e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2008
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 000-51064
GREAT WOLF RESORTS, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of incorporation or organization)
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51-0510250
(I.R.S. Employer Identification No.) |
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122 West Washington Avenue
Madison, Wisconsin 53703
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53703
(Zip Code) |
(Address of principal executive offices) |
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(608) 661-4700
(Registrants telephone number, including area code)
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 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 |
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
The number of shares outstanding of the issuers common stock was 30,973,311 as of May 6, 2008.
Great Wolf Resorts, Inc.
Quarterly Report on Form 10-Q
For the Quarter Ended March 31, 2008
INDEX
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GREAT WOLF RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
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March 31, |
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December 31, |
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2008 |
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2007 |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
60,492 |
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$ |
18,597 |
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Accounts receivable, net of allowance for doubtful accounts of $99 and $113 |
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1,738 |
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2,373 |
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Accounts receivable unconsolidated related parties |
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8,636 |
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3,973 |
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Inventory |
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4,756 |
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4,632 |
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Other current assets |
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3,386 |
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2,869 |
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Total current assets |
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79,008 |
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32,444 |
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Property and equipment, net |
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638,728 |
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617,697 |
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Investments in and advances to unconsolidated related parties |
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63,502 |
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59,148 |
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Other assets |
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23,029 |
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20,257 |
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Other intangible assets |
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23,829 |
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23,829 |
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Goodwill |
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17,430 |
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17,430 |
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Total assets |
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$ |
845,526 |
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$ |
770,805 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Current portion of long-term debt |
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$ |
134,085 |
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$ |
78,752 |
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Accounts payable |
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25,360 |
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18,471 |
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Accrued payroll |
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1,963 |
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3,644 |
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Accrued expenses |
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19,405 |
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17,132 |
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Accrued expenses unconsolidated related parties |
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61 |
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124 |
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Advance deposits |
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12,900 |
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8,211 |
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Gift certificates payable |
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4,189 |
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4,670 |
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Total current liabilities |
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197,963 |
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131,004 |
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Mortgage debt |
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236,718 |
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225,042 |
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Other long-term debt |
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92,434 |
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92,508 |
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Other long-term liabilities |
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2,118 |
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2,232 |
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Deferred tax liability |
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5,441 |
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7,597 |
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Deferred compensation liability |
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1,744 |
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2,029 |
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Total liabilities |
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536,418 |
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460,412 |
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Commitments and contingencies |
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Stockholders equity: |
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Common stock, $0.01 par value; 250,000,000 shares authorized;
30,841,238 and 30,698,683 shares issued and outstanding, at March
31, 2008, and December 31, 2007, respectively |
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308 |
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307 |
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Additional paid-in-capital |
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401,207 |
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399,759 |
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Preferred stock, $0.01 par value, 10,000,000 shares authorized, no
shares issued or outstanding at March 31, 2008 and December 31,
2007 |
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Accumulated deficit |
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(89,413 |
) |
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(87,086 |
) |
Deferred compensation |
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(2,200 |
) |
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(2,200 |
) |
Accumulated other comprehensive loss, net of tax |
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(794 |
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(387 |
) |
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Total stockholders equity |
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309,108 |
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310,393 |
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Total liabilities and stockholders equity |
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$ |
845,526 |
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$ |
770,805 |
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See accompanying notes to condensed consolidated financial statements.
3
GREAT WOLF RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(Unaudited; dollars in thousands, except per share data)
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Three months ended |
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March 31, |
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2008 |
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2007 |
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Revenues: |
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Rooms |
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$ |
38,866 |
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$ |
28,872 |
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Food and beverage |
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10,428 |
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7,790 |
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Other hotel operations |
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9,570 |
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6,984 |
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Management and other fees |
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766 |
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607 |
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Management and other fees related parties |
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1,095 |
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1,171 |
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60,725 |
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45,424 |
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Other revenue from managed properties related parties |
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3,483 |
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3,035 |
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Total revenues |
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64,208 |
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48,459 |
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Operating expenses by department: |
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Rooms |
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5,147 |
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4,155 |
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Food and beverage |
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7,993 |
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6,653 |
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Other |
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7,277 |
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5,712 |
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Other operating expenses: |
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Selling, general and administrative |
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13,398 |
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13,122 |
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Property operating costs |
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11,829 |
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7,883 |
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Depreciation and amortization |
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11,019 |
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8,644 |
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56,663 |
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46,169 |
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Other expenses from managed properties related parties |
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3,483 |
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3,035 |
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Total operating expenses |
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60,146 |
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49,204 |
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Net operating income (loss) |
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4,062 |
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(745 |
) |
Investment income related parties |
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(451 |
) |
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Interest income |
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(490 |
) |
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(1,155 |
) |
Interest expense |
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6,907 |
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3,693 |
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Loss before income taxes, minority interests, and equity in
losses of unconsolidated related parties |
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(1,904 |
) |
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(3,283 |
) |
Income tax benefit |
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(805 |
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(1,026 |
) |
Minority interests, net of tax |
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(316 |
) |
Equity in losses of unconsolidated related parties, net of tax |
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1,228 |
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64 |
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Net loss |
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$ |
(2,327 |
) |
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$ |
(2,005 |
) |
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Other comprehensive loss, net of tax: |
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Unrealized loss on interest rate swaps |
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407 |
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Comprehensive loss |
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$ |
(2,734 |
) |
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$ |
(2,005 |
) |
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Net loss per share-basic |
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$ |
(0.08 |
) |
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$ |
(0.07 |
) |
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Net loss per share-diluted |
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$ |
(0.08 |
) |
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$ |
(0.07 |
) |
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Weighted average common shares outstanding: |
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Basic |
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30,665,162 |
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30,426,130 |
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Diluted |
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30,665,162 |
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30,426,130 |
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See accompanying notes to the condensed consolidated financial statements.
4
GREAT WOLF RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; dollars in thousands)
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Three months ended |
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March 31 |
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2008 |
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2007 |
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Operating activities: |
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Net loss |
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$ |
(2,327 |
) |
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$ |
(2,005 |
) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
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Depreciation and amortization |
|
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11,019 |
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|
8,644 |
|
Non-cash employee compensation expense |
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26 |
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|
629 |
|
Equity in losses of unconsolidated related parties |
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2,127 |
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|
94 |
|
Minority interests |
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(461 |
) |
Deferred tax benefit |
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(1,782 |
) |
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(911 |
) |
Changes in operating assets and liabilities: |
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Accounts receivable and other assets |
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(5,235 |
) |
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(1,816 |
) |
Accounts payable, accrued expenses and other liabilities |
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1,366 |
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155 |
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Net cash provided by operating activities |
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5,194 |
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4,329 |
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Investing activities: |
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Capital expenditures for property and equipment |
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(19,860 |
) |
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(43,592 |
) |
Investments in unconsolidated related parties |
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(6,600 |
) |
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Investment in development |
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(1,067 |
) |
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|
(8,571 |
) |
(Increase) decrease in restricted cash |
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49 |
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|
(19 |
) |
(Increase) decrease in escrows |
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(1,777 |
) |
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638 |
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Net cash used in investing activities |
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(29,255 |
) |
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(51,544 |
) |
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Financing activities: |
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Principal payments on long-term debt |
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(400 |
) |
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(348 |
) |
Proceeds from issuance of long-term debt |
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67,335 |
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13,503 |
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Payment of loan costs |
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(979 |
) |
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Net cash provided by financing activities |
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65,956 |
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13,155 |
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Net increase (decrease) in cash and cash equivalents |
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41,895 |
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(34,060 |
) |
Cash and cash equivalents, beginning of period |
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18,597 |
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|
96,778 |
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Cash and cash equivalents, end of period |
|
$ |
60,492 |
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$ |
62,718 |
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Supplemental Cash Flow Information |
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Cash paid for interest, net of capitalized interest |
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$ |
6,760 |
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$ |
3,377 |
|
Cash paid for income taxes |
|
$ |
92 |
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$ |
147 |
|
Non-cash items: |
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Construction in process accruals |
|
$ |
11,764 |
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|
$ |
895 |
|
See accompanying notes to the condensed consolidated financial statements.
5
GREAT WOLF RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands, except per share amounts)
1. ORGANIZATION
The terms Great Wolf Resorts, us, we and our are used in this report to refer to Great
Wolf Resorts, Inc.
Business Summary
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, operator and developer in North America
of drive-to family resorts featuring indoor waterparks and other family-oriented entertainment
activities. Our resorts generally feature approximately 270 to 400 family suites that sleep from
six to ten people and each 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 under our Great Wolf Lodge® and Blue Harbor
Resorttm brand names. 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 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 operating resorts and resorts
under construction. As of March 31, 2008, we operate ten Great Wolf Lodge resorts (our signature
Northwoods-themed resorts), and one Blue Harbor Resort (a nautical-themed property).
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Number of |
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Number of |
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Indoor |
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Ownership |
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Opened/ |
|
Guest |
|
Condo |
|
Entertainment |
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|
Percentage |
|
Opening |
|
Suites |
|
Units (1) |
|
Area (2) |
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|
|
(Approx.
ft2) |
Existing Resorts: |
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Wisconsin Dells, WI (3) |
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30.32 |
% |
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|
1997 |
|
|
|
308 |
|
|
|
77 |
|
|
|
102,000 |
|
Sandusky, OH (3) |
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|
30.32 |
% |
|
|
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 |
|
|
100 |
% |
|
|
2005 |
|
|
|
405 |
|
|
|
|
|
|
|
87,000 |
|
Pocono Mountains, PA |
|
|
100 |
% |
|
|
2005 |
|
|
|
401 |
|
|
|
|
|
|
|
101,000 |
|
Niagara Falls, ONT (4) |
|
|
|
|
|
|
2006 |
|
|
|
406 |
|
|
|
|
|
|
|
104,000 |
|
Mason, OH |
|
|
100 |
% |
|
|
2006 |
|
|
|
401 |
|
|
|
|
|
|
|
105,000 |
|
Grapevine, TX (5) |
|
|
100 |
% |
|
|
2007 |
|
|
|
402 |
|
|
|
|
|
|
|
110,000 |
|
Grand Mound, WA (6) |
|
|
49 |
% |
|
March 2008 |
|
|
398 |
|
|
|
|
|
|
|
74,000 |
|
Resorts Under Construction: |
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|
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|
Concord, NC (7) |
|
|
100 |
% |
|
Spring 2009 |
|
|
402 |
|
|
|
|
|
|
|
97,000 |
|
6
|
|
|
(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 and fitness
room, as well as our Aveda® spa in the resorts that have such
amenities. |
|
(3) |
|
These properties are owned by a joint venture. CNL Income Properties, Inc.
(CNL), a real estate investment trust focused on leisure and lifestyle
properties, owns a 69.68% interest in the joint venture, and we own a 30.32%
interest. We operate the properties and license the Great Wolf Lodge brand to
the joint venture under long-term agreements through October 2020, subject to
earlier termination in certain situations. |
|
(4) |
|
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 manage the resort on behalf of Ripley and
also provide central reservation services. |
|
(5) |
|
In late 2007, we began construction on an additional 203 suites and
20,000 square feet of meeting space as an expansion of this resort. Expected
completion of the expansion is early 2009. |
|
(6) |
|
This property is owned by a joint venture with The Confederated Tribes of the
Chehalis Reservation (Chehalis). We operate the resort under our Great Wolf
Lodge brand. Chehalis has leased the land needed for the resort to the joint
venture, and they have a majority equity interest in the joint venture. The
resort opened in March 2008. |
|
(7) |
|
We have announced plans to develop a Great Wolf Lodge resort in Concord, North
Carolina. The Northwoods-themed, approximately 402-suite resort will provide a
comprehensive package of first-class destination lodging amenities and
activities. Construction on the resort began in October 2007 with expected
completion in Spring 2009. |
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General We have prepared these unaudited condensed consolidated interim financial statements
according to the rules and regulations of the Securities and Exchange Commission. Accordingly, we
have omitted certain information and footnote disclosures that are normally included in annual
financial statements prepared in accordance with accounting principles generally accepted in the
United States of America. These interim financial statements should be read in conjunction with the
financial statements, accompanying notes and other information included in our Annual Report on
Form 10-K for the year ended December 31, 2007.
The accompanying unaudited condensed consolidated interim financial statements reflect all
adjustments, which are of a normal and recurring nature, necessary for a fair presentation of the
financial condition and results of operations and cash flows for the periods presented. The
preparation of financial statements in accordance with accounting principles generally accepted in
the United States of America requires us to make estimates and assumptions. Such estimates and
assumptions affect the reported amounts of assets and liabilities, as well as 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. Our actual results could differ from those
estimates. The results of operations for the interim periods are not necessarily indicative of the
results to be expected for the entire year.
Principles of Consolidation Our consolidated financial statements include our accounts and
the accounts of all of our majority-owned subsidiaries. As part of our consolidation process, we
eliminate all significant intercompany balances and transactions.
Investments in and Advances to Related Parties - As of March 31, 2008, we have investments in
two joint ventures that we do not consolidate:
|
§ |
|
A 30.32% interest in a joint venture that owns Great Wolf Lodge resorts in Wisconsin
Dells, Wisconsin and Sandusky, Ohio. |
|
|
§ |
|
A 49% interest in a joint venture that owns the Great Wolf Lodge resort in Grand
Mound, Washington. |
7
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 owners 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 owners based on the difference between each
owners claim on the net assets of the joint venture at the end and beginning of the period, after
taking into account contributions and distributions. Each owners share of the net assets of the
joint venture is calculated as the amount that the owner would receive if the joint venture were to
liquidate all of its assets at net book value and distribute the resulting cash to creditors and
owners in accordance with their respective priorities.
Included in our Investment in and Advances to Related Parties line on our March 31, 2008
consolidated balance sheet is a preferred equity investment of $8,000 in one of our joint ventures.
This preferred equity investment bears interest at 11%. We also have a $11,691 loan outstanding
at March 31, 2008 to one of our joint ventures. This loan bears interest at 11%.
Minority Interest We record the non-owned equity interests of our consolidated subsidiaries
as minority interests on our consolidated balance sheets. The minority ownership interest of our
earnings or loss, net of tax, is classified as Minority interests in our condensed consolidated
statements of operations. In June 2007 we purchased the minority interest in the one resort that
had a minority interest, and we now own 100% of the resort.
Income Taxes At the end of each interim reporting period, we estimate the effective tax rate
expected to be applicable for the full fiscal year. The rate determined is used in providing for
income taxes on a year-to-date basis.
Other Comprehensive Income - We record unrealized gain and loss on interest rate swaps in
accordance with Financial Accounting Standards (SFAS) 133, Accounting for Derivative Instruments
and Hedging Activities, which requires the effective portion of the swaps gain or loss to be
initially reported as a component of other comprehensive income (loss) and subsequently
reclassified into earnings when the forecasted transaction affects earnings. The ineffective
portion of the gain or loss is reported in earnings immediately.
SegmentsWe are organized into a single operating division. Within that operating division,
we have three reportable segments in 2008 and 2007:
|
|
|
resort ownership/operation-revenues derived from our consolidated owned resorts; |
|
|
|
|
resort third-party management-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. |
We evaluate the performance of each segment based on earnings before interest, income taxes,
and depreciation and amortization (EBITDA), excluding minority interests and equity in earnings of
unconsolidated related parties.
The following summarizes significant financial information regarding our segments:
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resort |
|
|
Resort |
|
|
|
|
|
|
|
|
|
|
Totals per |
|
|
|
Ownership/ |
|
|
Third-Party |
|
|
Condominium |
|
|
|
|
|
|
Financial |
|
|
|
Operation |
|
|
Management |
|
|
Sales |
|
|
Other |
|
|
Statements |
|
Three months ended March 31,
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
58,864 |
|
|
$ |
5,344 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
64,208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA, excluding certain
items |
|
|
13,834 |
|
|
|
1,860 |
|
|
|
|
|
|
|
(613 |
) |
|
$ |
15,081 |
|
Depreciation and amortization |
|
|
(10,844 |
) |
|
|
|
|
|
|
|
|
|
|
(175 |
) |
|
|
(11,019 |
) |
Investment income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
451 |
|
Interest expense, net of
interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,417 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes,
minority interests, and
Equity in losses of
unconsolidated related
parties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1,904 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to long-lived assets |
|
|
19,550 |
|
|
|
|
|
|
|
|
|
|
|
310 |
|
|
$ |
19,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
676,285 |
|
|
|
9,055 |
|
|
|
|
|
|
|
160,186 |
|
|
$ |
845,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resort |
|
|
Resort |
|
|
|
|
|
|
|
|
|
|
Totals per |
|
|
|
Ownership/ |
|
|
Third-Party |
|
|
Condominium |
|
|
|
|
|
|
Financial |
|
|
|
Operation |
|
|
Management |
|
|
Sales |
|
|
Other |
|
|
Statements |
|
Three months ended March 31,
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
43,647 |
|
|
$ |
4,812 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
48,459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA, excluding certain
items |
|
|
8,422 |
|
|
|
1,778 |
|
|
|
|
|
|
|
(2,301 |
) |
|
$ |
7,899 |
|
Depreciation and amortization |
|
|
(8,417 |
) |
|
|
|
|
|
|
|
|
|
|
(227 |
) |
|
|
(8,644 |
) |
Interest expense, net of
interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,538 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes,
minority interests, and
Equity in losses of
unconsolidated related
parties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(3,283 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to long-lived assets |
|
|
43,354 |
|
|
|
|
|
|
|
|
|
|
|
238 |
|
|
$ |
43,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
622,480 |
|
|
|
2,319 |
|
|
|
|
|
|
|
67,645 |
|
|
$ |
692,444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
investments in and advances to related parties, and intangibles. Goodwill is included in our
resort ownership/operation segment.
Recent Accounting Pronouncements In September 2006, the FASB issued SFAS 157, Fair Value
Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value in
accordance with generally accepted accounting principles, and expands disclosures about fair value
measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. The adoption of SFAS 157 in 2008 did not have an impact
on our results of operations or financial position.
In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and
Financial Liabilities. SFAS 159 permits companies to choose to measure many financial assets and
liabilities at fair value. Unrealized gains and losses on items for which the fair value option
has been elected are reported in earnings at each reporting date. SFAS 159 is effective for fiscal
years beginning after November 15, 2007. The provisions of this
9
statement are required to be applied prospectively. The adoption of SFAS 159 in 2008 did not
have an impact on our results of operations or financial position.
In December 2007, the FASB issued SFAS 141 (Revised 2007), Business Combinations. SFAS
141(R) will significantly change the accounting for business combinations. Under SFAS 141(R), an
acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a
transaction at the acquisition-date fair value with limited exceptions. SFAS 141(R) also includes
a substantial number of new disclosure requirements. SFAS 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. We will be required to adopt SFAS 141(R)
on or after December 15, 2008. We do not expect the adoption of SFAS 141(R) to have a material
impact on our consolidated financial statements.
In December 2007, the FASB issued SFAS 160, Non-controlling Interests in Consolidated
Financial Statements-an Amendment of Accounting Research Bulletin No. 51. SFAS 160 establishes new
accounting and reporting standards for a non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a
non-controlling interest (minority interest) as equity in the consolidated financial statements
separate from the parents equity. The amount of the new income attributable to the
non-controlling interest will be included in consolidated net income on the face of the income
statement. SFAS 160 clarifies that changes in a parents ownership interest in a subsidiary that
do not result in deconsolidation are equity transactions if the parent retains its controlling
financial interest. In addition, this statement requires that a parent recognize a gain or loss in
net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair
value of the non-controlling equity investment on the deconsolidation date. SFAS 160 also includes
expanded disclosure requirements regarding the interests of the parent and its non-controlling
interest. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. We are currently evaluating the impact of the adoption of
this statement.
In March 2008, the FASB issued SFAS 161, Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133. SFAS 161 requires enhanced disclosures for
derivative and hedging activities. SFAS 161 is effective for fiscal years and interim periods
beginning after November 15, 2008. We are currently evaluating the impact of the adoption of this
statement.
3. SHARE-BASED COMPENSATION
We
account for share-based compensation in accordance with SFAS 123(R),
Share-Based Payment.
We recognized $26, and $629, net of estimated forfeitures, in share-based compensation expense for
the three months ended March 31, 2008 and 2007, respectively. The total income tax benefit
recognized related to share-based compensation was $11 and $256 for the three months ended March
31, 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 March 31, 2008, total unrecognized compensation cost related to share-based
compensation awards was $3,107, which we expect to recognize over a weighted average period of
approximately 3.0 years.
The Great Wolf Resorts 2004 Incentive Stock Plan (the Plan) authorizes us to grant up to
3,380,740 stock options, stock appreciation rights or shares of our common stock to employees and
directors. At March 31, 2008, there were 1,534,003 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 with
exercise prices equal to the fair market value of the common stock on the grant dates. The
exercise price for certain options granted
10
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 $62 and $459 for the three months ended March 31, 2008 and
2007, respectively. There were no stock options granted during the three months ended March 31,
2008 or 2007.
A summary of stock option activity during the three months ended March 31, 2008, is:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
Average |
|
|
|
|
|
|
Average |
|
Remaining |
|
|
|
|
|
|
Exercise |
|
Contractual |
|
|
Shares |
|
Price |
|
Life |
Number of shares under option: |
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of period |
|
|
987,000 |
|
|
$ |
17.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(1,000 |
) |
|
$ |
17.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period |
|
|
986,000 |
|
|
$ |
17.29 |
|
|
6.78 years |
Exercisable at end of period |
|
|
954,004 |
|
|
$ |
17.24 |
|
|
6.75 years |
There was no intrinsic value of our outstanding or exercisable stock options at March 31, 2008 or
2007.
Market Condition Share Awards
Certain officers are eligible to receive shares of our common stock in payment of market
condition share awards granted to them.
We granted 84,748 and 215,592 market condition share awards during the three months ended
March 31, 2008 and 2007, respectively. We recorded share-based compensation expense of $108 and
$160 for the three months ended March 31, 2008 and 2007, respectively.
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 is based on the one-year T-bill rate. Our expected stock price
volatility was estimated using daily returns data of our stock |
11
|
|
|
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. |
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 |
% |
|
|
|
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. |
|
|
|
|
81,293 are based on our common stocks absolute performance during the three-year
period 2007-2009. Half of these shares vest 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. |
|
|
|
|
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 vest on 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 |
% |
12
|
|
|
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. |
Performance Share Awards
Certain officers are eligible to receive shares of our common stock in payment of performance
share awards granted to them in accordance with the terms thereof. We granted 37,386 and 23,149
performance shares during the three months ended March 31, 2008 and 2007, respectively. Grantees
of performance shares are eligible to receive shares of our common stock based on the achievement
of certain individual and departmental performance goals during the calendar year. The per share
fair value of performance shares granted during the three months ended March 31, 2008 and 2007, was
$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 $45 and $25 for the three months ended March
31, 2008 and 2007, respectively.
Based on our achievement of certain individual and departmental performance goals, employees
earned and were issued 20,843 performance shares in February 2008 related to the 2007 grants and
17,949 in February 2007 related to 2006 grants. As a result, we recorded a reduction in expense of
$10 and $103 during the three months ended March 31, 2008 and 2007, respectively, related to the
shares not issued.
Deferred Compensation Awards
Pursuant to their employment arrangements, certain executives received bonuses upon completion
of our initial public offering (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. In accordance with the provisions of Emerging Issues Task Force, (EITF)
Issue No. 97-14, Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held
in a Rabbi Trust and Invested, 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.
Also, as prescribed by EITF Issue No. 97-14, 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 revenue
of $444 and $94, for the three months ended March 31, 2008 and 2007, respectively.
Non-vested Shares
We have granted non-vested shares to certain employees and our directors. Shares vest ratably
over various periods up to five years from the grant date. We valued the non-vested shares at the
closing market value of our common stock on the date of grant.
A summary of non-vested shares activity for the three months ended March 31, 2008 is as follows:
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
Grant Date |
|
Aggregate |
|
|
Shares |
|
Fair Value |
|
Intrinsic Value |
Non-vested shares balance at beginning of period |
|
|
333,111 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
13,895 |
|
|
$ |
7.87 |
|
|
|
|
|
Forfeited |
|
|
(12,000 |
) |
|
$ |
10.39 |
|
|
|
|
|
Vested |
|
|
(38,800 |
) |
|
$ |
11.65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested shares balance at end of period |
|
|
296,206 |
|
|
$ |
12.33 |
|
|
$ |
|
|
We recorded share-based expense of $266 and $182 for the three months ended March 31, 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. For 2007, certain of these employees had the option to
elect to have some or all of their annual bonus compensation related to performance in 2007 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 $2,353 in
the year ended December 31, 2007 related to our short-term incentive plan. In connection with
these 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.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Land and improvements |
|
$ |
51,684 |
|
|
$ |
51,398 |
|
Building and improvements |
|
|
325,740 |
|
|
|
289,768 |
|
Furniture, fixtures and equipment |
|
|
309,194 |
|
|
|
334,836 |
|
Construction in process |
|
|
40,745 |
|
|
|
19,737 |
|
|
|
|
|
|
|
|
|
|
|
727,363 |
|
|
|
695,739 |
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation |
|
|
(88,635 |
) |
|
|
(78,042 |
) |
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
638,728 |
|
|
$ |
617,697 |
|
|
|
|
|
|
|
|
Depreciation expense was $10,593 and $8,450 for the three months ended March 31, 2008 and 2007,
respectively.
14
5. LONG-TERM DEBT
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Long-Term Debt: |
|
|
|
|
|
|
|
|
Traverse City/Kansas City mortgage loan |
|
$ |
71,210 |
|
|
$ |
71,542 |
|
Mason mortgage loan |
|
|
76,800 |
|
|
|
76,800 |
|
Pocono Mountains mortgage loan |
|
|
97,000 |
|
|
|
97,000 |
|
Williamsburg mortgage loan |
|
|
55,000 |
|
|
|
|
|
Grapevine construction loan |
|
|
70,595 |
|
|
|
58,260 |
|
Junior subordinated debentures |
|
|
80,545 |
|
|
|
80,545 |
|
Other Debt: |
|
|
|
|
|
|
|
|
City of Sheboygan bonds |
|
|
8,440 |
|
|
|
8,465 |
|
City of Sheboygan loan |
|
|
3,647 |
|
|
|
3,690 |
|
|
|
|
|
|
|
|
|
|
|
463,237 |
|
|
|
396,302 |
|
Less current portion of long-term debt |
|
|
(134,085 |
) |
|
|
(78,752 |
) |
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
329,152 |
|
|
$ |
317,550 |
|
|
|
|
|
|
|
|
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 March 31, 2008.
Mason Mortgage Loan This loan is secured by our Mason resort. The loan bears interest at a
floating rate of 30-day LIBOR plus a spread of 265 basis points (effective rate of 5.35% as of
March 31, 2008). The loan matures in December 2008 and also has two one-year extensions available
at our option, assuming the property meets an operating performance threshold. We do not expect
the property to meet the operating performance threshold at December 2008. We are negotiating a
waiver or modification allowing us to exercise the one-year extension prior to the loans maturity
date in December 2008. The loan is interest-only during its initial three-year term and then is
subject to a 25-year amortization schedule in the extension periods. This loan has customary
financial and operating debt compliance covenants associated with an individual mortgaged property,
including a maximum ratio of consolidated net long-term debt divided by consolidated trailing
twelve month adjusted EBITDA and a minimum consolidated tangible net worth provision. This loan
has no restrictions or fees associated with the repayment of the loan principal. We were in
compliance with all covenants under this loan at March 31, 2008.
In April 2007, we entered into an interest rate swap agreement with two financial institutions
on a notional amount of $71,000. The agreement expires in December 2008. The agreement effectively
fixes the interest rate on $71,000 of floating rate debt outstanding at a rate of 7.65% per annum,
thus reducing our exposure to interest rate fluctuations. The notional amount does not represent
amounts exchanged by the parties, and thus is not a measure of exposure to us. The differences to
be paid or received by us under the interest rate swap agreement are recognized as an adjustment to
interest expense. The agreement is with major financial institutions, which are expected to fully
perform under the terms of the agreement. Taking into account the effect of this interest rate
swap, the total blended rate on this loan was 7.48% as of March 31, 2008.
Pocono Mountains Mortgage Loan In December 2006 we closed on a $97,000 first mortgage loan
secured by our Pocono Mountains resort. The loan bears interest at a fixed rate of 6.10% and
matures December 1, 2016. The loan is interest only for the initial 18-month period and thereafter
is 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 March 31, 2008.
15
Williamsburg Mortgage Loan In February 2008 we closed on a $55,000 first mortgage loan
secured by our Williamsburg resort. The loan bears interest at a floating rate of 30-day LIBOR
plus a spread of 300 basis points with a minimum rate of 6.50% per annum (effective rate of 6.50%
as of March 31, 2008). This loan is interest only and matures in February 2009. Prior to the
loans maturity in February 2009, we expect to either extend it or refinance it into a larger,
longer-term, fixed rate loan. The loan has customary covenants associated with an individual
mortgaged property. The loan is prepayable without penalty after August 2008. We were in
compliance with all covenants under this loan at March 31, 2008.
Grapevine Construction Loan In July 2006 we closed on a $79,500 loan to construct the Great
Wolf Lodge in Grapevine, Texas. The loan is secured by a first mortgage on the Grapevine, Texas
property. The loan bears interest at a floating rate of 30-day LIBOR plus a spread of 260 basis
points (effective rate of 5.30% as of March 31, 2008). The loan matures in July 2009 and also has
two one-year extensions available at our option. The loan is interest-only during its initial
three-year term and then is subject to a 25-year amortization schedule in the extension periods.
This loan has customary financial and operating debt compliance covenants associated with an
individual mortgaged property, including a maximum ratio of consolidated net long-term debt divided
by consolidated trailing twelve month adjusted EBITDA and a minimum consolidated tangible net worth
provision. The loan has no restrictions or fees associated with the repayment of the loan
principal. We were in compliance with all covenants under this loan at March 31, 2008.
In December 2007, we entered into an interest rate cap that hedged our entire Grapevine loan
in accordance with our original loan document. This interest rate cap matures in July 2009 and
fixes the maximum annual interest rate on this loan at 10%.
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
trust securities. 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 will use the net proceeds for future development costs.
As a result of the issuance of FIN No. 46R, Consolidation of Variable Interest Entities and
the accounting professions application of the guidance provided by the FASB, issue trusts, like
Trust I and Trust III (collectively, the
16
Trusts), are generally variable interest entities. 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. 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. In accordance with the provisions
of EITF Issue No. 91-10, we have recognized as a liability the obligations for the BANs. The notes
bear interest at an annual rate of 3.95% and mature in 2008. The notes are not a general
obligation of the City and are payable from (a) the proceeds of BANs or other funds appropriated by
the City for the payment of interest on the BANs and (b) the proceeds to be delivered from the
issuance and sale of securities by the City. We have an obligation to fund payment of these BANs.
Our obligation to fund repayment of the notes will be satisfied by certain minimum guaranteed
amounts of room tax payments to be made by the Blue Harbor Resort through 2028.
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:
|
|
|
|
|
Through |
|
|
|
|
March 31, |
|
|
|
|
2009 |
|
$ |
134,085 |
|
2010 |
|
|
3,510 |
|
2011 |
|
|
4,207 |
|
2012 |
|
|
71,890 |
|
2013 |
|
|
3,471 |
|
Thereafter |
|
|
246,074 |
|
|
|
|
|
Total |
|
$ |
463,237 |
|
|
|
|
|
6. COMPREHENSIVE INCOME
SFAS 130, Reporting Comprehensive Income, requires the disclosure of the components included
in comprehensive income. For the three months ended March 31, 2008, we recorded comprehensive
loss, net of tax of $407, related to an unrealized loss on our interest rate swap. We had no
similar amount for the three months ended March 31, 2007.
7. 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 using the treasury stock method. 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
129,412 shares of our common stock. In accordance with the provisions of EITF Issue No. 97-14,
Accounting for Deferred Compensation
17
Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested, we treat those
shares of common stock as treasury stock for purposes of our earnings per share computations and
therefore we exclude them from our basic and diluted earnings per share calculations.
Options to purchase 986,000 and 1,048,500 shares of common stock were not included in the
computations of diluted earnings per share for the three months ended March 31, 2008 and 2007,
respectively, because the exercise prices for the options were greater than the average market
price of the common shares during that period. There were 284,718 and 238,741 shares of common
stock that were not included in the computation of diluted earnings per share for the three months
ended March 31, 2008 and 2007, respectively, because the market and/or performance criteria related
to these shares had not been met.
Basic and diluted earnings per common share are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
March 31, |
|
|
2008 |
|
2007 |
|
|
|
Net loss attributable to common shares |
|
$ |
(2,327 |
) |
|
$ |
(2,005 |
) |
Weighted average common shares outstanding basic |
|
|
30,665,162 |
|
|
|
30,426,130 |
|
Weighted average common shares outstanding diluted |
|
|
30,665,162 |
|
|
|
30,426,130 |
|
Net loss per share basic |
|
$ |
(0.08 |
) |
|
$ |
(0.07 |
) |
Net loss per share diluted |
|
$ |
(0.08 |
) |
|
$ |
(0.07 |
) |
8. SUBSEQUENT EVENTS
On April 30, 2008, we closed on a $63,940 construction loan to fund a portion of the total
costs of our Great Wolf Lodge resort under construction in Concord, N.C. The four-year loan is
potentially expandable to a maximum principal amount of up to $79,900. The loan bears
interest at a floating annual rate of LIBOR plus a spread of 345 basis points during the
construction period and LIBOR plus a spread of 310 basis points once the resort is open, with a
minimum rate (floor) of 6.50% per annum.
On
May 6, 2008, we reported that our chief executive officer, John
Emery, has announced his intention to resign as our chief executive
officer and a member of our Board of Directors. As a result of
Mr. Emerys decision, the Board of Directors will appoint
Randy Churchey, one of our directors, as interim chief executive
officer.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial statements and notes
thereto appearing elsewhere in this report. We make statements in this section that are
forward-looking statements within the meaning of the federal securities laws. For a complete
discussion of forward-looking statements, see the section in Item 1 of our Annual Report on Form
10-K entitled, Forward-Looking Statements. 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.
Business. 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, operator and developer in
North America of drive-to family resorts featuring indoor waterparks and other family-oriented
entertainment activities. Our resorts generally feature approximately 270 to 400 family suites that
sleep from six to ten people and each 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
18
under our Great Wolf Lodge® and Blue Harbor Resort brand names. Our resorts are open
year-round and provide a consistent and 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 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 operating resorts and resorts
under construction. As of March 31, 2008, we operate ten Great Wolf Lodge resorts (our signature
Northwoods-themed resorts), and one Blue Harbor Resort (a nautical-themed property).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
Number |
|
|
|
|
|
|
|
|
|
|
|
|
of |
|
of |
|
Indoor |
|
|
Ownership |
|
Opened/ |
|
Guest |
|
Condo |
|
Entertainment |
|
|
Percentage |
|
Opening |
|
Suites |
|
Units (1) |
|
Area (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Approx.
ft2) |
Existing Resorts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wisconsin Dells, WI (3) |
|
|
30.32 |
% |
|
|
1997 |
|
|
|
308 |
|
|
|
77 |
|
|
|
102,000 |
|
Sandusky, OH (3) |
|
|
30.32 |
% |
|
|
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 |
|
|
100 |
% |
|
|
2005 |
|
|
|
405 |
|
|
|
|
|
|
|
87,000 |
|
Pocono Mountains, PA |
|
|
100 |
% |
|
|
2005 |
|
|
|
401 |
|
|
|
|
|
|
|
101,000 |
|
Niagara Falls, ONT (4) |
|
|
|
|
|
|
2006 |
|
|
|
406 |
|
|
|
|
|
|
|
104,000 |
|
Mason, OH |
|
|
100 |
% |
|
|
2006 |
|
|
|
401 |
|
|
|
|
|
|
|
105,000 |
|
Grapevine, TX (5) |
|
|
100 |
% |
|
|
2007 |
|
|
|
402 |
|
|
|
|
|
|
|
110,000 |
|
Grand Mound, WA (6) |
|
|
49 |
% |
|
March 2008 |
|
|
398 |
|
|
|
|
|
|
|
74,000 |
|
Resorts Under Construction: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concord, NC (7) |
|
|
100 |
% |
|
Spring 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 and fitness
room, as well as our Aveda® spa in the resorts that have such
amenities. |
|
(3) |
|
These properties are owned by a joint venture. CNL Income Properties, Inc.
(CNL), a real estate investment trust focused on leisure and lifestyle
properties, owns a 69.68% interest in the joint venture, and we own a 30.32%
interest. We operate the properties and license the Great Wolf Lodge brand to
the joint venture under long-term agreements through October 2020, subject to
earlier termination in certain situations. |
|
(4) |
|
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 manage the resort on behalf of Ripley and
also provide central reservation services. |
|
(5) |
|
In late 2007, we began construction on an additional 203 suites and
20,000 square feet of meeting space as an expansion of this resort. Expected
completion of the expansion is early 2009. |
|
(6) |
|
This property is owned by a joint venture with The Confederated Tribes of the
Chehalis Reservation (Chehalis). We operate the resort under our Great Wolf
Lodge brand. Chehalis has leased the land needed for the resort to the joint
venture, and they have a majority equity interest in the joint venture. The
resort opened in March 2008. |
|
(7) |
|
We have announced plans to develop a Great Wolf Lodge resort in Concord, North
Carolina. The Northwoods- |
19
|
|
|
|
|
themed, approximately 402-suite resort will provide a
comprehensive package of first-class destination lodging amenities and
activities. Construction on the resort began in October 2007 with expected
completion in Spring 2009. |
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 there over the past
20 years. 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.
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 recent Hotel & Leisure Advisors,
LLC survey indicates that the number of indoor waterpark destination resorts has grown from 41
available properties as of year-end 2006 to 49 available properties as of January 2008. This same
survey indicated 15 new indoor waterpark projects currently projected to open in 2008.
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 they can
drive to has 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 Great Wolf Resorts has
established a portfolio of family entertainment resorts featuring indoor waterparks. We intend to
continue to expand our portfolio of owned resorts throughout the United States and to selectively
seek licensing and management opportunities domestically and internationally. The resorts we are
currently constructing and plan to develop in the future require significant industry knowledge and
substantial capital resources. Similar family entertainment resorts compete directly with several
of our resorts.
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
internal growth strategies are to: maximize total resort revenue; minimize costs by leveraging our
economies of scale; and build upon our existing brand awareness and loyalty in order to compete
more effectively. Our primary external growth strategies are to: capitalize on our first-mover
advantage by being the first to develop and operate family entertainment resorts featuring indoor
waterparks in our selected target markets; focus on development and strategic growth opportunities
by seeking to develop additional resorts and target selected licensing and joint venture
opportunities; and continue to innovate by leveraging our in-house expertise, in conjunction with
the knowledge and experience of our third-party suppliers and designers.
In attempting to execute our internal and external growth strategies, we are subject to a
variety of business challenges and risks. These challenges include: development and licensing of
properties; increases in costs of constructing, operating and maintaining our resorts; competition
from other entertainment companies, both within and outside our
20
industry segment; and external economic risks, including family vacation patterns and trends.
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.
We believe that our Traverse City and Sandusky resorts have been and will continue to be
affected by 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 three years. The
Michigan/Northern Ohio region includes cities that have historically been the Traverse City and
Sandusky resorts largest suppliers 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. We believe this has
and may continue to have an impact on the operating performance of our Traverse City and Sandusky
resorts. Also, we have experienced a much slower-than-expected occupancy ramp-up 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 behind our initial
expectations. We believe this has impacted and will likely continue to impact the consumer demand
for our indoor waterpark resort in that market and the operations of the resort. Additionally, our
Mason resort opened its first phase in December 2006 and is ramping up more slowly than we had
projected, which we believe is due, in part, to the opening of competitive properties in the region
and to negative publicity from operating issues at the resort in 2007.
Our external growth strategies are based primarily on developing additional indoor waterpark
resorts by ourselves (either alone or in conjunction with joint venture partners) or by others (in
a licensing situation). 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 subprime loan crisis in 2007 has precipitated a general tightening in US
lending markets and decreased the overall availability of construction financing to us and other
parties. 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 to us of
construction financing may be lessened in the future and that terms of construction financing may
be less favorable than we have seen over the past few years. Although we believe we can continue
to obtain construction financing sufficient to execute our development strategies, we believe the
more difficult credit market environment is likely to continue through the remainder of 2008.
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
profitability. Rooms revenue accounted for approximately 66% of our total resort revenue for the
three months ended March 31, 2008. 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 |
21
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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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|
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 Rev POR is calculated by dividing total revenue by total occupied rooms. |
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 three months ended March 31, 2008, approximately 34% of our
total 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 profitability. We focus on increasing ADR and Total RevPOR because we
believe those increases can have the greatest positive impact on our profitability. 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
profitability.
22
We also use EBITDA as a measure of the operating 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 of America, or GAAP. See Non-GAAP Financial Measures below for further
discussion of our use of EBITDA and a reconciliation to net income.
Critical Accounting Policies and Estimates
This discussion and analysis of our financial condition and results of operations is based on our
condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP.
The preparation of these condensed consolidated financial statements requires management to make
estimates and judgments that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the unconsolidated financial
statements, as well as revenue and expenses during the reporting periods. We evaluate our
estimates and judgments on an ongoing basis. We base our estimates on historical experience and on
various other factors we believe are reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results could therefore differ materially from those
estimates under different assumptions or conditions.
For a description of our critical accounting policies and estimates, please refer to Critical
Accounting Policies and Estimates section of our Managements Discussion and Analysis of
Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the
year ended December 31, 2007. There have been no material changes in any of our accounting
policies since December 31, 2007.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS 157, Fair Value Measurements. SFAS 157 defines fair
value, establishes a framework for measuring fair value in accordance with generally accepted
accounting principles, and expands disclosures about fair value measurements. SFAS 157 is
effective for fiscal years beginning after November 15, 2007, and interim periods within those
fiscal years. The adoption of SFAS 157 in 2008 did not have an impact on our results of operations
or financial position.
In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and
Financial Liabilities. SFAS 159 permits companies to choose to measure many financial assets and
liabilities at fair value. Unrealized gains and losses on items for which the fair value option
has been elected are reported in earnings at each reporting date. SFAS 159 is effective for fiscal
years beginning after November 15, 2007. The provisions of this statement are required to be
applied prospectively. The adoption of SFAS 159 in 2008 did not have an impact on our results of
operations or financial position.
In December 2007, the FASB issued SFAS 141 (Revised 2007), Business Combinations. SFAS
141(R) will significantly change the accounting for business combinations. Under SFAS 141(R), an
acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a
transaction at the acquisition-date fair value with limited exceptions. SFAS 141(R) also includes
a substantial number of new disclosure requirements. SFAS 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. We will be required to adopt SFAS 141(R)
on or after December 15, 2008. We do not expect the adoption of SFAS 141(R) to have a material
impact on our consolidated financial statements.
In December 2007, the FASB issued SFAS 160, Non-controlling Interests in Consolidated
Financial Statements-an Amendment of Accounting Research Bulletin No. 51. SFAS 160 establishes new
accounting and reporting standards for a non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a
non-controlling interest (minority interest) as equity in the consolidated financial statements
separate from the parents equity. The amount of the new income attributable to the
non-controlling interest will be included in consolidated net income on the face of the income
statement. SFAS 160 clarifies that changes in a parents ownership interest in a subsidiary that
do not result in deconsolidation are equity transactions if the parent retains its controlling
financial interest. In addition, this statement requires that a parent recognize a gain or loss in
net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair
value of the non-controlling equity investment on the deconsolidation date. SFAS 160 also includes
expanded disclosure requirements regarding the interests of the parent and its non-controlling
interest. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. We are currently evaluating the impact of the adoption of
this statement.
In March 2008, the FASB issued SFAS 161, Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133. SFAS 161 requires enhanced disclosures for
derivative and hedging activities. SFAS 161 is effective for fiscal years and interim periods
beginning after November 15, 2008. We are currently evaluating the impact of the adoption of this
statement.
23
Non-GAAP Financial Measures
We use EBITDA as a measure of our operating performance. EBITDA is a supplemental non-GAAP
financial measure. EBITDA is commonly defined as net income plus (a) net interest expense; (b)
income taxes; 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:
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|
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; |
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|
it is widely used in the hospitality and entertainment industries to measure operating
performance without regard to items such as depreciation and amortization; and |
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|
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:
|
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|
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; |
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|
for planning purposes, including the preparation of our annual operating budget; |
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|
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 |
|
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|
as one measure in determining the value of other acquisitions and dispositions. |
Using a measure such as EBITDA has material limitations. These limitations include the
difficulty associated with comparing results among companies and the inability to analyze certain
significant items, including depreciation and interest expense, which directly affect our net
income or loss. Management compensates for these limitations by considering the economic effect of
the excluded expense items independently, as well as in connection with its analysis of net income.
The following table reconciles net loss to EBITDA for the periods presented.
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Three months ended |
|
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March 31, |
|
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2008 |
|
|
2007 |
|
Net loss |
|
$ |
(2,327 |
) |
|
$ |
(2,005 |
) |
Adjustments: |
|
|
|
|
|
|
|
|
Interest expense, net of interest income |
|
|
6,417 |
|
|
|
2,538 |
|
Income tax benefit |
|
|
(1,704 |
) |
|
|
(911 |
) |
Depreciation and amortization |
|
|
11,019 |
|
|
|
8,644 |
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
13,405 |
|
|
$ |
8,266 |
|
|
|
|
|
|
|
|
24
Results of Operations
General
Our results of operations for the three months ended March 31, 2008 and 2007 are not directly
comparable primarily due to the opening of our Great Wolf Lodge in Grapevine, Texas in December
2007.
Our financial information includes:
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|
our subsidiary entity that provides resort development and management/licensing services; |
|
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|
our Traverse City, Kansas City, Sheboygan, Williamsburg, Pocono Mountains, Mason and
Grapevine operating resorts; |
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|
equity interests in resorts in which we have ownership interests but which we do not
consolidate; and |
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|
our resorts that are under construction which we will consolidate. |
Revenues. Our revenues consist of:
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|
lodging revenue, which includes rooms, food and beverage, and other department revenues from
our resorts; |
|
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|
management fee and other revenue from resorts, which includes fees received under our
management, license, development and construction management agreements; and |
|
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|
other revenue from managed properties. We employ the staff at our managed properties
(except for the Niagara Falls resort). Under our management agreements, the resort owners
reimburse us for payroll, benefits and certain other costs related to the operations of the
managed properties. Emerging Issues Task Force, or EITF, Issue No. 01-14, Income Statement
Characteristics of Reimbursements for Out-of-Pocket Expenses (EITF 01-14), establishes
standards for accounting for reimbursable expenses in our statements of operations. Under
this pronouncement, 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:
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|
|
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; |
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|
property operation and maintenance expenses, such as utility costs and property taxes; |
|
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|
depreciation and amortization; and |
25
|
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|
other expenses from managed properties, which are recorded as an expense in accordance
with EITF 01-14. |
Three months ended March 31, 2008, compared with the three months ended March 31, 2007
The following table shows key operating statistics for our resorts for the three months ended March
31, 2008 and 2007:
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All Properties (a) |
|
Same Store Comparison (b) |
|
|
Three months |
|
Three months |
|
Three months |
|
|
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ended |
|
ended |
|
ended |
|
Increase (Decrease) |
|
|
March 31, 2008 |
|
March 31, 2008 |
|
March 31, 2007 |
|
$ |
|
% |
Occupancy |
|
|
62.4 |
% |
|
|
64.0 |
% |
|
|
64.2 |
% |
|
|
N/A |
|
|
|
(0.3 |
)% |
ADR |
|
$ |
269.67 |
|
|
$ |
265.80 |
|
|
$ |
248.21 |
|
|
$ |
17.59 |
|
|
|
7.1 |
% |
RevPAR |
|
$ |
168.32 |
|
|
$ |
170.01 |
|
|
$ |
159.46 |
|
|
$ |
10.55 |
|
|
|
6.6 |
% |
Total RevPOR |
|
$ |
413.15 |
|
|
$ |
402.97 |
|
|
$ |
378.74 |
|
|
$ |
24.23 |
|
|
|
6.4 |
% |
Total RevPAR |
|
$ |
257.88 |
|
|
$ |
257.75 |
|
|
$ |
243.32 |
|
|
$ |
14.43 |
|
|
|
5.9 |
% |
|
|
|
(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, Poconos, Niagara Falls and Mason resorts). |
Increases
in our same store ADR, RevPAR, Total RevPOR and Total RevPAR, are
primarily a result of an earlier Easter holiday in the three months
ended March 31, 2008 as compared to the three months ended
March 31, 2007, compressing more of the traditional spring break
holiday for families into the first quarter in 2008.
In December 2007 we opened our resort in Grapevine, Texas. As a result, total revenue, rooms
revenue and other revenue for the three month periods ended March 31, 2008 and 2007 are not
directly comparable.
Presented below are selected amounts from the statements of operations for the three months
ended March 31, 2008 and 2007:
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|
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Three months ended |
|
|
March 31, |
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|
|
|
|
|
|
Increase |
|
|
2008 |
|
2007 |
|
(Decrease) |
Revenues |
|
$ |
64,208 |
|
|
$ |
48,459 |
|
|
$ |
15,749 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Departmental operating expenses |
|
|
20,417 |
|
|
|
16,520 |
|
|
|
3,897 |
|
Selling, general and administrative |
|
|
13,398 |
|
|
|
13,122 |
|
|
|
276 |
|
Property operating costs |
|
|
11,829 |
|
|
|
7,883 |
|
|
|
3,946 |
|
Depreciation and amortization |
|
|
11,019 |
|
|
|
8,644 |
|
|
|
2,375 |
|
Net operating income (loss) |
|
|
4,062 |
|
|
|
(745 |
) |
|
|
4,807 |
|
Interest expense, net of interest income |
|
|
6,417 |
|
|
|
2,538 |
|
|
|
3,879 |
|
Income tax benefit |
|
|
(805 |
) |
|
|
(1,026 |
) |
|
|
221 |
|
Net loss |
|
|
(2,327 |
) |
|
|
(2,005 |
) |
|
|
(322 |
) |
Revenues. Total revenues increased primarily due to the opening of our Grapevine resort in
December 2007 and our construction of 104 additional guest suites at our Williamsburg resort that
were completed in late March 2007. Revenues increased at these resorts by $13,779 for the three
months ended March 31, 2008, as compared to the three months ended March 31, 2007.
26
Operating expenses. Total operating expenses increased primarily due to the opening of our
Grapevine resort in December 2007 and our construction of 104 additional guest suites at our
Williamsburg resort that were completed in late March 2007.
|
|
|
Departmental expenses increased by $3,897 for the three months ended March 31, 2008, as
compared to the three months ended March 31, 2007, due primarily to the opening of our
Grapevine resort and the expansion of our Williamsburg resort that was completed in late
March 2007. |
|
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|
|
Resort-related selling, general and administrative expenses increased by $1,785 due
primarily to the opening of our Grapevine resort and increased marketing efforts at our
Williamsburg, Pocono Mountains and Mason resorts. This increase was partially offset by a
decrease in corporate selling, general and administrative expenses of $1,509 due primarily
to more capitalizable labor, because of increased development activity for the three months
ended March 31, 2008, as compared to the three months ended March 31, 2007. |
|
|
|
|
Total property operating costs (exclusive of opening costs) increased $2,692 for the
three months ended March 31, 2008, as compared to the three months ended March 31, 2007,
due primarily to the opening of our Grapevine resort. Opening costs related to our resorts
were $3,580 for the three months ended March 31, 2008, as compared to $2,327 for the three
months ended March 31, 2007. |
|
|
|
|
Total depreciation and amortization increased mainly due to the opening of our Grapevine
resort and the expansion of our Williamsburg resort that was completed in late March 2007.
The total increase in depreciation and amortization at these two resorts was $1,954 during
the three months ended March 31, 2008 as compared to three months ended March 31, 2007. |
Net operating income. During the three months ended March 31, 2008, we had net operating
income of $4,062 as compared to a net operating loss of $(745) for the three months ended March 31,
2007.
Net loss. Net loss increased due to the following:
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|
|
An increase in net interest expense of $3,879 mainly due to interest expense on mortgage
debt related to our Williamsburg and Grapevine resorts, hedge fees related to a terminated
debt transaction related to our Williamsburg resort and interest expense on our Trust
Preferred Securities debt issued in June 2007; and |
|
|
|
|
An decrease of $221 in income tax benefit recorded in the three months ended March 31,
2008, as compared to the three months ended March 31, 2007. |
This increase was partially offset by an increase in operating income from $(745) for the three
months ended March 31, 2007, to $4,062 for the three months ended March 31, 2008.
Segments
We are organized into a single operating division. Within that operating division, we have
three reportable segments in 2008 and 2007:
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resort ownership/operation-revenues derived from our consolidated owned resorts; |
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|
resort third-party management-revenues derived from management, license and other
related fees from unconsolidated managed resorts; and |
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|
condominium sales-revenues derived from sales of condominium units to third-party
owners. |
We evaluate the performance of each segment based on earnings before interest, income taxes,
and depreciation and amortization (EBITDA), excluding minority interests and equity in earnings of
unconsolidated related parties. See our
27
Segments section in our Summary of Significant Accounting Policies for a reconciliation of
these measures to their most directly comparable GAAP measure.
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|
|
|
|
|
Three months ended |
|
|
March 31, |
|
|
2008 |
|
2007 |
|
Increase |
Resort Ownership/Operation |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
58,864 |
|
|
$ |
43,647 |
|
|
$ |
15,217 |
|
EBITDA, excluding certain items |
|
|
13,834 |
|
|
|
8,422 |
|
|
|
5,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resort Third-Party Mgmt |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
5,344 |
|
|
|
4,812 |
|
|
|
532 |
|
EBITDA, excluding certain items |
|
|
1,860 |
|
|
|
1,778 |
|
|
|
82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condominium Sales |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA, excluding certain items |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA, excluding certain items |
|
|
(613 |
) |
|
|
(2,301 |
) |
|
|
1,688 |
|
The Other items in the table above represent corporate-level activities that do not constitute a
reportable segment.
Liquidity and Capital Resources
We had total indebtedness of $463,237 and $396,302 as of March 31, 2008, and December 31,
2007, respectively, summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Long-Term Debt: |
|
|
|
|
|
|
|
|
Traverse City/Kansas City mortgage loan |
|
$ |
71,210 |
|
|
$ |
71,542 |
|
Mason mortgage loan |
|
|
76,800 |
|
|
|
76,800 |
|
Pocono Mountains mortgage loan |
|
|
97,000 |
|
|
|
97,000 |
|
Williamsburg mortgage loan |
|
|
55,000 |
|
|
|
|
|
Grapevine construction loan |
|
|
70,595 |
|
|
|
58,260 |
|
Junior subordinated debentures |
|
|
80,545 |
|
|
|
80,545 |
|
Other Debt: |
|
|
|
|
|
|
|
|
City of Sheboygan bonds |
|
|
8,440 |
|
|
|
8,465 |
|
City of Sheboygan loan |
|
|
3,647 |
|
|
|
3,690 |
|
|
|
|
|
|
|
|
|
|
|
463,237 |
|
|
|
396,302 |
|
Less current portion of long-term debt |
|
|
(134,085 |
) |
|
|
(78,752 |
) |
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
329,152 |
|
|
$ |
317,550 |
|
|
|
|
|
|
|
|
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 March 31, 2008.
28
Mason Mortgage Loan This loan is secured by our Mason resort. The loan bears interest at a
floating rate of 30-day LIBOR plus a spread of 265 basis points (effective rate of 5.35% as of
March 31, 2008). The loan matures in December 2008 and also has two one-year extensions available
at our option, assuming the property meets an operating performance threshold. We do not expect
the property to meet the operating performance threshold at December 2008. We are negotiating a
waiver or modification allowing us to exercise the one-year extension prior to the loans maturity
date in December 2008. The loan is interest-only during its initial three-year term and then is
subject to a 25-year amortization schedule in the extension periods. This loan has customary
financial and operating debt compliance covenants associated with an individual mortgaged property,
including a maximum ratio of consolidated net long-term debt divided by consolidated trailing
twelve month adjusted EBITDA and a minimum consolidated tangible net worth provision. This loan
has no restrictions or fees associated with the repayment of the loan principal. We were in
compliance with all covenants under this loan at March 31, 2008.
In April 2007, we entered into an interest rate swap agreement with two financial institutions
on a notional amount of $71,000. The agreement expires in December 2008. The agreement effectively
fixes the interest rate on $71,000 of floating rate debt outstanding at a rate of 7.65% per annum,
thus reducing our exposure to interest rate fluctuations. The notional amount does not represent
amounts exchanged by the parties, and thus is not a measure of exposure to us. The differences to
be paid or received by us under the interest rate swap agreement are recognized as an adjustment to
interest expense. The agreement is with major financial institutions, which are expected to fully
perform under the terms of the agreement. Taking into account the effect of this interest rate
swap, the total blended rate on this loan was 7.48% as of March 31, 2008.
Pocono Mountains Mortgage Loan In December 2006 we closed on a $97,000 first mortgage loan
secured by our Pocono Mountains resort. The loan bears interest at a fixed rate of 6.10% and
matures December 1, 2016. The loan is interest only for the initial 18-month period and thereafter
is 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 March 31, 2008.
Williamsburg Mortgage Loan In February 2008 we closed on a $55,000 first mortgage loan
secured by our Williamsburg resort. The loan bears interest at a floating rate of 30-day LIBOR
plus a spread of 300 basis points with a minimum rate of 6.50% per annum (effective rate of 6.50%
as of March 31, 2008). This loan is interest only and matures in February 2009. Prior to the
loans maturity in February 2009, we expect to either extend it or refinance it into a larger,
longer-term, fixed rate loan. The loan has customary covenants associated with an individual
mortgaged property. The loan is prepayable without penalty after August 2008. We were in
compliance with all covenants under this loan at March 31, 2008.
Grapevine Construction Loan In July 2006 we closed on a $79,500 loan to construct the Great
Wolf Lodge in Grapevine, Texas. The loan is secured by a first mortgage on the Grapevine, Texas
property. The loan bears interest at a floating rate of 30-day LIBOR plus a spread of 260 basis
points (effectiverate of 5.30% as of March 31, 2008). The loan matures in July 2009 and also has
two one-year extensions available at our option. The loan is interest-only during its initial
three-year term and then is subject to a 25-year amortization schedule in the extension periods.
This loan has customary financial and operating debt compliance covenants associated with an
individual mortgaged property, including a maximum ratio of consolidated net long-term debt divided
by consolidated trailing twelve month adjusted EBITDA and a minimum consolidated tangible net worth
provision. The loan has no restrictions or fees associated with the repayment of the loan
principal. We were in compliance with all covenants under this loan at March 31, 2008.
In December 2007, we entered into an interest rate cap that hedged our entire Grapevine loan
in accordance with our original loan document. This interest rate cap matures in July 2009 and
fixes the maximum annual interest rate on this loan at 10%.
29
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
trust securities. 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 will use the net proceeds for future development costs.
As a result of the issuance of FIN No. 46R, Consolidation of Variable Interest Entities and
the accounting professions application of the guidance provided by the FASB, issue trusts, like
Trust I and Trust III (collectively, the Trusts), are generally variable interest entities. 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. 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. In accordance with the provisions
of EITF Issue No. 91-10, we have recognized as a liability the obligations for the BANs. The notes
bear interest at an annual rate of 3.95% and mature in 2008. The notes are not a general
obligation of the City and are payable from (a) the proceeds of BANs or other funds appropriated by
the City for the payment of interest on the BANs and (b) the proceeds to be delivered from the
issuance and sale of securities by the City. We have an obligation to fund payment of these BANs.
Our obligation to fund repayment of the notes will be satisfied by certain minimum guaranteed
amounts of room tax payments to be made by the Blue Harbor Resort through 2028.
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.
30
Future Maturities Future principal requirements on long-term debt are as follows:
|
|
|
|
|
Through |
|
|
|
|
March 31, |
|
|
|
|
2009 |
|
$ |
134,085 |
|
2010 |
|
|
3,510 |
|
2011 |
|
|
4,207 |
|
2012 |
|
|
71,890 |
|
2013 |
|
|
3,471 |
|
Thereafter |
|
|
246,074 |
|
|
|
|
|
Total |
|
$ |
463,237 |
|
|
|
|
|
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; |
|
|
|
|
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 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 existing working capital; 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 borrowings under future credit facilities, contributions
from joint venture partners, and the issuance of equity instruments, including common
31
stock, or additional or replacement debt, as market conditions permit. We believe these
sources of capital will be sufficient to provide for our long-term capital needs.
Our Mason mortgage loan in the amount of $76,800 matures in December 2008. The loan has two,
one-year extensions available at our option, assuming the property meets an operating performance
threshold. We do not expect the property to meet the operating performance threshold at December
2008. Accordingly, we have begun discussions with the lender on obtaining a waiver or modification
of this performance threshold, in order to exercise the one-year extension at December 2008. We
expect to obtain a waiver or modification allowing us to exercise the one-year extension prior to
the loans maturity date in December 2008.
Also, in February 2008 we closed on a $55,000 mortgage loan secured by our Williamsburg
resort. That loan has a one-year term. Prior to the loans maturity in February 2009, we expect
to either extend it or refinance it into a larger, longer-term, fixed rate loan.
Our largest long-term expenditures are expected to be for capital expenditures for development
of future resorts and capital contributions or loans to joint ventures owning resorts under
construction or development. Such expenditures were $19,860 for the three months ended March 31,
2008. We expect to have approximately $105,900 of such expenditures in the remainder of 2008 and
$40,700 in 2009. As discussed above, we expect to meet these requirements through a combination of
cash provided by operations, cash on hand, contributions from new joint venture partners, proceeds
from investing activities and proceeds from financing activities.
Off Balance Sheet Arrangements
We have two unconsolidated joint venture arrangements at March 31, 2008. We account for our
unconsolidated joint ventures using the equity method of accounting.
|
|
|
Our joint venture with CNL Income Properties, Inc. (CNL) owns two resorts, Great Wolf
Lodge-Wisconsin Dells, Wisconsin and Great Wolf Lodge-Sandusky, Ohio. We are a limited
partner in the CNL joint venture with a 30.32% ownership interest. At March 31, 2008, the
joint venture had aggregate outstanding indebtedness to third parties of $63,000. This
loan is a mortgage loan that is non-recourse to us. |
|
|
|
|
We entered into our 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. 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 March 31, 2008, the joint venture had aggregate outstanding
indebtedness to third parties of $78,078. We have provided a 49% guarantee on mortgage
debt obtained by the Grand Mound joint venture. In the first quarter of 2008, we made a
combined loan and equity contribution of $5,522 to the joint venture to fund a portion of
construction costs of the resort. |
As capital may be required to fund the activities of the resorts owned by these joint
ventures, we may in the future fund either or both of the joint ventures shares of the costs not
funded by the majority owner of the joint venture, the joint ventures operations or outside
financing. Based on the nature of the activities conducted in these joint ventures, management
cannot estimate with any degree of accuracy amounts that we may be required to fund in the long
term. Management does not currently believe that any additional future funding of these joint
ventures will have an adverse effect on our financial condition, however, as currently we do not
expect to make any significant future capital contributions to these joint ventures.
32
Contractual Obligations
The following table summarizes our contractual obligations as of March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Terms |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More |
|
|
|
|
|
|
|
Less Than |
|
|
|
|
|
|
|
|
|
|
Than |
|
|
|
Total |
|
|
1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
5 Years |
|
Debt obligations (1) |
|
$ |
463,237 |
|
|
$ |
134,085 |
|
|
$ |
7,717 |
|
|
$ |
75,361 |
|
|
$ |
246,074 |
|
Operating lease obligations |
|
|
1,509 |
|
|
|
554 |
|
|
|
577 |
|
|
|
317 |
|
|
|
61 |
|
Construction contracts |
|
|
100,338 |
|
|
|
75,615 |
|
|
|
24,723 |
|
|
|
|
|
|
|
|
|
Related party guarantee (2) |
|
|
1,066 |
|
|
|
457 |
|
|
|
609 |
|
|
|
|
|
|
|
|
|
Reserve on unrecognized tax benefits |
|
|
1,268 |
|
|
|
|
|
|
|
|
|
|
|
1,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
567,418 |
|
|
$ |
210,711 |
|
|
$ |
33,626 |
|
|
$ |
76,946 |
|
|
$ |
246,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $8,440 of fixed rate debt recognized as a liability related to certain bonds
issued by the City of Sheboygan and $3,647 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. |
|
(2) |
|
We have provided a partial guarantee on mortgage debt obtained by one of our joint
ventures. |
As we develop future resorts, we expect to incur significant additional debt and construction
contract obligations.
Working Capital
We had $60,492 of available cash and cash equivalents and working capital deficit of $118,955
(current assets less current liabilities) at March 31, 2008, compared to the $18,597 of available
cash and cash equivalents and a working capital deficit of $98,560 at December 31, 2007. The
primary reason for the decline in our working capital balance from December 31, 2007 to March 31,
2008 was the use of cash for capital expenditures and investments in and advances to related
parties, for our properties under development, and the incurrence of $55,000 of mortgage debt
classified as a current liability.
Cash Flows
Three months ended March 31, 2008, compared with the three months ended March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
Increase |
Net cash provided by operating activities |
|
$ |
5,194 |
|
|
$ |
4,329 |
|
|
$ |
865 |
|
Net cash used in investing activities |
|
|
(29,255 |
) |
|
|
(51,544 |
) |
|
|
22,289 |
|
Net cash provided by financing activities |
|
|
65,956 |
|
|
|
13,155 |
|
|
|
52,801 |
|
Operating Activities. The increase in net cash provided by operating activities resulted
primarily from a decrease in net loss.
Investing Activities. The increase in net cash used in investing activities for the three
months ended March 31, 2008, as compared to the three months ended March 31, 2007, resulted
primarily from decreased capital expenditures for our properties that are in service and our
development properties. This increase in net cash used was partially offset by an increase in our
investments in affiliates.
Financing Activities. The increase in net cash provided by financing activities resulted
primarily from the proceeds from our Williamsburg loan during the three months ended March 31,
2008.
33
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 overall demand for our products and services could restrict our ability
to raise room and amenity rates to offset rising costs.
ITEM 3. 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.
In April 2007, we entered into an interest rate swap agreement with two financial institutions
on a notional amount of $71,000. The agreement expires in December 2008. The agreement effectively
fixes the interest rate on $71,000 of floating rate debt outstanding at a rate of 7.65% per annum,
thus reducing our exposure to interest rate fluctuations. The notional amount does not represent
amounts exchanged by the parties, and thus is not a measure of exposure to us. The differences to
be paid or received by us under the interest rate swap agreement are recognized as an adjustment to
interest expense. The agreement is with major financial institutions, which are expected to fully
perform under the terms of the agreement.
As
of March 31, 2008, we had total indebtedness of approximately $463,237. This debt consisted
of:
|
|
|
$71,210 of fixed rate debt secured by two of our resorts. This debt bears interest at
6.96%. |
|
|
|
|
$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. |
|
|
|
|
$97,000 of fixed rate debt secured by one of our resorts. This debt bears interest at
6.10% |
|
|
|
|
$76,800 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 265 basis points. $71,000 of this debt
is effectively fixed at a rate of 7.65% due to the interest rate swap described above.
Taking into account the effect of this interest rate swap, the total blended rate on this
loan was 7.48% as of March 31, 2008. |
|
|
|
|
$55,000 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 300 basis points, with a minimum rate of
6.50% per annum. The total rate was 6.50% at March 31, 2008. |
|
|
|
|
$70,595 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 260 basis points. The total rate was
5.30% at March 31, 2008. |
|
|
|
|
$8,440 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 $3,647 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. |
34
As of March 31, 2008, we estimate the total fair value of the indebtedness described above to
be $41,783 less than their 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.
If LIBOR were to increase by 1% or 100 basis points, the increase in interest expense on our
variable rate debt would decrease future earnings and cash flows by approximately $1,314 annually,
based on our debt balances outstanding as of March 31, 2008. If LIBOR were to decrease by 1% or 100
basis points, the decrease in interest expense on our variable rate debt would be approximately
$1,314 annually, based on our debt balances outstanding as of March 31, 2008.
ITEM 4. 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, 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 first
quarter of 2008. We have concluded that our disclosure controls and procedures were effective as
of March 31, 2008.
Changes In Internal Control
During the period covered by this quarterly report on Form 10-Q, there have been no changes to
our internal control over financial reporting that are reasonably likely to materially affect our
internal control over financial reporting.
35
PART II. OTHER INFORMATION
ITEM 1. 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.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider
the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the
year ended December 31, 2007, which could materially affect our business, financial condition or
future results. The risks described in our Annual Report on Form 10-K are not the only risks
facing us. Additional risks and uncertainties not currently known to us or that we currently deem
to be immaterial also may materially adversely affect our business, financial condition and/or
operating results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
The exhibits listed below are incorporated herein by reference to prior SEC filings by the
Registrant or are included as exhibits in this Quarterly Report on Form 10-Q.
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Exhibit |
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Number |
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Description |
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2.1 |
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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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2.2 |
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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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Exhibit |
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Number |
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Description |
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3.1 |
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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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3.2 |
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Form of Amended and Restated Bylaws of Great Wolf Resorts, Inc. effective
September 12, 2006 (incorporated herein by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K filed September 18, 2006) |
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4.1 |
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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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4.2 |
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Junior Subordinated Indenture, dated as of March 15, 2005, between Great
Wolf Resorts, Inc. and JP Morgan 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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4.3 |
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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;
JP Morgan Chase Bank, National Association, as property trustee; Great
Wolf Resorts, Inc., as depositor; and James A. Calder, Alex P. 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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4.4 |
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Junior Subordinated Indenture, dated as of June 15, 2007, between Great
Wolf Resorts, Inc. and Wells Fargo Bank, N.A., as trustee (incorporated
herein by reference to Exhibit 4.1 to the Companys Current Report on Form
8-K filed June 19, 2007) |
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4.5 |
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Amended and Restated Trust Agreement, dated as of June 15, 2007, by and
among Great Wolf Resorts, Inc., as depositor, Wells Fargo Bank, N.A., as
property trustee, Wells Fargo Delaware Trust Company, as Delaware trustee,
and James A. Calder, Alex P. 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 June 19, 2007) |
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10.1 |
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Loan Agreement dated February 6, 2008, by and between Great Wolf Lodge
Williamsburg SPE, LLC, and Citigroup Global Markets Realty Corp.
(incorporated herein by reference to Exhibit 99.1 to the Companys Current
Report on Form 8-K filed February 8, 2008) |
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31.1* |
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Certification of Chief Executive Officer of Periodic Report Pursuant to
Rule 13a14(a) and Rule 15d14(a) |
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31.2* |
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Certification of Chief Financial Officer of Periodic Report Pursuant to
Rule 13a14(a) and Rule 15d14(a) |
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32.1* |
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Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 |
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32.2* |
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Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 |
37
SIGNATURE
Pursuant to the requirements 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.
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GREAT WOLF RESORTS, INC.
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/s/ James A. Calder
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James A. Calder |
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Chief Financial Officer
(Duly authorized officer)
(Principal Financial and Accounting Officer) |
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Dated: May 6, 2008
38