not controlled through voting
(or similar rights) should be consolidated. The determination of
whether a reporting entity is required to consolidate another
entity is based on, among other things, the other entitys
purpose and design and the reporting entitys ability to
direct the activities of the other entity that most
significantly impact the other entitys economic
performance. The guidance will require a reporting entity to
provide additional disclosures about its involvement with
variable interest entities and any significant changes in risk
exposure due to that involvement. A reporting entity will be
required to disclose how its involvement with a variable
interest entity affects the reporting entitys financial
statements.
84
GREAT
WOLF RESORTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The adoption of this guidance is effective for fiscal years
beginning after November 15, 2009, and interim periods
within those fiscal years. The adoption of this guidance is not
expected to have a material impact on our consolidated financial
statements.
In June 2009, the FASB issued guidance on codification and the
hierarchy of Generally Accepted Accounting Principles. The
Codification superseded all non-SEC accounting and reporting
standards. All other nongrandfathered non-SEC accounting
literature not included in the Codification will become
nonauthoritative. The guidance is effective for interim
quarterly and annual periods beginning July 1, 2009. The
adoption of this guidance did not have a material impact on our
consolidated financial statements.
In August 2009, the FASB issued guidance on measuring
liabilities at fair value which provides clarification on
measuring liabilities at fair value when a quoted price in an
active market is not available. The guidance was effective for
the first reporting period beginning after issuance. The
adoption of this guidance did not have a material impact on our
consolidated financial statements.
In October 2009, the FASB issued guidance for revenue
recognition with multiple deliverables. This guidance eliminates
the residual method under the current guidance and replaces it
with the relative selling price method when
allocating revenue in a multiple deliverable arrangement. The
selling price for each deliverable shall be determined using
vendor specific objective evidence of selling price, if it
exists, otherwise third-party evidence of selling price shall be
used. If neither exists for a deliverable, the vendor shall use
its best estimate of the selling price for that deliverable.
After adoption, this guidance will also require expanded
qualitative and quantitative disclosures. The guidance is
effective for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15,
2010, although early adoption is permitted. We are currently
evaluating the impact of this guidance on our consolidated
financial statements.
|
|
3.
|
INVESTMENT
IN AFFILIATES
|
CNL
Joint Venture
On August 6, 2009, we sold our 30.26% joint venture
interest to CNL for $6,000. We recognized a $962 gain on this
sale.
Summary financial data for this joint venture is as follows:
|
|
|
|
|
|
|
|
|
|
|
Period January 1
|
|
|
|
|
through
|
|
Year Ended
|
|
|
August 5,
|
|
December 31,
|
Operating data:
|
|
2009
|
|
2008
|
|
Revenue
|
|
$
|
19,750
|
|
|
$
|
31,531
|
|
Operating expenses
|
|
$
|
(24,213
|
)
|
|
$
|
(39,491
|
)
|
Net loss
|
|
$
|
(4,463
|
)
|
|
$
|
(7,960
|
)
|
We had a receivable from the joint venture of $1,465 as of
December 31, 2008. At December 31, 2008, we reserved
$1,201 against this receivable. We had a payable to the joint
venture of $1,225 as of December 31, 2008.
Grand
Mound Joint Venture
Our joint venture with The Confederated Tribes of the Chehalis
Reservation owns the Great Wolf Lodge resort and conference
center on a
39-acre land
parcel in Grand Mound, Washington. This resort opened in March
2008. This joint venture is a limited liability company. We are
a member of that limited liability company with a 49% ownership
interest. At December 31 2009, the joint venture had aggregate
outstanding indebtedness to third parties of $101,094. As of
December 31, 2009, we have made combined loan and equity
contributions, net of loan repayments, of $29,700 to the joint
venture to fund a portion of construction costs of the resort.
In January 2009, the other member of the joint venture purchased
$5,991 of our loan at par.
85
GREAT
WOLF RESORTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Summary financial data for this joint venture as of and for the
years ended December 31, 2009 and 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Balance sheet data:
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
145,247
|
|
|
$
|
152,215
|
|
Total liabilities
|
|
$
|
114,129
|
|
|
$
|
118,636
|
|
Operating data:
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
39,645
|
|
|
$
|
33,194
|
|
Operating expenses
|
|
$
|
36,353
|
|
|
$
|
31,739
|
|
Net loss
|
|
$
|
(2,461
|
)
|
|
$
|
(5,553
|
)
|
We had a receivable from the joint venture of $2,614 and $661
that relates primarily to accrued preferred equity returns and
management fees as of December 31, 2009 and 2008,
respectively. We had a payable to the joint venture of $581 as
of December 31, 2008.
|
|
4.
|
PROPERTY
AND EQUIPMENT
|
Property and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Land and improvements
|
|
$
|
60,718
|
|
|
$
|
51,684
|
|
Building and improvements
|
|
|
427,602
|
|
|
|
353,537
|
|
Furniture, fixtures and equipment
|
|
|
341,529
|
|
|
|
315,577
|
|
Construction in process
|
|
|
327
|
|
|
|
117,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
830,176
|
|
|
|
837,861
|
|
Less accumulated depreciation
|
|
|
(153,771
|
)
|
|
|
(121,688
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
676,405
|
|
|
$
|
716,173
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $50,064, $43,663, and $35,686 for the
years ended December 31, 2009, 2008 and 2007, respectively.
86
GREAT
WOLF RESORTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Long-Term Debt:
|
|
|
|
|
|
|
|
|
Traverse City/Kansas City mortgage loan
|
|
$
|
68,773
|
|
|
$
|
70,211
|
|
Mason mortgage loan
|
|
|
73,800
|
|
|
|
76,800
|
|
Pocono Mountains mortgage loan
|
|
|
95,458
|
|
|
|
96,571
|
|
Williamsburg mortgage loan
|
|
|
63,125
|
|
|
|
64,625
|
|
Grapevine mortgage loan
|
|
|
77,909
|
|
|
|
78,709
|
|
Concord construction loan
|
|
|
78,549
|
|
|
|
27,594
|
|
Junior subordinated debentures
|
|
|
80,545
|
|
|
|
80,545
|
|
Other Debt:
|
|
|
|
|
|
|
|
|
City of Sheboygan bonds
|
|
|
8,544
|
|
|
|
8,493
|
|
City of Sheboygan loan
|
|
|
3,290
|
|
|
|
3,503
|
|
Other
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
550,071
|
|
|
|
507,051
|
|
Less current portion of long-term debt
|
|
|
(16,126
|
)
|
|
|
(81,464
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
533,945
|
|
|
$
|
425,587
|
|
|
|
|
|
|
|
|
|
|
Traverse City/Kansas City Mortgage Loan This
loan is secured by our Traverse City and Kansas City resorts.
The loan bears interest at a fixed rate of 6.96%, is subject to
a 25-year
principal amortization schedule, and matures in January 2015.
The loan has customary financial and operating debt compliance
covenants. The loan also has customary restrictions on our
ability to prepay the loan prior to maturity. We were in
compliance with all covenants under this loan at
December 31, 2009.
The loan requires us to maintain a minimum debt service coverage
ratio (DSCR) of 1.35, calculated on a quarterly basis. This
ratio is defined as the two collateral properties combined
trailing twelve-month net operating income divided by the
greater of (i) the loans twelve-month debt service
requirements and (ii) 8.5% of the amount of the outstanding
principal indebtedness under the loan. Failure to meet the
minimum DSCR is not an event of default and does not accelerate
the due date of the loan. Not meeting the minimum DSCR, however,
subjects the two properties to a lock-box cash management
arrangement, at the discretion of the loans servicer. We
believe that the lock-box arrangement would require
substantially all cash receipts for the two resorts to be moved
each day to a lender-controlled bank account, which the loan
servicer would then use to fund debt service and operating
expenses for the two resorts.
For the year ended December 31, 2009, the DSCR for this
loan was 0.73. As a result, the loan servicer may choose to
implement the lock-box cash management arrangement. We believe
that such an arrangement, if implemented, would constitute a
traditional lock-box arrangement as discussed in authoritative
accounting guidance. Based on that guidance, if the loan
servicer were to establish the traditional lock-box arrangement
now permitted under the loan, we believe we would be required to
classify the entire outstanding principal balance of the loan as
a current liability, since the lock-box arrangement would
require us to use the properties working capital to
liquidate the loan and we do not presently have the ability to
refinance this loan to a new, long-term loan.
The loan also contains a similar lock-box requirement if we open
any Great Wolf Lodge or Blue Harbor Resort within 100 miles
of either resort, and the two collateral properties
combined trailing twelve-month net operating income is not at
least equal to 1.8 times 8.5% of the amount of the outstanding
principal indebtedness under the loan.
87
GREAT
WOLF RESORTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Mason Mortgage Loan This loan is secured by
our Mason resort. During 2009, we extended the loans
maturity date to July 1, 2011. We incurred loan fees of
$1,965 related to the extension of this loan. The loan bears
interest at a floating rate of 90- day LIBOR plus a spread of
425 basis points with an interest rate floor of 6.50%
(effective rate of 6.50% as of December 31, 2009). The loan
requires principal amortization payments of $1,000 per quarter
in 2009 and $2,000 per quarter thereafter. This loan has
customary financial and operating debt compliance covenants
associated with an individual mortgaged property, including a
minimum tangible net worth provision for Great Wolf Resorts,
Inc. We were in compliance with all covenants under this loan at
December 31, 2009.
The loan also has a property-level cash trap. During those
months that Property Yield is less than 10%, excess
cash is trapped in an escrow account and applied to any
operating or debt service shortfalls, upon satisfaction of
certain conditions. Twice a year, funds remaining in the escrow
account that are not previously applied to any operating or debt
service shortfalls, are applied to reduce the outstanding
principal balance of the loan. Property Yield is
defined as the ratio of (i) net operating income divided by
(ii) the sum of (a) the outstanding principal balance
of the loan plus (b) any anticipated future funding
(excluding protective advances) plus (c) accrued interest
that remains unpaid for greater than 30 days.
The loan has no restrictions on the repayment of loan principal
and has exit fees payable upon full repayment of the loan or at
maturity. In addition, the owner of the Mason resort is
obligated to pay 50% of the proceeds of certain Liquidity
Events (described below) towards repayment of the Mason
mortgage loan, capped at $30,000, which amount is reduced as
repayments of principal on the Mason mortgage loan are
periodically made. The obligation to pay such proceeds is
uncapped if the Liquidity Event involves a sale of
the Mason resort or of any direct or indirect interest in our
subsidiary that owns the Mason resort. Great Wolf Resorts, Inc.
has guaranteed the entire amount of any required Liquidity Event
paydown obligation, and up to $30,000 of the Liquidity Event
paydown obligation is cross-collateralized by our Grapevine
resort. Liquidity Events include the sale of
(i) any of our Mason, Concord or Grapevine resorts,
(ii) any direct or indrect equity interest in the Mason,
Concord or Grapevine resorts, (iii) a majority equity
interest by Great Wolf Resorts, Inc. or any of its
majority-owned or wholly-owned subsidiaries in (x) any of
such majority-owned or wholly-owned subsidiaries or (y) any
of our existing properties that are wholly-owned or
majority-owned, or the refinancing of a mortgage loan on any of
our majority-owned or wholly-owned existing properties. Great
Wolf Resorts, Inc. has also guaranteed all debt service
obligations under the loan.
We are required to provide interest rate protection on a portion
of the loan amount through the loans maturity date.
Therefore, we made an interest rate cap payment of $106 that
caps the loan at 7.00% interest. This interest rate cap has been
designated as an ineffective cash flow hedge. We mark the
interest rate cap to market and record the change to interest
expense.
Pocono Mountains Mortgage Loan This loan is
secured by our Pocono Mountains resort. The loan bears interest
at a fixed rate of 6.10% and matures in December 2016. The loan
is currently subject to a
30-year
principal amortization schedule. The loan has customary
covenants associated with an individual mortgaged property. The
loan also has customary restrictions on our ability to prepay
the loan prior to maturity. We were in compliance with all
covenants under this loan at December 31, 2009.
The loan requires us to maintain a minimum DSCR of 1.25,
calculated on a quarterly basis. Subject to certain exceptions,
the DSCR is increased to 1.35 if we open up a waterpark resort
within 75 miles of the property or incur mezzanine debt
secured by the resort. This ratio is defined as the
propertys combined trailing twelve-month net operating
income divided by the greater of (i) the loans
twelve-month debt service
88
GREAT
WOLF RESORTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
requirements and (ii) 7.25% of the amount of the
outstanding principal indebtedness under the loan. Failure to
meet the minimum DSCR is not an event of default and does not
accelerate the due date of the loan. Not meeting the minimum
DSCR, however, subjects the property to a lock-box cash
management arrangement, at the discretion of the loans
servicer. We believe that lock-box arrangement would require
substantially all cash receipts for the resort to be moved each
day to a lender-controlled bank account, which the loan servicer
would then use to fund debt service and operating expenses for
the resort, with excess cash flow being deposited in a reserve
account and held as additional collateral for the loan. While
recourse under the loan is limited to the property owners
interest in the mortgage property, we have provided limited
guarantees with respect to certain customary non-recourse
provisions and environmental indemnities relating to the loan.
Williamsburg Mortgage Loan This loan is
secured by our Williamsburg resort. The loan bears interest at a
floating rate of
30-day LIBOR
plus a spread of 350 basis points with a minimum rate of
6.25% per annum (effective rate of 6.25% as of December 31,
2009). This loan matures in August 2011 and has a one-year
extension available at our option, assuming the property meets
an operating performance threshold. The loan has no prepayment
fees. The loan has customary covenants associated with an
individual mortgaged property. We were in compliance with all
covenants under this loan at December 31, 2009.
The loan also has a property-level cash trap. Commencing upon
the third payment date after it has been determined that a
Cash Sweep Condition exists, and continuing for two
payment dates thereafter, the borrower must pay, in addition to
other amounts due, excess cash (subject to certain limitations),
which must be applied towards the outstanding principal balance
of the loan. Cash Sweep Conditions include
(i) the failure to maintain a DSCR of 1.50 to 1.00;
(ii) the failure of Great Wolf Resorts, Inc. and its
subsidiaries, on a consolidated basis, to maintain liquidity of
at least $10,000; and (iii) the failure of Great Wolf,
Resorts, Inc. and its subsidiaries, on a consolidated basis, to
maintain a minimum tangible net worth of $85,000.
In conjunction with the closing of this loan, we were required
to provide interest rate protection on a portion of the loan
amount through the loans maturity date. Therefore, we
executed an interest rate cap payment in the amount of $522 that
caps the loan at 8% interest through the loans maturity
date. This interest rate cap was designated as an ineffective
cash flow hedge. We mark the interest rate cap to market and
record the change to interest expense.
Grapevine Mortgage Loan This loan is secured
by our Grapevine resort. During 2009, we extended the
loans maturity date to July 1, 2011. We incurred loan
fees of $1,415 related to the extension of this loan. The loan
bears interest at a floating rate of 90- day LIBOR plus a spread
of 400 basis points with an interest rate floor of 7.00%
(effective rate of 7.00% as of December 31, 2009). The loan
requires principal amortization payments of $800 per quarter
until maturity. Great Wolf Resorts, Inc. has provided a
guarantee of monthly amortization payments. This loan has
customary financial and operating debt compliance covenants
associated with an individual mortgaged property, including a
minimum tangible net worth provision for Great Wolf Resorts,
Inc., as well as the same property yield-based cash trap as the
mortgage loan secured by the Mason resort. The loan has no
restrictions on the repayment of loan principal and has exit
fees that must be paid upon full repayment of the loan or at
maturity. We were in compliance with all covenants under this
loan at December 31, 2009.
We are required to provide interest rate protection on a portion
of the loan amount through the loans maturity date.
Therefore, we executed an interest rate cap payment in the
amount of $205 that caps the loan at 7% interest through
December 2010. This interest rate cap was designated as an
ineffective cash flow hedge. We mark the interest rate cap to
market and record the change to interest expense.
Concord Construction Loan In April 2008 we
closed on a $63,940 construction loan to fund a portion of the
total costs of our Great Wolf Lodge resort in Concord. The loan,
which matures in April 2012, was expanded to its $79,900 maximum
principal amount in January 2009. The loan had an aggregate
outstanding principal amount of $78,549 as of December 31,
2009. The loan requires monthly amortization payments of a
89
GREAT
WOLF RESORTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
25-year
basis beginning on September 30, 2010. The loan bears
interest at a floating annual rate of LIBOR plus a spread of
310 basis points, with a minimum rate of 6.50% per annum
(effective rate of 6.50% as of December 31, 2009). The loan
requires interest only payments until the one-year anniversary
of the conversion date of the property and then requires monthly
principal payments based on a
25-year
amortization schedule. However, if after the Conversion
Date (that is, after a certificate of occupancy for the
project, but in no event after April 30, 2010) the
resort owners net income available to pay debt service on
this loan for four consecutive quarters is less than
$10 million, or if maximum principal amount of the loan
exceeds 75% of the fair market value of the property, then we
are required to post cash collateral or partially repay the loan
in an amount sufficient to remedy such deficiency. This loan has
customary financial and operating debt compliance covenants
associated with an individual mortgaged property, including a
minimum consolidated tangible net worth provision. We were in
compliance with all covenants under this loan at
December 31, 2009.
Great Wolf Resorts, Inc. has provided a $79,900 payment guaranty
of the loan on our Concord, North Carolina resort property. If
our subsidiary defaults on this obligation we would be required
to assume that obligation, including the payment of any
outstanding debt amounts. If we are required to undertake such
obligation, it may have an adverse affect on our business,
financial condition and results of operations.
Junior Subordinated Debentures In March 2005
we completed a private offering of $50,000 of trust preferred
securities (TPS) through Great Wolf Capital Trust I
(Trust I), a Delaware statutory trust which is our
subsidiary. The securities pay holders cumulative cash
distributions at an annual rate which is fixed at 7.80% through
March 2015 and then floats at LIBOR plus a spread of
310 basis points thereafter. The securities mature in March
2035 and are callable at no premium after March 2010. In
addition, we invested $1,500 in Trust Is common
securities, representing 3% of the total capitalization of
Trust I.
Trust I used the proceeds of the offering and our
investment to purchase from us $51,550 of our junior
subordinated debentures with payment terms that mirror the
distribution terms of the TPS. The costs of the TPS offering
totaled $1,600, including $1,500 of underwriting commissions and
expenses and $100 of costs incurred directly by Trust I.
Trust I paid these costs utilizing an investment from us.
These costs are being amortized over a
30-year
period. The proceeds from our debenture sale, net of the costs
of the TPS offering and our investment in Trust I, were
$48,400. We used the net proceeds to retire a construction loan.
In June 2007 we completed a private offering of $28,125 of TPS
through Great Wolf Capital Trust III (Trust III), a
Delaware statutory trust which is our subsidiary. The securities
pay holders cumulative cash distributions at an annual rate
which is fixed at 7.90% through June 2012 and then floats at
LIBOR plus a spread of 300 basis points thereafter. The
securities mature in June 2017 and are callable at no premium
after June 2012. In addition, we invested $870 in the
Trusts common securities, representing 3% of the total
capitalization of Trust III.
Trust III used the proceeds of the offering and our
investment to purchase from us $28,995 of our junior
subordinated debentures with payment terms that mirror the
distribution terms of the trust securities. The costs of the TPS
offering totaled $932, including $870 of underwriting
commissions and expenses and $62 of costs incurred directly by
Trust III. Trust III paid these costs utilizing an
investment from us. These costs are being amortized over a
10-year
period. The proceeds from our debenture sales, net of the costs
of the TPS offering and our investment in Trust III, were
$27,193. We used the net proceeds for development costs.
Issue trusts, like Trust I and Trust III
(collectively, the Trusts), are generally variable interests. We
have determined that we are not the primary beneficiary under
the Trusts, and accordingly we do not include the financial
statements of the Trusts in our consolidated financial
statements.
Based on the foregoing accounting authority, our consolidated
financial statements present the debentures issued to the Trusts
as long-term debt. Our investments in the Trusts are accounted
as cost investments and are included in other assets on our
consolidated balance sheet. For financial reporting purposes, we
record interest expense on the corresponding debentures in our
condensed consolidated statements of operations.
90
GREAT
WOLF RESORTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
City of Sheboygan Bonds The City of Sheboygan
(the City) bonds represent the face amount of bond anticipation
notes (BANs) issued by the City in November 2003 in conjunction
with the construction of the Blue Harbor Resort in Sheboygan,
Wisconsin. We have recognized as a liability the obligations for
the BANs. We have an obligation to fund certain minimum
guaranteed amounts of room tax payments to be made by the Blue
Harbor Resort through 2028, which obligation is indirectly
related to the payments by the City on the BANs.
City of Sheboygan Loan The City of Sheboygan
loan amount represents a loan made by the City in 2004 in
conjunction with the construction of the Blue Harbor Resort in
Sheboygan, Wisconsin. The loan is noninterest bearing and
matures in 2018. Our obligation to repay the loan will be
satisfied by certain minimum guaranteed amounts of real and
personal property tax payments to be made by the Blue Harbor
Resort through 2018.
Future Maturities Future principal
requirements on long-term debt are as follows:
|
|
|
|
|
2010
|
|
$
|
16,126
|
|
2011
|
|
|
206,645
|
|
2012
|
|
|
80,189
|
|
2013
|
|
|
3,675
|
|
2014
|
|
|
3,966
|
|
Thereafter
|
|
|
239,470
|
|
|
|
|
|
|
Total
|
|
$
|
550,071
|
|
|
|
|
|
|
|
|
6.
|
FAIR
VALUE OF FINANCIAL INSTRUMENTS
|
Fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date
(an exit price). United States Generally Accepted Accounting
Principles (GAAP) outlines a valuation framework and creates a
fair value hierarchy in order to increase the consistency and
comparability of fair value measurements and the related
disclosures. Certain assets and liabilities must be measured at
fair value, and disclosures are required for items measured at
fair value.
We measure our financial instruments using inputs from the
following three levels of the fair value hierarchy. The three
levels are as follows:
Level 1 inputs are unadjusted quoted prices in active
markets for identical assets or liabilities that we have the
ability to access at the measurement date.
Level 2 inputs include quoted prices for similar assets and
liabilities in active markets, quoted prices for identical or
similar assets or liabilities in markets that are not active,
inputs other than quoted prices that are observable for the
asset or liability (that is, interest rates, yield curves,
etc.), and inputs that are derived principally from or
corroborated by observable market data by correlation or other
means (market corroborated inputs).
Level 3 includes unobservable inputs that reflect our
assumptions about the assumptions that market participants would
use in pricing the asset or liability. We develop these inputs
based on the best information available, including our own data.
The following table summarizes the our financial assets measured
at fair value on a recurring basis as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Interest rate caps
|
|
$
|
|
$133
|
|
$
|
|
$133
|
91
GREAT
WOLF RESORTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Level 2 assets consist of our interest rate caps. To
determine the estimated fair value of our interest rate caps we
use market information provided by the banks from whom the
interest rate caps were purchased and considering the credit
risk is the counterparty.
As of December 31, 2009, we estimate the total fair value
of our long-term debt to be $91,646 less than its total carrying
value due to the terms of the existing debt being different than
those terms currently available to us for indebtedness with
similar risks and remaining maturities. These fair value
estimates have not been comprehensively revalued for purposes of
these consolidated financial statements since that date, and
current estimates of fair values may differ significantly.
The following table summarizes the valuation of financial
instruments measured at fair value on a nonrecurring basis in
the consolidated balance sheet at December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Property and Equipment
|
|
$
|
|
$
|
|
$5,771
|
|
$5,771
|
|
|
|
|
|
|
|
|
|
Property and equipment with a carrying amount of $30,000 were
written down to their fair value of $6,000 as of
September 30, 2009, resulting in an impairment charge of
$24,000. To determine the estimated fair value for purposes of
calculating the impairment charge related to our resort in
Sheboygan, we used a combination of historical and projected
cash flows and other available market information, such as
recent sales prices for similar assets.
The carrying amounts for cash and cash equivalents, other
current assets, escrows, accounts payable, gift certificates
payable and accrued expenses approximate fair value because of
the short-term nature of these instruments.
Income Tax Expense Income tax expense
(benefit) consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
Deferred
|
|
|
Total
|
|
|
Year ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
|
$
|
86
|
|
|
$
|
86
|
|
State and local
|
|
|
248
|
|
|
|
45
|
|
|
|
293
|
|
Foreign
|
|
|
80
|
|
|
|
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
328
|
|
|
$
|
131
|
|
|
$
|
459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
|
$
|
(12,499
|
)
|
|
$
|
(12,499
|
)
|
State and local
|
|
|
955
|
|
|
|
(1,573
|
)
|
|
|
(618
|
)
|
Foreign
|
|
|
89
|
|
|
|
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,044
|
|
|
$
|
(14,072
|
)
|
|
$
|
(13,028
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
|
$
|
(5,723
|
)
|
|
$
|
(5,723
|
)
|
State and local
|
|
|
398
|
|
|
|
(1,382
|
)
|
|
|
(984
|
)
|
Foreign
|
|
|
92
|
|
|
|
|
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
490
|
|
|
$
|
(7,105
|
)
|
|
$
|
(6,615
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92
GREAT
WOLF RESORTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Total tax expense (benefit) is included in the following line
items in our statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax Expense (Benefit)
|
|
|
|
for the Year Ending December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Income tax expense (benefit)
|
|
$
|
440
|
|
|
$
|
(11,956
|
)
|
|
$
|
(5,859
|
)
|
Net loss attributable to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
312
|
|
Equity in unconsolidated affiliates, net of tax
|
|
|
19
|
|
|
|
(1,072
|
)
|
|
|
(1,068
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
459
|
|
|
$
|
(13,028
|
)
|
|
$
|
(6,615
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The differences between the statutory federal income tax rate
and the effective income tax rate reflected in our consolidated
statements of operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Federal statutory income tax benefit
|
|
|
(35.0
|
)%
|
|
|
(35.0
|
)%
|
|
|
(35.0
|
)%
|
State income taxes, net of federal income taxes
|
|
|
(3.5
|
)%
|
|
|
(0.6
|
)%
|
|
|
(6.1
|
)%
|
Nondeductible goodwill
|
|
|
|
|
|
|
11.5
|
%
|
|
|
|
|
Change in valuation allowance
|
|
|
39.7
|
%
|
|
|
|
|
|
|
|
|
Other
|
|
|
(0.4
|
)%
|
|
|
(0.1
|
)%
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.8
|
%
|
|
|
(24.2
|
)%
|
|
|
(40.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Assets and Liabilities The tax
effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at
December 31, 2009 and 2008 are presented below:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
31,032
|
|
|
$
|
17,504
|
|
Intangibles
|
|
|
14,222
|
|
|
|
11,564
|
|
Investment in affiliates
|
|
|
2,200
|
|
|
|
7,161
|
|
Salaries and wages
|
|
|
2,901
|
|
|
|
2,534
|
|
Other
|
|
|
1,329
|
|
|
|
1,329
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
51,684
|
|
|
|
40,092
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
(22,522
|
)
|
|
|
(32,922
|
)
|
Prepaid expenses
|
|
|
(856
|
)
|
|
|
(932
|
)
|
Interest rate swap
|
|
|
|
|
|
|
(273
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(23,378
|
)
|
|
|
(34,127
|
)
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(23,008
|
)
|
|
|
(366
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
5,298
|
|
|
$
|
5,599
|
|
|
|
|
|
|
|
|
|
|
Our 2009 net deferred tax asset is comprised of a current
deferred tax liability of $406 included in accrued expenses and
a long-term deferred tax asset of $28,712. Our long-term
deferred tax asset is partially offset by a valuation allowance
of $23,008. Our 2008 net deferred tax asset consisted of a
current deferred tax
93
GREAT
WOLF RESORTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
liability of $126 included in accrued expenses and a long-term
deferred tax asset of $5,725 included in other assets on the
consolidated balance sheet.
Net Operating Loss Carryforwards As of
December 31, 2009, we had net operating loss carryforwards
of approximately $79,791 and $77,348 for federal and state
income tax purposes, respectively. These federal and state
carryforwards begin expiring in 2024 and 2014, respectively. We
consider whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. Based on
our analysis, we have recorded a valuation allowance of $23,008
at December 31, 2009, due to uncertainties related to our
ability to utilize some of our deferred tax assets, primarily
consisting of certain net operating loss carryforwards, before
they expire. We also determined that due to current conditions
in the credit markets, real estate markets and our current
financial position, the tax planning strategy we previously
expected to generate substantial taxable income was no longer
feasible. The valuation allowance is based on our estimates of
taxable income solely from the reversal of existing deferred tax
liabilities and the period over which deferred tax assets
reverse. In the event that actual results differ from these
estimates or we adjust these estimates in a future period, we
may need to increase or decrease our valuation allowance, which
could materially impact our consolidated statement of
operations. At December 31, 2008, we believed all but
$6,620 of the net operating loss carryforwards related to the
State of Ohio would be realized; therefore we established a
valuation allowance as of December 31, 2008 of $366, the
tax effected benefit of such state carryforward. The valuation
allowance is included on the balance sheet in deferred tax
liability.
Other The 2009 income tax provision includes
a deduction of $339 related to share-based compensation, of
which $170 was recorded as an increase in additional paid in
capital and $169 increased income tax expense. The 2008 income
tax provision includes a deduction of $126 related to
share-based compensation which was recorded as an increase in
additional paid in capital.
At December 31, 2009, we had unrecognized tax benefits of
$1,298, which primarily related to uncertainty regarding the
sustainability of certain deductions taken on our 2005 and 2006
U.S. Federal income tax return related to transaction costs
from our IPO and certain deductions taken on our 2006
U.S. Federal income tax return related to a tax assessment.
To the extent these unrecognized tax benefits are ultimately
recognized, they will impact the effective tax rate in a future
period. We do not expect the total amount of unrecognized tax
benefits to change significantly in the next year. The
unrecognized tax benefits are classified as a reduction of the
net operating loss carryforwards. The following is a
reconciliation of the total amounts of unrecognized tax benefits
for the year:
|
|
|
|
|
Unrecognized tax benefit December 31, 2008
|
|
$
|
1,298
|
|
Gross increases tax positions in current period
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefit December 31, 2009
|
|
$
|
1,298
|
|
|
|
|
|
|
|
|
8.
|
RELATED-PARTY
TRANSACTIONS
|
We rent office space for our headquarters location in Madison,
Wisconsin from a company that is an affiliate of an individual
who was a member of our board of directors through May 2009. Our
total payments for rent and related expenses for this office
space were $353, $304, and $325 for the years ended
December 31, 2009, 2008 and 2007, respectively, and are
included in selling, general and administrative expenses on our
consolidated statements of operations and comprehensive loss.
94
GREAT
WOLF RESORTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We regularly transact business with our unconsolidated
affiliates. The following summarizes our transactions with these
unconsolidated affiliates for the years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Management and other fees
|
|
$
|
4,973
|
|
|
$
|
5,346
|
|
|
$
|
4,314
|
|
Other revenue from managed properties
|
|
|
17,132
|
|
|
|
19,826
|
|
|
|
11,477
|
|
Other expenses from managed properties
|
|
|
17,132
|
|
|
|
19,826
|
|
|
|
11,477
|
|
Investment income
|
|
|
1,330
|
|
|
|
2,187
|
|
|
|
667
|
|
Accounts receivable
|
|
|
2,614
|
|
|
|
925
|
|
|
|
3,973
|
|
Accrued expenses
|
|
|
|
|
|
|
1,806
|
|
|
|
124
|
|
|
|
9.
|
COMMITMENTS
AND CONTINGENCIES
|
Legal Matters We are involved in litigation
from time to time in the ordinary course of our business. We do
not believe that the outcome of any such pending or threatened
litigation will have a material adverse effect on our financial
condition or results of operations. However, as is inherent in
legal proceedings where issues may be decided by finders of
fact, there is a risk that an unpredictable decision adverse to
the company could be reached.
Letters of Credit In connection with the
construction of our Sheboygan, Wisconsin resort, we have
supplied a $2,000 letter of credit in favor of the City of
Sheboygan. The letter of credit expires on December 31,
2010. There have been no draws on this letter of credit. We have
made a $2,000 deposit with a bank as collateral for this letter
of credit. The deposit is considered restricted cash and is
included in other assets on the consolidated balance sheets.
Guarantees We recognize guarantees when the
guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee.
In connection with the construction of our Sheboygan, Wisconsin
resort, we entered into agreements with the City of Sheboygan
and The Redevelopment Authority of the City of Sheboygan,
Wisconsin (collectively, the City) whereby the City funded
certain costs of construction. The City funded $4,000 toward the
construction of the resort and related public improvements and
$8,200 toward construction of a convention center connected to
the resort.
In exchange for the $4,000 funding, we guaranteed real and
personal property tax payments over a fourteen-year period
totaling $16,400. This obligation is also guaranteed by three of
our former members of senior management. The guarantee was
entered into on July 30, 2003.
In exchange for the $8,200 funding, we entered into a lease for
the convention center with the City. The initial term of the
lease is
251/2
years with fifteen, five-year renewal options. Under the lease,
we will satisfy repayment of the $8,200 funding by making
guaranteed room tax payments totaling $25,944 over the initial
term of the lease. This obligation is also guaranteed by three
of our former members of senior management. This guarantee was
also entered into on July 30, 2003.
The debt related to the $4,000 and $8,200 fundings is included
in the accompanying consolidated balance sheets; therefore, we
have not recorded any liability related to the guarantees on
those fundings.
Great Wolf Resorts, Inc. has guaranteed the entire amount of any
required Liquidity Event (as defined by the loan agreement)
paydown obligation, and up to $30,000 of the Liquidity Event
paydown obligation is
cross-collateralized
by our Grapevine resort. Great Wolf Resorts, Inc. has also
guaranteed all debt service obligations under the Mason mortgage
loan.
95
GREAT
WOLF RESORTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Great Wolf Resorts, Inc. has provided a guarantee of monthly
amortization payments on our Grapevine mortgage loan.
Great Wolf Resorts, Inc. has provided a $79,900 payment guaranty
of the loan on our Concord, North Carolina resort property. If
our subsidiary defaults on this obligation we would be required
to assume that obligation, including the payment of any
outstanding debt amounts.
Commitments We lease office space, storage
space and office equipment under various operating leases that
expire between 2010 and 2017. Most of the leases include renewal
options. Future minimum payments on these operating leases are
as follows:
|
|
|
|
|
2010
|
|
$
|
377
|
|
2011
|
|
|
195
|
|
2012
|
|
|
174
|
|
2013
|
|
|
34
|
|
2014
|
|
|
34
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
814
|
|
|
|
|
|
|
Rent expense for the years ended December 31, 2009, 2008,
and 2007 was $741, $708, and $488, respectively.
We maintain a 401(k) profit sharing plan for our employees.
Eligibility for participation in the plan is based on an
employee meeting certain minimum age and service requirements.
Participants may make voluntary, pre-tax contributions through
salary deferrals to the plan. Employer matching contributions
are discretionary and are based on a percentage of employee
contributions. Our contributions to the plan were $339, $432,
and $336 for the years ended December 31, 2009, 2008, and
2007, respectively.
Deferred Compensation We have a deferred
compensation plan for certain of our employees. The plan allows
for contributions by both the participants and us. Our employer
contributions for the plan were $185, $43, and $54 for the years
ended December 31, 2009, 2008 and 2007, respectively.
Earnings per Share We calculate our basic
earnings per common share by dividing net income (loss)
available to common shareholders by the weighted average number
of shares of common stock outstanding. Our diluted earnings per
common share assumes the issuance of common stock for all
potentially dilutive stock equivalents outstanding. In periods
in which we incur a net loss, we exclude potentially dilutive
stock equivalents from the computation of diluted weighted
average shares outstanding, as the effect of those potentially
dilutive items is anti-dilutive.
The trust that holds the assets to pay obligations under our
deferred compensation plan has 11,765 shares of our common
stock. We treat those shares of common stock as treasury stock
for purposes of our earnings
96
GREAT
WOLF RESORTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
per share computations and therefore we exclude them from our
basic and diluted earnings per share calculations. Basic and
diluted earnings per common share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Net loss attributable to common shares
|
|
$
|
(58,476
|
)
|
|
$
|
(40,725
|
)
|
|
$
|
(9,581
|
)
|
Weighted average common shares outstanding basic and
diluted
|
|
|
30,749,318
|
|
|
|
30,827,860
|
|
|
|
30,533,249
|
|
Net loss per share basic and diluted
|
|
$
|
(1.90
|
)
|
|
$
|
(1.32
|
)
|
|
$
|
(0.31
|
)
|
Options to purchase 441,000 shares of common stock were not
included in the computations of diluted earnings per share for
the year ended December 31, 2009, because the exercise
price for the options were greater than the average market price
of the common shares during that period. There were
767,825 shares of common stock that were not included in
the computation of diluted earnings per share for the year ended
December 31, 2009, because the market
and/or
performance criteria related to these shares had not been met at
December 31, 2009.
|
|
12.
|
SHARE-BASED
COMPENSATION
|
We recognized share-based compensation expense of $1,138, $222,
and $5,080, net of estimated forfeitures, in share-based
compensation expense for the years ended December 31, 2009,
2008 and 2007, respectively. The total income tax expense
(benefit) recognized related to share-based compensation was $9,
$(54) and $(2,073) for the years ended December 31, 2009,
2008, and 2007, respectively.
We recognize compensation expense on grants of share-based
compensation awards on a straight-line basis over the requisite
service period of each award recipient. As of December 31,
2009, total unrecognized compensation cost related to
share-based compensation awards was $1,913, which we expect to
recognize over a weighted average period of approximately
2.8 years.
The Great Wolf Resorts 2004 Incentive Stock Plan (the Plan)
authorizes us to grant up to 3,380, 740 options, stock
appreciation rights or shares of our common stock to employees
and directors. At December 31, 2009, there were
1,152,963 shares available for future grants under the Plan.
We anticipate having to issue new shares of our common stock for
stock option exercises.
Stock
Options
We have granted non-qualified stock options to purchase our
common stock under the Plan at prices equal to the fair market
value of the common stock on the grant dates. The exercise price
for certain options granted under the plans may be paid in cash,
shares of common stock or a combination of cash and shares.
Stock options expire ten years from the grant date and vest
ratably over three years.
We recorded stock option expense of $26, $111 and $1,524 for the
years ended December 31, 2009, 2008 and 2007, respectively.
There were no stock options granted in 2009, 2008 or 2007.
97
GREAT
WOLF RESORTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of stock option activity during the years ended
December 31, 2009, 2008, and 2007 is:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
|
Shares
|
|
|
Price
|
|
|
Life
|
|
|
Number of shares under option:
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2007
|
|
|
1,064,500
|
|
|
$
|
17.55
|
|
|
|
8.05 years
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(167
|
)
|
|
$
|
12.40
|
|
|
|
|
|
Forfeited
|
|
|
(77,333
|
)
|
|
$
|
20.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
987,000
|
|
|
$
|
17.29
|
|
|
|
7.03 years
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(512,000
|
)
|
|
$
|
17.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
475,000
|
|
|
$
|
17.59
|
|
|
|
6.09 years
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(34,000
|
)
|
|
$
|
18.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009
|
|
|
441,000
|
|
|
$
|
17.53
|
|
|
|
5.09 years
|
|
Exercisable at December 31, 2009
|
|
|
441,000
|
|
|
$
|
17.53
|
|
|
|
5.09 years
|
|
At December 31, 2009, 2008 and 2007, all of our option
grant prices were above our stock price. Therefore there was no
intrinsic value for our outstanding or exercisable shares at
December 31, 2009, 2008 or 2007.
Market
Condition Share Awards
Certain employees are eligible to receive shares of our common
stock in payment of market condition share awards granted to
them in accordance with the terms thereof.
We granted 541,863, 84,748 and 215,592 market condition share
awards during the years ended December 31, 2009, 2008 and
2007, respectively. We recorded share-based compensation expense
of $367, $(132) and $779 for the years ended December 31,
2009, 2008 and 2007, respectively. Included in the 2008 amount
were reversals of expense related to the resignation of two
senior officers in 2008, as the service condition of these
shares was not met.
Of the 2009 market condition shares granted:
|
|
|
|
|
541,863 were based on our common stocks performance in
2009 relative to a stock index, as designated by the
Compensation Committee of the Board of Directors. These shares
vest ratably over a three-year period,
2009-2011.
The per share fair value of these market condition shares was
$1.26 as of the grant date.
|
98
GREAT
WOLF RESORTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair value of these market condition shares was determined
using a Monte Carlo simulation and the following assumptions:
|
|
|
|
|
Dividend yield
|
|
|
|
|
Weighted average, risk free interest rate
|
|
|
0.62
|
%
|
Expected stock price volatility
|
|
|
96.51
|
%
|
Expected stock price volatility (small-cap stock index)
|
|
|
37.89
|
%
|
We used an expected dividend yield of 0% as we do not currently
pay a dividend and do not contemplate paying a dividend in the
foreseeable future. The weighted average, risk free interest
rate was based on the one-year T-bill rate. Our expected stock
price volatility was estimated using daily returns data of our
stock for a two-year period ending on the grant date. The
expected stock price volatility for the small cap stock index
was estimated using daily returns data for a two-year period
ending on the grant date.
Based on our common stock performance in 2009, employees earned
all of these market condition shares.
Of the 2008 market condition shares granted:
|
|
|
|
|
84,748 are based on our common stocks performance in 2008
relative to a stock index, as designated by the Compensation
Committee of the Board of directors. These shares vest ratably
over a three-year period,
2008-2010.
The per share fair value of these market condition shares was
$1.63.
|
The fair value of these market condition shares was determined
using a Monte Carlo simulation and the following assumptions:
|
|
|
|
|
Dividend yield
|
|
|
|
|
Weighted average, risk free interest rate
|
|
|
2.05
|
%
|
Expected stock price volatility
|
|
|
34.98
|
%
|
Expected stock price volatility (small-cap stock index)
|
|
|
20.08
|
%
|
We used an expected dividend yield of 0% as we do not currently
pay a dividend and do not contemplate paying a dividend in the
foreseeable future. The weighted average, risk free interest
rate was based on the one-year T-bill rate. Our expected stock
price volatility was estimated using daily returns data of our
stock for a two-year period ending on the grant date. The
expected stock price volatility for the small cap stock index
was estimated using daily returns data for a two-year period
ending on the grant date. Due to the resignation of a senior
officer in 2008, 55,046 shares were forfeited.
Based on our common stock performance in 2008, employees did not
earn any of these market condition shares.
Of the 2007 market condition shares awards granted:
|
|
|
|
|
53,006 are based on our common stocks performance in 2007
relative to a stock index, as designated by the Compensation
Committee of the Board of directors. These shares vest ratably
over a three-year period,
2007-2009.
The per share fair value of these market condition shares was
$7.25.
|
The fair value of these market condition shares was determined
using a Monte Carlo simulation and the following assumptions:
|
|
|
|
|
Dividend yield
|
|
|
|
|
Weighted average, risk free interest rate
|
|
|
5.05
|
%
|
Expected stock price volatility
|
|
|
42.13
|
%
|
Expected stock price volatility (small-cap stock index)
|
|
|
16.64
|
%
|
99
GREAT
WOLF RESORTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We used an expected dividend yield of 0% as we do not currently
pay a dividend and do not contemplate paying a dividend in the
foreseeable future. The weighted average, risk free interest
rate is based on the one-year T-bill rate. Our expected stock
price volatility was estimated using daily returns data of our
stock for a two-year period ending on the grant date. The
expected stock price volatility for the small cap stock index
was estimated using daily returns data for a two-year period
ending on the grant date.
Based on our common stock performance in 2007, employees did not
earn any of these market condition shares.
|
|
|
|
|
81,293 are based on our common stocks absolute performance
during the three-year period
2007-2009.
Half of these shares vested on December 31, 2009, and the
other half vest on December 31, 2010. The per share fair
value of these market condition shares was $6.65.
|
The fair value of these market condition shares was determined
using a Monte Carlo simulation and the following assumptions:
|
|
|
|
|
Dividend yield
|
|
|
|
|
Weighted average, risk free interest rate
|
|
|
4.73
|
%
|
Expected stock price volatility
|
|
|
42.13
|
%
|
We used an expected dividend yield of 0% as we do not currently
pay a dividend and do not contemplate paying a dividend in the
foreseeable future. The weighted average, risk free interest
rate is based on the four-year T-bill rate. Our expected stock
price volatility was estimated using daily returns data of our
stock for a two-year period ending on the grant date. Due to the
resignation of two senior officers in 2008, 58,628 shares
were forfeited.
Based on our common stock performance during the three year
period
2007-2009,
employees did not earn any of these market condition shares.
|
|
|
|
|
81,293 are based on our common stocks performance in
2007-2009
relative to a stock index, as designated by the Compensation
Committee of the Board of directors. Half of these shares vested
December 31, 2009, and the other half vest on
December 31, 2010. The per share fair value of these market
condition shares was $8.24.
|
The fair value of these market condition shares was determined
using a Monte Carlo simulation and the following assumptions:
|
|
|
|
|
Dividend yield
|
|
|
|
|
Weighted average, risk free interest rate
|
|
|
4.73
|
%
|
Expected stock price volatility
|
|
|
42.13
|
%
|
Expected stock price volatility (small-cap stock index)
|
|
|
16.64
|
%
|
We used an expected dividend yield of 0% as we do not currently
pay a dividend and do not contemplate paying a dividend in the
foreseeable future. The weighted average, risk free interest
rate is based on the four-year T-bill rate. Our expected stock
price volatility was estimated using daily returns data of our
stock for a two-year period ending on the grant date. The
expected stock price volatility for the small cap stock index
was estimated using daily returns data for a two-year period
ending on the grant date. Due to the resignation of two senior
officers in 2008, 58,628 shares were forfeited.
Based on our common stock performance during the three year
period
2007-2009
relative to a stock index, employees did not earn any of these
market condition shares.
100
GREAT
WOLF RESORTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Performance
Share Awards
Certain employees are eligible to receive shares of our common
stock in payment of performance share awards granted to them.
Grantees of performance shares are eligible to receive shares of
our common stock based on the achievement of certain individual
and departmental performance criteria during the calendar year
in which the shares were granted. We granted 180,622, 37,386 and
23,149 performance shares during the years ended
December 31, 2009, 2008 and 2007, respectively. Shares
earned related to shares granted in 2009 vest over a three year
period,
2009-2011;
shares earned related to shares granted in 2008 vest ratably
over a three year period,
2008-2010;
shares earned related to shares granted in 2007 vest ratably
over a three year period,
2007-2009.
The per share fair value of performance shares granted during
the years ended December 31, 2009, 2008 and 2007, was
$1.54, $7.09 and $13.10, respectively, which represents the fair
value of our common stock on the grant date. We recorded
share-based compensation expense of $184, $51 and $101 for the
years ended December 31, 2009, 2008 and 2007, respectively.
Since all shares originally granted were not earned, we recorded
a reduction in expense of $2 and $10 during the years ended
December 31, 2009 and 2008, respectively, related to the
shares not issued.
Based on their achievement of certain individual and
departmental performance goals:
|
|
|
|
|
Employees earned and were issued 18,084 performance shares in
February 2009 related to the 2008 grants, and
|
|
|
|
Employees earned and were issued 20,843 performance shares in
February 2008 related to the 2007 grants.
|
Deferred
Compensation Awards
Pursuant to their employment arrangements, certain executives
received bonuses upon completion of our IPO. Executives
receiving bonus payments totaling $2,200 elected to defer those
payments pursuant to our deferred compensation plan. To satisfy
this obligation, we contributed 129,412 shares of our
common stock to the trust that holds the assets to pay
obligations under our deferred compensation plan. The fair value
of that stock at the date of contribution was $2,200. We have
recorded the fair value of the shares of common stock, at the
date the shares were contributed to the trust, as a reduction of
our stockholders equity. We account for the change in fair
value of the shares held in the trust as a charge to
compensation cost. We recorded share-based compensation income
of $348, $893 and $537, for the years ended December 31,
2009, 2008 and 2007, respectively.
In 2008, one of the executives who had deferred a bonus payment
as discussed above resigned from our company. As a result, we
have reclassified $2,000 previously recorded as deferred
compensation to additional
paid-in-capital.
Non-vested
Shares
We have granted non-vested shares to certain employees and our
directors. Shares vest over time periods between three and five
years. We valued the non-vested shares at the closing market
value of our common stock on the date of grant.
101
GREAT
WOLF RESORTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of non-vested shares activity for the years ended
December 31, 2009, 2008, and 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Non-vested shares balance at January 1, 2007
|
|
|
245,000
|
|
|
$
|
11.08
|
|
Granted
|
|
|
143,711
|
|
|
$
|
13.47
|
|
Forfeited
|
|
|
(5,000
|
)
|
|
$
|
10.79
|
|
Vested
|
|
|
(50,600
|
)
|
|
$
|
11.53
|
|
|
|
|
|
|
|
|
|
|
Non-vested shares balance at December 31, 2007
|
|
|
333,111
|
|
|
$
|
12.37
|
|
Granted
|
|
|
210,799
|
|
|
$
|
6.78
|
|
Forfeited
|
|
|
(162,008
|
)
|
|
$
|
10.91
|
|
Vested
|
|
|
(81,653
|
)
|
|
$
|
12.14
|
|
|
|
|
|
|
|
|
|
|
Non-vested shares balance at December 31, 2008
|
|
|
300,249
|
|
|
$
|
9.29
|
|
Granted
|
|
|
331,179
|
|
|
$
|
2.75
|
|
Forfeited
|
|
|
(61,809
|
)
|
|
$
|
4.73
|
|
Vested
|
|
|
(86,151
|
)
|
|
$
|
10.79
|
|
|
|
|
|
|
|
|
|
|
Non-vested shares balance at December 31, 2009
|
|
|
483,468
|
|
|
$
|
5.13
|
|
|
|
|
|
|
|
|
|
|
Our non-vested shares had an intrinsic value of $1 at
December 31, 2009. There was no intrinsic value of our
shares at December 31, 2008 or 2007.
We recorded share-based compensation expense of $837, $657, and
$963 for the years ended December 31, 2009, 2008, and 2007,
respectively.
Vested
Shares
We have an annual short-term incentive plan for certain
employees that provides them the potential to earn cash bonus
payments. In 2008 and 2007, certain of these employees had the
option to elect to have some or all of their annual bonus
compensation paid in the form of shares of our common stock
rather than cash. Employees making this election received shares
having a market value equal to 125% of the cash they would
otherwise receive. Shares issued in lieu of cash bonus payments
are fully vested upon issuance. We recorded expense of $32, and
$2,353 during the years ended December 31, 2008 and 2007,
respectively, related to our short-term incentive plan.
|
|
|
|
|
In connection with the elections related to 2008 bonus amounts,
we issued 17,532 shares in February 2009. We valued these
shares at $32 based on the closing market value of our common
stock on the date of the grant.
|
|
|
|
In connection with the elections related to 2007 bonus amounts,
we issued 265,908 shares in February 2008. We valued these
shares at $2,055 based on the closing market value of our common
stock on the date of the grant.
|
In 2009 and 2008, our directors had the option to elect to have
some or all of the cash portion of their annual fees paid in the
form of shares of our common stock rather than cash. Directors
making this election received shares having a market value equal
to 125% of the cash they would otherwise receive. Shares issued
in lieu of cash fee payments are fully vested upon issuance. We
recorded non-cash professional fees expense of $74 and $437 for
the years ended December 31, 2009 and 2008, respectively,
related to these elections to
102
GREAT
WOLF RESORTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
receive shares in lieu of cash. We issued 31,347 and
118,823 shares during the years ended December 31,
2009 and 2008, respectively. We had no similar issuances of
stock for director compensation in 2007.
|
|
13.
|
QUARTERLY
FINANCIAL DATA (UNAUDITED)
|
The following tables set forth certain items included in our
consolidated financial statements for each quarter of the years
ended December, 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
62,307
|
|
|
$
|
68,625
|
|
|
$
|
76,827
|
|
|
$
|
56,273
|
|
Net operating loss
|
|
|
(2,450
|
)
|
|
|
(581
|
)
|
|
|
(15,491
|
)
|
|
|
(5,941
|
)
|
Net loss attributable to Great Wolf Resorts, Inc.
|
|
|
(5,645
|
)
|
|
|
(5,706
|
)
|
|
|
(36,923
|
)
|
|
|
(10,202
|
)
|
Basic loss per common share
|
|
$
|
(0.18
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(1.18
|
)
|
|
$
|
(0.33
|
)
|
Diluted loss per common share
|
|
$
|
(0.18
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(1.18
|
)
|
|
$
|
(0.33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
64,208
|
|
|
$
|
63,018
|
|
|
$
|
69,413
|
|
|
$
|
48,899
|
|
Net operating income (loss)
|
|
|
4,062
|
|
|
|
51
|
|
|
|
9,763
|
|
|
|
(39,542
|
)
|
Net (loss) income attributable to Great Wolf Resorts, Inc.
|
|
|
(2,327
|
)
|
|
|
(4,090
|
)
|
|
|
2,171
|
|
|
|
(36,479
|
)
|
Basic (loss) earnings per share
|
|
$
|
(0.08
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
0.07
|
|
|
$
|
(1.18
|
)
|
Diluted (loss) earnings per share
|
|
$
|
(0.08
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
0.07
|
|
|
$
|
(1.18
|
)
|
The following is a summary of the significant fourth quarter
adjustments for our fiscal year 2008:
|
|
|
|
|
Impairment loss on investment in affiliates
|
|
$
|
18,777
|
|
Goodwill impairment
|
|
|
17,430
|
|
|
|
|
|
|
|
|
$
|
36,207
|
|
|
|
|
|
|
The sum of the basic and diluted (loss) earnings per share for
the four quarters may differ from the annual (loss) earnings per
share due to the required method of computing the weighted
average number of shares in the respective periods.
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to
provide reasonable assurance that information in our reports
under the Securities Exchange Act of 1934, as amended (the
Exchange Act) is recorded, processed, summarized and
reported within the time periods specified pursuant to the
SECs rules and forms. Disclosure controls and procedures,
as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Exchange Act, include controls and procedures designed
to ensure that information required to be disclosed by us in the
reports we file or submit under the Exchange Act is accumulated
and communicated to our management,
103
GREAT
WOLF RESORTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognizes that any controls
and procedures, no matter how well designed and operated, can
provide only reasonable, and not absolute, assurance that the
objectives of the system are met.
We carried out an evaluation, under the supervision and with the
participation of our management including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures
as of the end of the fourth quarter of 2009. In making this
evaluation, we considered matters discussed below relating to
internal control over financial reporting. After consideration
of the matters discussed below, we have concluded that our
disclosure controls and procedures were not effective as of
December 31, 2009, due to a certain material weakness in
internal control over financial reporting described below.
Changes
in Internal Control
There were no changes in internal control over financial
reporting that occurred during the fourth quarter of 2009 that
have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Managements
Report on Internal Control over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate and effective internal control over financial
reporting. Internal control over financial reporting refers to
the process designed by, or under the supervision of, our Chief
Executive Officer and Chief Financial Officer, and effected by
our Board of Directors, management and other personnel, to
provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
for external purposes in accordance with U.S. generally
accepted accounting principles, and includes those policies and
procedures that:
|
|
|
|
|
Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions
of the assets of the Company;
|
|
|
|
Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with U.S. generally accepted accounting
principles, and that receipts and expenditures of the Company
are being made only in accordance with authorizations of our
management and directors; and
|
|
|
|
Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on the financial
statements.
|
Internal control over financial reporting cannot provide
absolute assurance for the prevention or detection of
misstatements within our financial reporting because of its
inherent limitations. Internal control over financial reporting
is a process that involves human judgment and requires diligence
and compliance to prevent errors. Internal control over
financial reporting can also be circumvented by collusion or
improper management override. Because of such limitations, there
is a risk that material misstatements may not be prevented or
detected on a timely basis. However, these inherent limitations
are known features of the financial reporting process and it is
possible to design safeguards to reduce, though not eliminate,
this risk. Our management has used the framework set forth in
the report entitled Internal Control-Integrated
Framework published by the Committee of Sponsoring
Organizations of the Treadway Commission to evaluate the
effectiveness of our internal control over financial reporting.
Management conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the framework
in Internal Control Integrated Framework issued by
the Committee of Sponsoring
104
GREAT
WOLF RESORTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Organizations of the Treadway Commission and concluded that our
internal control over financial reporting was not effective as
of December 31, 2009.
Material
Weakness Detected During the First Quarter 2010
The companys management assessed the effectiveness of our
internal control over financial reporting as of
December 31, 2009. One material weakness, as defined in
standards by the Public Company Accounting Oversight Board
(United States), was identified in connection with the
preparation of our financial reports for the quarter ended
September 30, 2009. A material weakness is a deficiency, or
a combination of deficiencies, in internal control over
financial reporting, such that there is a reasonable possibility
that a material misstatement of the companys annual or
interim financial statements will not be prevented or detected
in a timely basis.
During the first quarter 2010, our Audit Committee, in
consultation with management, determined that it was necessary
to restate previously issued financial statements because of
errors that occurred during the computation of the valuation
allowance on certain deferred tax assets recorded as of
September 30, 2009. Due to the errors, we have made
adjustments to restate the previously issued financial
statements for the three and nine months period ended
September 30, 2009.
Our management believes that the errors giving rise to the
restatement occurred because of a variety of factors, including
the complexity of the calculation of the valuation allowance on
certain deferred tax assets and certain spreadsheet errors that
were not detected in the related review and approval process.
This control deficiency resulted in adjustments to the
September 30, 2009 unaudited condensed consolidated
financial statements. Accordingly, management has concluded that
this control deficiency constituted a material weakness.
Conclusion
Because of the material weakness detected as described above,
our management has concluded that, as of December 31, 2009,
we did not maintain effective internal control over financial
reporting.
The effectiveness of our internal control over financial
reporting as of December 31, 2009 has been audited by Grant
Thornton LLP, an independent registered public accounting firm,
as stated in their report which is included herein.
Remediation
Measures for Identified Material Weakness
In order to remediate this material weakness in internal control
over financial reporting, we will increase the level of detail
in our reviews of complex calculations used to derive
significant financial statement amounts or estimates.
105
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Great Wolf Resorts, Inc.
We have audited Great Wolf Resorts, Inc.s (a Delaware
Corporation) and subsidiaries (the Company) internal
control over financial reporting as of December 31, 2009,
based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Companys management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Report of
Management on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Companys
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions or that the degree
of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material
misstatement of the Companys annual or interim financial
statements will not be prevented or detected on a timely basis.
The following material weakness has been identified and included
in managements assessment.
Deficiencies were identified in the operation of the
Companys internal control over accounting for income
taxes. The deficiencies related to inadequate review of the
Companys accounting for income taxes, including the review
of the deferred tax asset valuation allowance which resulted in
a restatement to the Companys condensed consolidated
financial statements as of and for the three and nine-month
period ended September 30, 2009.
In our opinion, because of the effect of the material weakness
described above on the achievement of the objectives of the
control criteria, Great Wolf Resorts, Inc. has not maintained
effective internal control over financial reporting as of
December 31, 2009, based on criteria established in
Internal Control Integrated Framework issued
by COSO.
106
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements of the Company as of
December 31, 2009 and 2008 and for each of the two years in
the period ended December 31, 2009. The material weakness
identified above was considered in determining the nature,
timing and extent of audit tests applied in our audit of the
2009 financial statements, and this report does not affect our
report dated March 2, 2010, which expressed an unqualified
opinion on those consolidated financial statements.
We do not express an opinion or any other form of assurance on
the corrective actions and other changes in internal controls
reported in Managements Report on Internal Control over
Financial Reporting.
Madison, Wisconsin
March 2, 2010
107
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
None.
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICER AND CORPORATE GOVERNANCE
|
This information is hereby incorporated by reference to our 2010
Proxy Statement (under the headings The Election of
Directors, The Executive Officers,
Corporate Governance and Section 16(A)
Beneficial Ownership Compliance).
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
This information is hereby incorporated by reference to our 2010
Proxy Statement (under the headings Executive
Compensation, Compensation Committee Interlocks and
Insider Participation and Compensation of
Directors).
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
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This information is hereby incorporated by reference to our 2010
Proxy Statement (under the headings Ownership Of Our
Common Stock and Equity Compensation Plan
Information).
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ITEM 13.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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This information is hereby incorporated by reference to our 2010
Proxy Statement (under the heading Certain Relationships
And Related Transactions).
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ITEM 14.
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PRINCIPAL
ACCOUNTANT FEES AND SERVICES
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This information is hereby incorporated by reference to our 2010
Proxy Statement (under the heading Relationship With
Independent Public Accountants).
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ITEM 15.
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EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
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(a)(1) Financial Statements
The financial statements included in this Annual Report on
Form 10-K
are provided under Item 8.
(a)(2) Financial Statement Schedules
All schedules are omitted since the required information is not
present in amounts sufficient to require submission to the
schedule or because the information required is included in the
financial statements and notes thereto.
(a)(3) Exhibits
See Index to Exhibits.
108
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the registrant has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GREAT WOLF RESORTS, INC.
Kimberly K. Schaefer
Chief Executive Officer
Dated: March 2, 2010
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities and on the dates indicated.
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Signature
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Title
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Date
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/s/ Kimberly
K. Schaefer
Kimberly
K. Schaefer
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Chief Executive Officer (Principal Executive Officer) and
Director
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March 2, 2010
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/s/ James
A. Calder
James
A. Calder
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Chief Financial Officer (Principal Financial and Accounting
Officer)
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March 2, 2010
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/s/ Joseph
V. Vittoria
Joseph
V. Vittoria
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Chairman of the Board and Director
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March 2, 2010
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Elan
Blutinger
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Director
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March 2, 2010
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/s/ Randy
L. Churchey
Randy
L. Churchey
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Director
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March 2, 2010
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/s/ Edward
H. Rensi
Edward
H. Rensi
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Director
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March 2, 2010
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/s/ Howard
A. Silver
Howard
A. Silver
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Director
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March 2, 2010
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109
INDEX TO
EXHIBITS
The exhibits listed below are incorporated herein by reference
to prior SEC filings by Registrant or are included as exhibits
in this Annual Report on
Form 10-K.
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Exhibit
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Number
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Description
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2
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.1
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Form of Merger Agreement (Delaware) (incorporated herein by
reference to Exhibit 2.1 to the Companys Registration
Statement on
Form S-1
filed August 12, 2004)
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2
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.2
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Form of Merger Agreement (Wisconsin) (incorporated herein by
reference to Exhibit 2.2 to the Companys Registration
Statement on
Form S-1
filed August 12, 2004)
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3
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.1
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Form of Amended and Restated Certificate of Incorporation for
Great Wolf Resorts, Inc. dated December 9, 2004
(incorporated herein by reference to Exhibit 3.1 to the
Companys Registration Statement on
Form S-1
filed August 12, 2004)
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3
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.2
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Form of Amended and Restated Bylaws of Great Wolf Resorts, Inc.
effective September 12, 2007 (incorporated herein by
reference to Exhibit 4.1 to the Companys Current
Report on
Form S-1
filed September 18, 2007)
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4
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.1
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Form of the Common Stock Certificate of Great Wolf Resorts, Inc.
(incorporated herein by reference to Exhibit 4.1 to the
Companys Registration Statement on
Form S-1
filed October 21, 2004)
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4
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.2
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Junior Subordinated Indenture, dated as of March 15, 2005,
between Great Wolf Resorts, Inc. and JPMorgan Chase Bank,
National Association, as trustee (incorporated herein by
reference to Exhibit 4.1 to the Companys Current
Report on
Form 8-K
filed March 18, 2005)
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4
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.3
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Amended and Restated Trust Agreement, dated as of
March 15, 2005, by and among Chase Manhattan Bank USA,
National Association, as Delaware trustee; JPMorgan Chase Bank,
National Association, as property trustee; Great Wolf Resorts,
Inc., as depositor; and James A. Calder, Alex G. Lombardo and J.
Michael Schroeder, as administrative trustees (incorporated
herein by reference to Exhibit 4.2 to the Companys
Current Report on
Form 8-K
filed March 18, 2005)
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10
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.1
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License Agreement, dated January 30, 2004, by and between
The Great Lakes Companies, Inc. and Jim Pattison Entertainment
Ltd. (incorporated herein by reference to Exhibit 10.1 to
the Companys Registration Statement on
Form S-1
filed September 23, 2004)
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10
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.2
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Development Agreement, dated as of July 30, 2003, among the
City of Sheboygan, Wisconsin, the Redevelopment Authority of the
City of Sheboygan, Wisconsin, The Great Lakes Companies, Inc.,
Blue Harbor Resort Sheboygan, LLC, and Blue Harbor Resort
Condominium, LLC (incorporated herein by reference to
Exhibit 10.2 to the Companys Registration Statement
on
Form S-1
filed August 12, 2004)
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10
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.3
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First Amendment to the Development Agreement, dated
June 25, 2004, by and among the City of Sheboygan,
Wisconsin, the Redevelopment Authority of the City of Sheboygan,
Wisconsin, The Great Lakes Companies, Inc., Blue Harbor Resort
Sheboygan, LLC, and Blue Harbor Resort Condominium, LLC
(incorporated herein by reference to Exhibit 10.3 to the
Companys Registration Statement on
Form S-1
filed August 12, 2004)
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10
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.4
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Tall Pines Exclusive License and Royalty Agreement, dated
July 25, 2004, between Tall Pines Development Corporation
and The Great Lakes Companies, Inc. (incorporated herein by
reference to Exhibit 10.4 to the Companys
Registration Statement on
Form S-1
filed December 7, 2004)
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10
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.5+
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Employment Agreement between Great Wolf Resorts, Inc., and
Kimberly Schaefer, dated December 13, 2004
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10
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.6+
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Employment Agreement between Great Wolf Resorts, Inc. and James
Calder, dated December 13, 2004
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10
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.7+
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Employment Agreement between Great Wolf Resorts, Inc. and J.
Michael Schroeder, dated December 13, 2004
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10
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.8+
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First Amendment to Employment Agreement between Great Wolf
Resorts, Inc. and J. Michael Schroeder, dated May 28, 2008
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10
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.9+
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Second Amendment to Employment Agreement between Great Wolf
Resorts, Inc. and J. Michael Schroeder, dated July 2, 2008
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10
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.10+
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Employment Agreement between Great Wolf Resorts, Inc. and
Timothy Black, dated March 20, 2009
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10
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.11+
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First Amendment to Employment Agreement between Great Wolf
Resorts, Inc. and Timothy Black, dated December 16, 2009
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10
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.12
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Registration Statement on
Form S-1
filed January 21, 2005) Form of Noncompete Agreement,
Trade Secret and Confidentiality Agreement (incorporated herein
by reference to Exhibit 10.6 to the Companys
Registration Statement on
Form S-1
filed January 21, 2005)
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Exhibit
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Number
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Description
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10
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.13
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Form of Officers and Directors Indemnification Agreement
(incorporated herein by reference to Exhibit 10.7 to the
Companys Registration Statement on
Form S-1
filed August 12, 2004)
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10
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.14
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Form of Indemnity Agreement (incorporated herein by reference to
Exhibit 10.8 to the Companys Registration Statement
on
Form S-1
filed September 23, 2004)
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10
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.14
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Form of Great Wolf Resorts, Inc. Employee Stock Purchase Plan
(incorporated herein by reference to Exhibit 10.9 to the
Companys Registration Statement on
Form S-1
filed August 12, 2004)
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10
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.15
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Form of Great Wolf Resorts, Inc. 2004 Incentive Stock Plan
(incorporated herein by reference to Exhibit 10.10 to the
Companys Registration Statement on
Form S-1
filed November 26, 2004)
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10
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.16
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Form of Great Wolf Resorts, Inc. Deferred Compensation Plan
(incorporated herein by reference to Exhibit 10.11 to the
Companys Registration Statement on
Form S-1
filed August 12, 2004)
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10
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.17
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Loan Agreement by and among Great Wolf Resorts, Inc., Citigroup
Global Markets Realty Corp. and The Travelers Insurance Company
(incorporated herein by reference to Exhibit 10.16 to
Companys Registration Statement on
Form S-1
filed January 21, 2005)
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10
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.18
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Purchase Agreement, dated as of March 15, 2005, among Great
Wolf Resorts, Inc., Great Wolf Capital Trust I, Taberna
Preferred Funding I, Ltd and Merrill Lynch International
(incorporated herein by reference to Exhibit 1.1 to the
Companys Current Report on
Form 8-K
filed March 18, 2005)
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10
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.19
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Loan Agreement dated July 28, 2007, among Great Wolf Lodge
of Grapevine, LLC, as borrower, and Merrill Lynch Capital and
HSH Nordbank, as lenders (incorporated herein by reference to
Exhibit 1.1 to the Companys Current Report on
Form 8-K
filed July 31, 2007).
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10
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.20
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Third Amendment to Loan Agreement dated July 31, 2009,
among Great Wolf Lodge of Grapevine, LLC, as borrower, and GE
Business Financial Services Inc. (f/k/a Merrill Lynch Business
Financial Services, Inc. through its division Merrill Lynch
Capital), as administrative agent on behalf of the lenders
(incorporated herein by reference to Exhibit 1.1 to the
Companys Current Report on
Form 8-K
filed July 31, 2009).
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10
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.21
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Loan Agreement dated December 6, 2007, between Great Wolf
Lodge of the Poconos, LLC, as borrower, and Citigroup Global
Markets Realty Corp., as lender (incorporated herein by
reference to Exhibit 1.1 to the Companys Current
Report on
Form 8-K
filed December 13, 2007).
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10
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.22
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Loan Agreement dated August 4, 2008, between Great Wolf
Lodge Williamsburg SPE, LLC, as borrower, and Calyon New York
Branch and Capmark Bank, as lenders (incorporated herein by
reference to the Companys Current Report on
Form 10-Q
filed August 5, 2008).
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10
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.23*
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Amendment to Loan Agreement dated January 15, 2010, among
Great Wolf Lodge Williamsburg SPE, LLC, as borrower, and Calyon
New York Branch, as agent, and Calyon New York Branch and
Capmark Bank, as lenders.
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10
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.24
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Loan Agreement dated April 30, 2008, among Great Wolf Lodge
of the Carolinas, LLC, as borrower, Marshall Financial Group, as
administrative agent, and the several banks and other financial
institutions from time to time party thereto, as lenders
(incorporated herein by reference to Exhibit 1.1 to the
Companys Current Report on
Form 8-K
filed May 6, 2008).
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10
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.25
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Fifth Amendment to Lease, dated January 22, 2009, between
the registrant and Hovde Building, LLC, (incorporated herein by
reference to the Companys Current Report on
Form 8-K
filed January 28, 2009).
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21
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.1*
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List of Subsidiaries
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23
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.1*
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Consent of Grant Thornton LLP
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23
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.2*
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Consent of Deloitte & Touche LLP
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31
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.1*
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Certification of Chief Executive Officer of Periodic Report
Pursuant to Rule 13a 14(a) and
Rule 15d 14(a)
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31
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.2*
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Certification of Chief Financial Officer of Periodic Report
Pursuant to Rule 13a 14(a) and
Rule 15d 14(a)
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32
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.1*
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Certification of Chief Executive Officer Pursuant to
18 U.S.C. Section 1350
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32
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.2*
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Certification of Chief Financial Officer Pursuant to
18 U.S.C. Section 1350
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* |
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Filed herewith. |
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Indicated management contract or compensatory plan or
arrangement required to be filed as an exhibit pursuant to
Item 15(c) of Form
10-K. |