e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(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 June 30, 2007
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 |
Commission File Number 000-51064
GREAT WOLF RESORTS, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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51-0510250 |
(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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122 West Washington Avenue
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53703 |
Madison, Wisconsin 53703
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(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,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer þ Non-accelerated filer 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 30,700,387 as of August 7, 2007.
Great Wolf Resorts, Inc.
Quarterly Report on Form 10-Q
For the Quarter Ended June 30, 2007
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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June 30, |
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December 31, |
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2007 |
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2006 |
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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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$ |
26,479 |
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$ |
96,778 |
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Accounts receivable, net of allowance for doubtful accounts of $117 and $205 |
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2,616 |
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2,680 |
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Accounts receivable affiliates |
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2,118 |
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2,223 |
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Inventory |
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3,854 |
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2,825 |
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Advances to affiliates |
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3,027 |
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Other current assets |
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7,046 |
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4,638 |
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Total current assets |
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45,140 |
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109,144 |
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Property and equipment, net |
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560,760 |
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489,968 |
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Investments in and advances to affiliates |
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51,840 |
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25,028 |
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Other assets |
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21,595 |
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19,450 |
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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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17,927 |
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16,020 |
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Total assets |
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$ |
721,091 |
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$ |
683,439 |
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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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$ |
1,470 |
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$ |
1,432 |
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Accounts payable |
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19,465 |
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25,882 |
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Accrued payroll |
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2,442 |
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2,768 |
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Accrued expenses |
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13,202 |
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12,740 |
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Accrued expenses affiliates |
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378 |
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443 |
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Advance deposits |
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7,980 |
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7,165 |
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Gift certificates payable |
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2,652 |
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3,349 |
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Total current liabilities |
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47,589 |
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53,779 |
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Mortgage debt |
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249,304 |
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224,161 |
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Other long-term debt |
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92,549 |
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63,796 |
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Other long-term liabilities |
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|
391 |
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|
391 |
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Deferred tax liability |
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14,031 |
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15,846 |
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Deferred compensation liability |
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2,535 |
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2,200 |
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Total liabilities |
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406,399 |
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360,173 |
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Minority interest |
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5,757 |
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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;
30,700,619 and 30,509,320 shares issued and outstanding, at June 30,
2007, and December 31, 2006, respectively |
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307 |
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|
305 |
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Additional paid in capital |
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397,592 |
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396,909 |
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Preferred stock, $0.01 par value, 10,000,000 shares authorized, no
shares issued or outstanding |
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Accumulated deficit |
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(81,166 |
) |
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(77,505 |
) |
Deferred compensation |
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(2,200 |
) |
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(2,200 |
) |
Accumulated other comprehensive income, net of tax |
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159 |
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Total stockholders equity |
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314,692 |
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317,509 |
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Total liabilities and stockholders equity |
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$ |
721,091 |
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$ |
683,439 |
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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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Six months ended |
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June 30, |
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June 30, |
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2007 |
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2006 |
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2007 |
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2006 |
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Revenues: |
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Rooms |
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$ |
28,033 |
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$ |
21,453 |
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$ |
56,905 |
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$ |
44,140 |
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Food and beverage |
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7,254 |
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5,200 |
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15,044 |
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10,971 |
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Other hotel operations |
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6,600 |
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4,908 |
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13,584 |
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10,429 |
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Management and other fees |
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641 |
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593 |
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1,248 |
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741 |
|
Management and other fees related parties |
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1,017 |
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670 |
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2,188 |
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1,397 |
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43,545 |
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32,824 |
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88,969 |
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67,678 |
|
Other revenue from managed properties |
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2,802 |
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|
3,003 |
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|
5,838 |
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|
5,985 |
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|
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Total revenues |
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|
46,347 |
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|
35,827 |
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|
94,807 |
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73,663 |
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Operating expenses by department: |
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Rooms |
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3,834 |
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2,877 |
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7,989 |
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5,874 |
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Food and beverage |
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6,457 |
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|
4,485 |
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|
13,110 |
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|
|
9,355 |
|
Other |
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|
5,878 |
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|
4,012 |
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|
|
11,591 |
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|
8,338 |
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Other operating expenses: |
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Selling, general and administrative |
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11,458 |
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10,952 |
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24,579 |
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22,603 |
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Property operating costs |
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|
6,289 |
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|
4,699 |
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|
14,172 |
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|
9,575 |
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Depreciation and amortization |
|
|
8,818 |
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|
|
6,169 |
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|
17,462 |
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|
|
12,267 |
|
Loss on sale of property |
|
|
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|
|
|
|
|
|
|
|
|
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|
578 |
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|
|
|
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|
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|
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42,734 |
|
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|
33,194 |
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|
88,903 |
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|
68,590 |
|
Other expenses from managed properties |
|
|
2,802 |
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|
3,003 |
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|
|
5,838 |
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5,985 |
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Total operating expenses |
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|
45,536 |
|
|
|
36,197 |
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|
|
94,741 |
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|
74,575 |
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|
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Net operating income (loss) |
|
|
811 |
|
|
|
(370 |
) |
|
|
66 |
|
|
|
(912 |
) |
Interest income |
|
|
(659 |
) |
|
|
(769 |
) |
|
|
(1,814 |
) |
|
|
(1,452 |
) |
Interest expense |
|
|
3,582 |
|
|
|
1,720 |
|
|
|
7,275 |
|
|
|
3,582 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
Loss before income taxes, minority interests, and
equity in losses of unconsolidated affiliates |
|
|
(2,112 |
) |
|
|
(1,321 |
) |
|
|
(5,395 |
) |
|
|
(3,042 |
) |
Income tax benefit |
|
|
(917 |
) |
|
|
(511 |
) |
|
|
(1,961 |
) |
|
|
(1,185 |
) |
Minority interests, net of tax |
|
|
(193 |
) |
|
|
(23 |
) |
|
|
(486 |
) |
|
|
(37 |
) |
Equity in loss of unconsolidated affiliates, net of tax |
|
|
654 |
|
|
|
615 |
|
|
|
713 |
|
|
|
525 |
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
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|
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Net loss |
|
$ |
(1,656 |
) |
|
$ |
(1,402 |
) |
|
$ |
(3,661 |
) |
|
$ |
(2,345 |
) |
|
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|
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Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Unrealized gain on interest rate swaps |
|
|
159 |
|
|
|
|
|
|
|
159 |
|
|
|
|
|
|
|
|
|
|
|
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|
|
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Comprehensive loss |
|
$ |
(1,497 |
) |
|
$ |
(1,402 |
) |
|
$ |
(3,502 |
) |
|
$ |
(2,345 |
) |
|
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Net loss per share-basic |
|
$ |
(0.05 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.08 |
) |
|
|
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Net loss per share-diluted |
|
$ |
(0.05 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.08 |
) |
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Weighted average common shares outstanding: |
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Basic |
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|
30,566,218 |
|
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|
30,299,896 |
|
|
|
30,496,174 |
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|
|
30,223,896 |
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Diluted |
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|
30,566,218 |
|
|
|
30,299,896 |
|
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|
30,496,174 |
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|
|
30,223,896 |
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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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Six months ended |
|
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|
June 30, |
|
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|
2007 |
|
|
2006 |
|
Operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(3,661 |
) |
|
$ |
(2,345 |
) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
17,462 |
|
|
|
12,267 |
|
Non-cash employee compensation expense |
|
|
1,406 |
|
|
|
1,672 |
|
Loss on sale of property |
|
|
|
|
|
|
578 |
|
Equity in losses of unconsolidated affiliates |
|
|
1,121 |
|
|
|
877 |
|
Minority interests |
|
|
(764 |
) |
|
|
(62 |
) |
Deferred tax benefit |
|
|
(2,091 |
) |
|
|
(1,511 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable and other assets |
|
|
(4,914 |
) |
|
|
2,803 |
|
Accounts payable, accrued expenses and other liabilities |
|
|
(484 |
) |
|
|
(6,690 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
8,075 |
|
|
|
7,589 |
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Capital expenditures for property and equipment |
|
|
(92,594 |
) |
|
|
(49,755 |
) |
Cash distributions from unconsolidated affiliates |
|
|
|
|
|
|
18,816 |
|
Investments in and advances to affiliates |
|
|
(19,455 |
) |
|
|
(357 |
) |
Investment in development |
|
|
(9,470 |
) |
|
|
|
|
Purchase of minority interest |
|
|
(6,900 |
) |
|
|
|
|
Issuance of notes receivable |
|
|
(3,264 |
) |
|
|
|
|
Proceeds from sale of assets |
|
|
|
|
|
|
2,010 |
|
Increase in restricted cash |
|
|
(2 |
) |
|
|
(836 |
) |
Decrease in escrows |
|
|
277 |
|
|
|
487 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(131,408 |
) |
|
|
(29,635 |
) |
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Principal payments on long-term debt |
|
|
(686 |
) |
|
|
(992 |
) |
Proceeds from issuance of long-term debt |
|
|
54,619 |
|
|
|
26,019 |
|
Payment of loan costs |
|
|
(899 |
) |
|
|
(563 |
) |
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
53,034 |
|
|
|
24,464 |
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
(70,299 |
) |
|
|
2,418 |
|
Cash and cash equivalents, beginning of period |
|
|
96,778 |
|
|
|
54,782 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
26,479 |
|
|
$ |
57,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information- |
|
|
|
|
|
|
|
|
Cash paid for interest, net of capitalized interest |
|
$ |
6,761 |
|
|
$ |
3,231 |
|
Cash paid for income taxes, net of refunds |
|
$ |
135 |
|
|
$ |
288 |
|
Non-cash items: |
|
|
|
|
|
|
|
|
Change in construction in process accruals |
|
$ |
5,203 |
|
|
$ |
6,425 |
|
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 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, an ice cream shop and confectionery, full-service spa, game arcade, gift shop,
miniature golf, interactive game attraction 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 June 30, 2007, we operate eight Great Wolf Lodge resorts (our signature
northwoods-themed resorts) and one Blue Harbor Resort (a nautical-themed property).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indoor |
|
|
Ownership |
|
|
|
|
|
Guest |
|
Condo |
|
Entertainment |
|
|
Percentage |
|
Opening |
|
Suites |
|
Units |
|
Area (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Approx. ft2)
|
Existing Resorts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wisconsin Dells, WI (2) |
|
|
30 |
% |
|
|
1997 |
|
|
|
308 |
|
|
|
77 |
|
|
|
102,000 |
|
Sandusky, OH (2) |
|
|
30 |
% |
|
|
2001 |
|
|
|
271 |
|
|
|
|
|
|
|
41,000 |
|
Traverse City, MI (3) |
|
|
100 |
% |
|
|
2003 |
|
|
|
281 |
|
|
|
|
|
|
|
51,000 |
|
Kansas City, KS |
|
|
100 |
% |
|
|
2003 |
|
|
|
281 |
|
|
|
|
|
|
|
49,000 |
|
Sheboygan, WI |
|
|
100 |
% |
|
|
2004 |
|
|
|
182 |
|
|
|
64 |
|
|
|
54,000 |
|
Williamsburg, VA |
|
|
100 |
% |
|
|
2005 |
|
|
|
405 |
|
|
|
|
|
|
|
78,000 |
|
Pocono Mountains, PA |
|
|
100 |
% |
|
|
2005 |
|
|
|
401 |
|
|
|
|
|
|
|
91,000 |
|
Niagara Falls, ONT (4) |
|
|
|
|
|
|
2006 |
|
|
|
406 |
|
|
|
|
|
|
|
94,000 |
|
Mason, OH (5) |
|
|
100 |
% |
|
|
2006 |
|
|
|
401 |
|
|
|
|
|
|
|
93,000 |
|
Resorts Announced or Under Construction: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grapevine, TX (6) |
|
|
100 |
% |
|
Late 2007 |
|
|
402 |
|
|
|
|
|
|
|
98,000 |
|
Grand Mound, WA (7) |
|
|
49 |
% |
|
Early 2008 |
|
|
398 |
|
|
|
|
|
|
|
78,000 |
|
Charlotte (metropolitan area), NC
(8) |
|
|
100 |
% |
|
Early 2009 |
|
|
400 |
|
|
|
|
|
|
|
95,000 |
|
6
|
|
|
(1) |
|
Our indoor entertainment areas generally include our indoor waterpark, game arcade,
childrens activity room and fitness room, as well as our Aveda spa in the resorts that have
such amenities. |
|
(2) |
|
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 have a 30.32% interest. We operate the properties and license the
Great Wolf Lodge brand to the joint venture under long-term agreements, subject to earlier
termination in certain situations. |
|
(3) |
|
Construction for the expansion of a 9,000 square foot conference center space began in May
2007. We expect to complete the expansion in late 2007. |
|
(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) |
|
We initially entered into a joint venture agreement with a subsidiary of CBS Corporation
(CBS) to build this resort and attached conference center. In June 2007 we purchased CBS
equity interest in this joint venture, and we now own 100% of the resort. |
|
(6) |
|
We are developing a Great Wolf Lodge resort in Grapevine, Texas. The northwoods-themed,
eight-story resort will provide a comprehensive package of first-class destination lodging
amenities and activities. Construction on the resort began in June 2006 with expected
completion in late 2007. |
|
(7) |
|
We have entered into a joint venture agreement with The Confederated Tribes of the Chehalis
Reservation (Chehalis) to build this resort. We will operate the resort under our Great Wolf
Lodge brand. Chehalis will lease the land needed for the resort to the joint venture, and they
will have a majority equity interest in the joint venture. Construction on the resort began in
October 2006 with expected completion in early 2008. |
|
(8) |
|
We have announced plans to develop a Great Wolf Lodge resort in the Charlotte, North Carolina
metropolitan area. The northwoods-themed, approximately 400-suite resort will provide a
comprehensive package of first-class destination lodging amenities and activities.
Construction on the resort is expected to begin in late 2007 with expected completion in early
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, 2006.
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
7
liabilities at the date of the financial statements and the reported amounts of revenue 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 Affiliates As of June 30, 2007, 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 a Great Wolf Lodge resort under construction in Grand Mound, Washington. |
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 Affiliates
lines on our June 30, 2007 balance sheet is
a loan of $11,027 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 minority interest, and we now own 100% of the resort. The excess of the purchase price over
the estimated fair value of tangible and identifiable intangible assets acquired was recorded as an
increase to goodwill of $1,907.
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 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 two reportable segments in 2007 and 2006:
|
|
|
resort ownership/operation-revenues derived from our consolidated owned resorts; and |
|
|
|
|
resort third-party management-revenues derived from management, license and other
related fees from unconsolidated managed resorts. |
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 affiliates.
8
The following summarizes significant financial information regarding our segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resort |
|
|
Resort Third- |
|
|
|
|
|
|
Totals per |
|
|
|
Ownership/ |
|
|
Party |
|
|
|
|
|
|
Financial |
|
|
|
Operation |
|
|
Management |
|
|
Other |
|
|
Statements |
|
Three months ended June 30,
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
41,887 |
|
|
$ |
4,460 |
|
|
$ |
|
|
|
$ |
46,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA, excluding certain items |
|
|
9,085 |
|
|
|
1,658 |
|
|
|
(1,114 |
) |
|
$ |
9,629 |
|
Depreciation and amortization |
|
|
(8,582 |
) |
|
|
|
|
|
|
(236 |
) |
|
|
(8,818 |
) |
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,923 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes,
minority interests, and equity
in earnings of unconsolidated
affiliates |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(2,112 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to long-lived assets |
|
|
48,898 |
|
|
|
|
|
|
|
104 |
|
|
$ |
49,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resort |
|
|
Resort Third- |
|
|
|
|
|
|
Totals per |
|
|
|
Ownership/ |
|
|
Party |
|
|
|
|
|
|
Financial |
|
|
|
Operation |
|
|
Management |
|
|
Other |
|
|
Statements |
|
Six months ended June 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
85,533 |
|
|
$ |
9,274 |
|
|
$ |
|
|
|
$ |
94,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA, excluding certain items |
|
|
17,507 |
|
|
|
3,436 |
|
|
|
(3,415 |
) |
|
$ |
17,528 |
|
Depreciation and amortization |
|
|
(17,168 |
) |
|
|
|
|
|
|
(294 |
) |
|
|
(17,462 |
) |
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,461 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes,
minority interests, and equity
in loss of unconsolidated
affiliates |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(5,395 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to long-lived assets |
|
|
92,252 |
|
|
|
|
|
|
|
342 |
|
|
$ |
92,594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
592,245 |
|
|
|
2,532 |
|
|
|
126,314 |
|
|
$ |
721,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resort |
|
|
Resort Third- |
|
|
|
|
|
|
Totals per |
|
|
|
Ownership/ |
|
|
Party |
|
|
|
|
|
|
Financial |
|
|
|
Operation |
|
|
Management |
|
|
Other |
|
|
Statements |
|
Three months ended June 30,
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
31,561 |
|
|
$ |
4,266 |
|
|
$ |
|
|
|
$ |
35,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA, excluding certain items |
|
|
7,943 |
|
|
|
1,263 |
|
|
|
(3,407 |
) |
|
$ |
5,799 |
|
Depreciation and amortization |
|
|
(6,046 |
) |
|
|
|
|
|
|
(123 |
) |
|
|
(6,169 |
) |
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(951 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes,
minority interests, and equity
in loss of unconsolidated
affiliates |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1,321 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to long-lived assets |
|
|
23,991 |
|
|
|
|
|
|
|
190 |
|
|
$ |
24,181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resort |
|
|
Resort Third- |
|
|
|
|
|
|
Totals per |
|
|
|
Ownership/ |
|
|
Party |
|
|
|
|
|
|
Financial |
|
|
|
Operation |
|
|
Management |
|
|
Other |
|
|
Statements |
|
Six months ended June 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
65,540 |
|
|
$ |
8,123 |
|
|
$ |
|
|
|
$ |
73,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA, excluding certain items |
|
|
16,044 |
|
|
|
2,138 |
|
|
|
(6,827 |
) |
|
$ |
11,355 |
|
Depreciation and amortization |
|
|
(12,041 |
) |
|
|
|
|
|
|
(226 |
) |
|
|
(12,267 |
) |
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,130 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes,
minority interests, and equity
in loss of unconsolidated
affiliates |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(3,042 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to long-lived assets |
|
|
49,443 |
|
|
|
|
|
|
|
312 |
|
|
$ |
49,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
498,973 |
|
|
|
1,569 |
|
|
|
119,170 |
|
|
$ |
619,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 affiliates, and intangibles. Goodwill is included in our resort
ownership/operation segment.
Recent Accounting Pronouncements In July 2006, the FASB issued Financial Interpretation No.
(FIN) 48, Accounting for Uncertainty in Income Taxes, which clarifies the accounting for
uncertainty in income taxes recognized in a companys financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes. The interpretation prescribes a recognition
threshold and measurement attribute criteria for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. The interpretation
also provides guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition.
We and our subsidiaries file income tax returns in the U.S. federal jurisdiction, and various
states and foreign jurisdictions. All of the tax years since the date of our IPO are open in all
jurisdictions. Our policy is to recognize interest related to unrecognized tax benefits as interest
expense and penalties as income tax expense. We believe that we have appropriate support for the
income tax positions taken and to be taken on our tax returns and that our accruals for tax
liabilities are adequate for all open years based on an assessment of many factors including past
experience and interpretations of tax law applied to the facts of each matter.
We adopted the provisions of FIN 48 on January 1, 2007. The adoption of FIN 48 did not impact
the consolidated financial condition, results of operations or cash flows. At January 1, 2007, we
had unrecognized tax benefits of $978, which primarily related to uncertainty regarding the
sustainability of certain deductions taken on our 2005 U.S. Federal income tax return related to
transaction costs from our IPO. To the extent these unrecognized tax benefits are ultimately
recognized, they will impact the effective tax rate in a future
period. We do not expect the total
amount of unrecognized tax benefits to change significantly in the next year.
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. We are currently evaluating the
impact of the adoption of this statement.
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. We are currently evaluating the impact of the adoption of this statement.
10
3. SHARE-BASED COMPENSATION
Effective January 1, 2006, we adopted SFAS 123(R), Share-Based Payment, using the modified
prospective application transition method. Before we adopted SFAS 123(R), we accounted for
share-based compensation in accordance with Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees. Other than for the expense related to our deferred compensation
shares and our non-vested shares, no share-based employee compensation cost has been reflected in
net income prior to January 1, 2006.
We recognized $777, and $1,406, net of estimated forfeitures, in share-based compensation
expense for the three and six months ended June 30, 2007, respectively. The total income tax
benefit recognized related to share-based compensation was $283 and $512 for the three and six
months ended June 30, 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 June 30, 2007, total unrecognized compensation cost related to share-based
compensation awards was $4,741, which we expect to recognize over a weighted average period of
approximately 3.1 years.
The Great Wolf Resorts 2004 Incentive Stock Plan (the Plan) authorizes us to grant up to
3,380,740 options, stock appreciation rights or shares of our common stock to employees and
directors. At June 30, 2007, there were 1,616,420 shares available for future grants under the
Plan.
We anticipate having to issue new shares of our common stock for stock option exercises.
Stock Options
We have granted non-qualified stock options to purchase our common stock under the Plan at
prices equal to the fair market value of the common stock on the grant dates. The exercise price
for certain options granted under the plans may be paid in cash, shares of common stock or a
combination of cash and shares. Stock options expire ten years from the grant date and vest
ratably over three years.
We recorded stock option expense of $251 and $709 for the three and six months ended June 30,
2007, respectively. There were no stock options granted during the six months ended June 30, 2007
or 2006. We recorded stock option expense of $505 and $987 for the three and six months ended June
30, 2006, respectively.
A summary of stock option activity during the six months ended June 30, 2007, is:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
Average |
|
|
|
|
|
|
Average |
|
Remaining |
|
|
|
|
|
|
Exercise |
|
Contractual |
|
|
Shares |
|
Price |
|
Life |
Number of shares under option: |
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of period |
|
|
1,064,500 |
|
|
$ |
17.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(167 |
) |
|
$ |
12.40 |
|
|
|
|
|
Forfeited |
|
|
(76,833 |
) |
|
$ |
20.90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period |
|
|
987,500 |
|
|
$ |
17.29 |
|
|
7.53 years |
Exercisable at end of period |
|
|
648,348 |
|
|
$ |
17.36 |
|
|
7.50 years |
11
The intrinsic value of our outstanding stock options was $16 at June 30, 2007. There is no
intrinsic value of our exercisable stock options at June 30, 2007. There was no intrinsic value
for our outstanding or exercisable stock options at June 30, 2006.
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 in accordance with the terms thereof.
We granted 215,592 and 81,820 market condition share awards during the six months ended June 30,
2007 and 2006, respectively. We recorded share based compensation expense of $121 and $282 for the three and
six months ended June 30, 2007, respectively. We recorded share
based compensation expense of $139 and $224 for
the three and six months ended June 30, 2006, respectively.
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. |
12
|
|
|
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 |
% |
|
|
|
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. |
Of the 2006 market condition shares awards granted:
|
|
|
81,820 were based on our common stocks performance in 2006 relative to
a stock index, as designated by the Compensation Committee of the Board of
Directors. The per share fair value of these market condition shares was $5.76. |
|
|
|
|
The fair value of the market condition shares was determined using a Monte Carlo
simulation and the following assumptions: |
|
|
|
|
|
Dividend yield |
|
|
|
|
Weighted average, risk free interest rate |
|
|
4.12 |
% |
Expected stock price volatility (peer group of companies) |
|
|
31.00 |
% |
Expected stock price volatility (small-cap stock index) |
|
|
17.50 |
% |
|
|
|
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 for the three-year period
ending on the grant date for peer group companies. The expected stock price
volatility for the small cap stock index was estimated using three-year return
averages. |
|
|
|
|
Based on our common stock performance in 2006, employees earned and were issued 81,820
market condition shares in February 2007. |
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 23,149 and 27,273
performance shares during the six months ended June 30, 2007 and 2006, respectively. Grantees of
performance shares are eligible to receive shares of our common stock based on the achievement of
certain individual and departmental performance criteria during the calendar year. The per share
fair value of performance shares granted during the six months ended June 30, 2007 and 2006, was
$13.10 and $11.03, respectively, which represents the fair value of our common stock on the grant
date. We recorded
13
share based compensation expense of $25 and $51 for the three and six months ended June 30,
2007, respectively. We recorded share based compensation expense of $91 and $146 for the three and
six months ended June 30, 2006, respectively.
Based on our achievement of certain individual and departmental performance goals, employees
earned and were issued 17,949 performance shares in February 2007. As a result, we recorded a
reduction in expense of $103 during the six months ended June 30, 2007 related to the shares not
issued. No similar reduction in expense was recorded during the six
months ended June 30, 2006.
Deferred Compensation Awards
Pursuant to their employment arrangements, certain executives received bonuses upon completion
of the 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 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 expense of $132 and $37, for the three and six months ended June
30, 2007, respectively. We recorded share based compensation expense of $54 and $220, for the
three and six months ended June 30, 2006, 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 six months ended June 30, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
Grant Date |
|
Aggregate |
|
|
Shares |
|
Fair Value |
|
Intrinsic Value |
Non-vested shares balance at beginning of period |
|
|
245,000 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
143,711 |
|
|
$ |
13.47 |
|
|
|
|
|
Forfeited |
|
|
(5,000 |
) |
|
$ |
10.79 |
|
|
|
|
|
Vested |
|
|
(45,000 |
) |
|
$ |
11.61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested shares balance at end of period |
|
|
338,711 |
|
|
$ |
12.35 |
|
|
$ |
645 |
|
We recorded share based expense of $248 and $430 for the three and six months ended June 30,
2007, respectively. We recorded share based expense of $87 and $95 for the three and six months
ended June 30, 2006, respectively.
14
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Land and improvements |
|
$ |
38,121 |
|
|
$ |
38,058 |
|
Building and improvements |
|
|
218,435 |
|
|
|
178,464 |
|
Furniture, fixtures and equipment |
|
|
254,893 |
|
|
|
243,991 |
|
Construction in process |
|
|
108,841 |
|
|
|
71,848 |
|
|
|
|
|
|
|
|
|
|
|
620,290 |
|
|
|
532,361 |
|
Less accumulated depreciation |
|
|
(59,530 |
) |
|
|
(42,393 |
) |
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
560,760 |
|
|
$ |
489,968 |
|
|
|
|
|
|
|
|
Depreciation expense was $8,690 and $6,067 for the three months ended June 30, 2007 and 2006,
respectively. Depreciation expense was $17,144 and $12,411 for the six months ended June 20, 2007
and 2006, respectively.
5. LONG-TERM DEBT
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Long-Term Debt: |
|
|
|
|
|
|
|
|
Traverse City/Kansas City mortgage loan |
|
$ |
72,174 |
|
|
$ |
72,801 |
|
Mason mortgage loan |
|
|
71,648 |
|
|
|
55,792 |
|
Pocono Mountains mortgage loan |
|
|
97,000 |
|
|
|
97,000 |
|
Grapevine construction loan |
|
|
9,769 |
|
|
|
|
|
Junior subordinated debentures |
|
|
80,545 |
|
|
|
51,550 |
|
Other Debt: |
|
|
|
|
|
|
|
|
City of Sheboygan bonds |
|
|
8,410 |
|
|
|
8,383 |
|
City of Sheboygan loan |
|
|
3,777 |
|
|
|
3,863 |
|
|
|
|
|
|
|
|
|
|
|
343,323 |
|
|
|
289,389 |
|
|
|
|
|
|
|
|
|
|
Less current portion of long-term debt |
|
|
(1,470 |
) |
|
|
(1,432 |
) |
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
341,853 |
|
|
$ |
287,957 |
|
|
|
|
|
|
|
|
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, including a minimum debt service coverage ratio. 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 June 30, 2007.
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 (total rate of 7.97% as of June 30,
2007). The loan matures in December 2008 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. 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 June 30, 2007.
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.
15
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 June 30, 2007.
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 (total rate of 7.92% as of June 30, 2007). 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 June 30, 2007.
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 + 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 + 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 FASB Interpretation 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.
16
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 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 |
|
|
|
June 30, |
|
2008 |
|
$ |
1,470 |
|
2009 |
|
|
3,178 |
|
2010 |
|
|
5,059 |
|
2011 |
|
|
74,107 |
|
2012 |
|
|
10,819 |
|
Thereafter |
|
|
248,690 |
|
|
|
|
|
Total |
|
$ |
343,323 |
|
|
|
|
|
6. COMPREHENSIVE INCOME
SFAS 130, Reporting Comprehensive Income, requires the disclosure of the components included
in comprehensive income. For the three and six months ended June 30, 2007, we recorded comprehensive income,
net of tax of approximately $159 related to unrealized gain on our interest rate swap. We had no
similar amount for the three and six months ended June 30, 2006.
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.
17
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 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. Basic and diluted earnings per common share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Net loss attributable to common shares |
|
$ |
(1,656 |
) |
|
$ |
(1,402 |
) |
|
$ |
(3,661 |
) |
|
$ |
(2,345 |
) |
Weighted average common shares outstanding basic |
|
|
30,566,218 |
|
|
|
30,299,896 |
|
|
|
30,496,174 |
|
|
|
30,223,896 |
|
Weighted average common shares outstanding
diluted |
|
|
30,566,218 |
|
|
|
30,299,896 |
|
|
|
30,496,174 |
|
|
|
30,223,896 |
|
Net loss per share basic |
|
$ |
(0.05 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.08 |
) |
Net loss per share diluted |
|
$ |
(0.05 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.08 |
) |
Options to purchase 972,500 shares of common stock were not included in the computations of
diluted earnings per share for the three and six months ended June 30, 2007, because the exercise
prices for the options were greater than the average market price of the common shares during that
period. There were 238,739 shares of common stock that were not included in the computation of
diluted earnings per share for the three and six months ended June 30, 2007, because the market
and/or performance criteria related to these shares had not been met at June 30, 2007.
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 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, an ice cream shop and confectionery, full-service spa,
game arcade, gift shop, miniature golf, interactive game attraction 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 June 30, 2007, we operate eight Great Wolf Lodge resorts (our signature
northwoods-themed resorts) and one Blue Harbor Resort (a nautical-themed property).
18
|
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Indoor |
|
|
Ownership |
|
|
|
|
|
Guest |
|
Condo |
|
Entertainment |
|
|
Percentage |
|
Opening |
|
Suites |
|
Units |
|
Area (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Approx. ft2)
|
Existing Resorts: |
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wisconsin Dells, WI (2) |
|
|
30 |
% |
|
|
1997 |
|
|
|
308 |
|
|
|
77 |
|
|
|
102,000 |
|
Sandusky, OH (2) |
|
|
30 |
% |
|
|
2001 |
|
|
|
271 |
|
|
|
|
|
|
|
41,000 |
|
Traverse City, MI (3) |
|
|
100 |
% |
|
|
2003 |
|
|
|
281 |
|
|
|
|
|
|
|
51,000 |
|
Kansas City, KS |
|
|
100 |
% |
|
|
2003 |
|
|
|
281 |
|
|
|
|
|
|
|
49,000 |
|
Sheboygan, WI |
|
|
100 |
% |
|
|
2004 |
|
|
|
182 |
|
|
|
64 |
|
|
|
54,000 |
|
Williamsburg, VA |
|
|
100 |
% |
|
|
2005 |
|
|
|
405 |
|
|
|
|
|
|
|
78,000 |
|
Pocono Mountains, PA |
|
|
100 |
% |
|
|
2005 |
|
|
|
401 |
|
|
|
|
|
|
|
91,000 |
|
Niagara Falls, ONT (4) |
|
|
|
|
|
|
2006 |
|
|
|
406 |
|
|
|
|
|
|
|
94,000 |
|
Mason, OH (5) |
|
|
100 |
% |
|
|
2006 |
|
|
|
401 |
|
|
|
|
|
|
|
93,000 |
|
Resorts Announced or Under Construction: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grapevine, TX (6) |
|
|
100 |
% |
|
Late 2007 |
|
|
402 |
|
|
|
|
|
|
|
98,000 |
|
Grand Mound, WA (7) |
|
|
49 |
% |
|
Early 2008 |
|
|
398 |
|
|
|
|
|
|
|
78,000 |
|
Charlotte (metropolitan area), NC
(8) |
|
|
100 |
% |
|
Early 2009 |
|
|
400 |
|
|
|
|
|
|
|
95,000 |
|
|
|
|
(1) |
|
Our indoor entertainment areas generally include our indoor waterpark, game arcade,
childrens activity room and fitness room, as well as our Aveda spa in the resorts that have
such amenities. |
|
(2) |
|
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 have a 30.32% interest. We operate the properties and license the
Great Wolf Lodge brand to the joint venture under long-term agreements, subject to earlier
termination in certain situations. |
|
(3) |
|
Construction for the expansion of a 9,000 square foot conference center space began in May
2007. We expect to complete the expansion in late 2007. |
|
(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) |
|
We initially entered into a joint venture agreement with a subsidiary of CBS Corporation
(CBS) to build this resort and attached conference center. In June 2007 we purchased CBS
equity interest in this joint venture, and we now own 100% of the resort. |
|
(6) |
|
We are developing a Great Wolf Lodge resort in Grapevine, Texas. The northwoods-themed,
eight-story resort will provide a comprehensive package of first-class destination lodging
amenities and activities. Construction on the resort began in June 2006 with expected
completion in late 2007. |
|
(7) |
|
We have entered into a joint venture agreement with The Confederated Tribes of the Chehalis
Reservation (Chehalis) to build this resort. We will operate the resort under our Great Wolf
Lodge brand. Chehalis will lease the land needed for the resort to the joint venture, and they
will have a majority equity interest in the joint venture. Construction on the resort began in
October 2006 with expected completion in early 2008. |
19
|
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|
(8) |
|
We have announced plans to develop a Great Wolf Lodge resort in the Charlotte, North Carolina
metropolitan area. The northwoods-themed, approximately 400-suite resort will provide a
comprehensive package of first-class destination lodging amenities and activities.
Construction on the resort is expected to begin in late 2007 with expected completion in early
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
17 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 that meet this
definition has grown from 29 available properties as of year-end 2005 to 41 available properties as
of year-end 2006.
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 industry segment; and external
economic risks, including family vacation patterns and trends. We seek to meet these
20
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 two 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 year 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.
Revenue and Key Performance Indicators. We seek to generate positive cash flows and net income
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 67% of our total resort revenue for the six months ended June 30, 2007.
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:
|
|
|
Monitoring our historical trends for occupancy and estimating our high occupancy nights; |
|
|
|
|
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; |
|
|
|
|
Structuring rates to allow us to offer our previous guests the best rate while
simultaneously working with a promotional partner or offering internet specials; |
|
|
|
|
Monitoring sales of room types daily to evaluate the effectiveness of offered discounts; and |
|
|
|
|
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:
|
|
|
Occupancy; |
|
|
|
|
Average daily room rate, or ADR; |
|
|
|
|
Revenue per available room, or RevPAR; |
|
|
|
|
Total revenue per available room, or Total RevPAR; |
21
|
|
|
Total revenue per occupied room, or Total RevPOR; and |
|
|
|
|
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:
|
|
|
Occupancy is calculated by dividing total occupied rooms by total available rooms. |
|
|
|
|
ADR is calculated by dividing total rooms revenue by total occupied rooms. |
|
|
|
|
RevPAR is the product of occupancy and ADR. |
Total RevPAR and Total RevPOR are defined as follows:
|
|
|
Total RevPAR is calculated by dividing total revenue by total available rooms. |
|
|
|
|
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 six months ended June 30, 2007, approximately 33% 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
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 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 in a greater increase in profitability.
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.
Recent Accounting Pronouncements
In July 2006, the FASB issued Financial Interpretation No. (FIN) 48, Accounting for
Uncertainty in Income Taxes, which clarifies the accounting for uncertainty in income taxes
recognized in a companys financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes. The interpretation prescribes a recognition threshold and
measurement attribute criteria for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. The interpretation also provides guidance
on derecognition, classification, interest and penalties, accounting in interim periods, disclosure
and transition.
22
We and our subsidiaries file income tax returns in the U.S. federal jurisdiction, and various
states and foreign jurisdictions. All of the tax years since the date of our IPO are open in all
jurisdictions. Our policy is to recognize interest related to unrecognized tax benefits as interest
expense and penalties as income tax expense. We believe that we have appropriate support for the
income tax positions taken and to be taken on our tax returns and that our accruals for tax
liabilities are adequate for all open years based on an assessment of many factors including past
experience and interpretations of tax law applied to the facts of each matter.
We adopted the provisions of FIN 48 on January 1, 2007. The adoption of FIN 48 did not impact
the consolidated financial condition, results of operations or cash flows. At January 1, 2007, we
had unrecognized tax benefits of $978, which primarily related to uncertainty regarding the
sustainability of certain deductions taken on our 2005 U.S. Federal income tax return related to
transaction costs from our IPO. To the extent these unrecognized tax benefits are ultimately
recognized, they will impact the effective tax rate in a future
period. We do not expect the total
amount of unrecognized tax benefits to change significantly in the next year.
In September 2006, the FASB issued Statement of Financial Accounting Standards (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.
We are currently evaluating the impact of the adoption of this statement.
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. We are currently evaluating the impact of the adoption of this statement.
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:
|
|
|
a significant portion of our assets consists of property and equipment that are
depreciated over their remaining useful lives in accordance with GAAP. Because depreciation
and amortization are non-cash items, we believe that presentation of EBITDA is a useful
measure of our operating performance; |
|
|
|
|
it is widely used in the hospitality and entertainment industries to measure operating
performance without regard to items such as depreciation and amortization; and |
|
|
|
|
we believe it helps investors meaningfully evaluate and compare the results of our
operations from period to period by removing the impact of items directly resulting from our
asset base, primarily depreciation and amortization, from our operating results. |
23
Our management uses EBITDA:
|
|
|
as a measurement of operating performance because it assists us in comparing our
operating performance on a consistent basis as it removes the impact of items directly
resulting from our asset base, primarily depreciation and amortization, from our operating
results; |
|
|
|
|
for planning purposes, including the preparation of our annual operating budget; |
|
|
|
|
as a valuation measure for evaluating our operating performance and our capacity to incur
and service debt, fund capital expenditures and expand our business; and |
|
|
|
|
as one measure in determining the value of other acquisitions and dispositions. |
Using a measure such as EBITDA has material limitations. 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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|
|
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|
|
|
|
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|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Net loss |
|
$ |
(1,656 |
) |
|
$ |
(1,402 |
) |
|
$ |
(3,661 |
) |
|
$ |
(2,345 |
) |
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
2,923 |
|
|
|
951 |
|
|
|
5,461 |
|
|
|
2,130 |
|
Income tax benefit |
|
|
(1,180 |
) |
|
|
(906 |
) |
|
|
(2,091 |
) |
|
|
(1,511 |
) |
Depreciation and amortization |
|
|
8,818 |
|
|
|
6,169 |
|
|
|
17,462 |
|
|
|
12,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
8,905 |
|
|
$ |
4,812 |
|
|
$ |
17,171 |
|
|
$ |
10,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of Operations
General
Our results of operations for the three and six months ended June 30, 2007 and 2006 are not
directly comparable primarily due to the opening of our Great Wolf Lodge in Mason, Ohio in December
2006.
Our financial information includes:
|
|
|
our subsidiary entity that provides resort development and management/licensing services; |
|
|
|
|
our Traverse City, Kansas City, Sheboygan, Williamsburg, Pocono Mountains and Mason operating resorts; |
|
|
|
|
equity interests in resorts in which we have ownership interests but which we do not consolidate; and |
|
|
|
|
our resorts that are under construction which we will consolidate. |
Revenues. Our revenues consist of:
24
|
|
|
lodging revenue, which includes rooms, food and beverage, and other department revenues from our resorts; |
|
|
|
|
management fee and other revenue from resorts, which includes fees received under our
management, license, development and construction management agreements; and |
|
|
|
|
other revenue from managed properties. We employ the staff at our managed properties
(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:
|
|
|
selling, general and administrative expenses, which are associated with the operations
and management of resorts and which consist primarily of expenses such as corporate payroll
and related benefits, operations management, sales and marketing, finance, legal,
information technology support, human resources and other support services, as well as
general corporate expenses; |
|
|
|
|
property operation and maintenance expenses, such as utility costs and property taxes; |
|
|
|
|
depreciation and amortization; and |
|
|
|
|
other expenses from managed properties, which are recorded as an expense in accordance with EITF 01-14. |
Three months ended June 30, 2007, compared with the three months ended June 30, 2006
The following table shows key operating statistics for our resorts for the three months ended June
30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Properties (a) |
|
Same Store Comparison (b) |
|
|
Three months |
|
Three months |
|
Three months |
|
|
|
|
ended |
|
ended |
|
ended |
|
Increase (Decrease) |
|
|
June 30, 2007 |
|
June 30, 2007 |
|
June 30, 2006 |
|
$ |
|
% |
Occupancy |
|
|
61.2 |
% |
|
|
63.3 |
% |
|
|
62.9 |
% |
|
|
N/A |
|
|
|
0.6 |
% |
ADR |
|
$ |
237.57 |
|
|
$ |
236.60 |
|
|
$ |
231.80 |
|
|
$ |
4.80 |
|
|
|
2.1 |
% |
RevPAR |
|
$ |
145.28 |
|
|
$ |
149.73 |
|
|
$ |
145.69 |
|
|
$ |
4.04 |
|
|
|
2.8 |
% |
Total RevPOR |
|
$ |
358.72 |
|
|
$ |
356.61 |
|
|
$ |
347.60 |
|
|
$ |
9.01 |
|
|
|
2.6 |
% |
Total RevPAR |
|
$ |
219.37 |
|
|
$ |
225.68 |
|
|
$ |
218.47 |
|
|
$ |
7.21 |
|
|
|
3.3 |
% |
|
|
|
(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 2007 and
2006 (that is, our Wisconsin Dells, Sandusky, Traverse City, Kansas City, Sheboygan,
Williamsburg, Poconos, and Niagara Falls resorts). |
25
In December 2006 we opened our resort in Mason, Ohio. As a result, total revenue, rooms
revenue and other revenue for the three month periods ended June 30, 2007 and 2006 are not directly
comparable.
Presented below are selected amounts from the statements of operations for the three months
ended June 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
June 30, |
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
2007 |
|
2006 |
|
(Decrease) |
Revenues |
|
$ |
46,347 |
|
|
$ |
35,827 |
|
|
$ |
10,520 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Departmental operating expenses |
|
|
16,169 |
|
|
|
11,374 |
|
|
|
4,795 |
|
Selling, general and administrative |
|
|
11,458 |
|
|
|
10,952 |
|
|
|
506 |
|
Property operating costs |
|
|
6,289 |
|
|
|
4,699 |
|
|
|
1,590 |
|
Depreciation and amortization |
|
|
8,818 |
|
|
|
6,169 |
|
|
|
2,649 |
|
Net operating income (loss) |
|
|
811 |
|
|
|
(370 |
) |
|
|
1,181 |
|
Net interest expense |
|
|
2,923 |
|
|
|
951 |
|
|
|
1,972 |
|
Income tax benefit |
|
|
(917 |
) |
|
|
(511 |
) |
|
|
(406 |
) |
Net loss |
|
|
(1,656 |
) |
|
|
(1,402 |
) |
|
|
(254 |
) |
Revenues. Total revenues increased primarily due to the opening of our Mason resort in
December 2006, our construction of 104 additional guest suites at our Williamsburg resort and
increased marketing efforts at our Williamsburg and Pocono Mountains resorts. Revenues increased
at these resorts by $10,970 for the three months ended June 30, 2007, as compared to the three
months ended June 30, 2006.
Operating expenses. Total operating expenses increased primarily due to the opening of our
Mason resort in December 2006, our construction of 104 additional guest suites at our Williamsburg
resort and increased marketing efforts at our Williamsburg and Pocono Mountains resorts.
|
|
|
Departmental expenses increased by $4,935 for the three months ended June 30, 2007, as
compared to the three months ended June 30, 2006, due to the opening of our Mason resort,
the expansion of our Williamsburg resort and increased marketing efforts at our Williamsburg
and Pocono Mountains resorts. |
|
|
|
|
Total selling, general and administrative expenses increased by $506 for the three months
ended June 30, 2007, as compared to the three months ended June 30, 2006. Selling, general
and administrative expenses increased by $2,672 due to the opening of our Mason resort, the
expansion of our Williamsburg resort and increased marketing efforts at our Williamsburg and
Pocono Mountains resorts, while corporate selling, general and administrative expenses
decreased by $2,142 due to decreased legal costs; more capitalizable
labor, due to increased development activity; and higher level
of start-up costs (which are included in property operating costs) for the three months
ended June 30, 2007, as compared to the three months ended June 30, 2006. |
|
|
|
|
Total property operating costs (exclusive of opening costs) increased $1,507 for the
three months ended June 30, 2007, as compared to the three months ended June 30, 2006, due
to the opening of our Mason resort, as well as increased repairs and maintenance expense
and increased utilities expense related to the expansion of our Williamsburg resort and
amenity additions to several of our other resorts. Opening costs related to our resorts
were $1,097 for the three months ended June 30, 2007, as compared to $1,014 for the three
months ended June 30, 2006. |
|
|
|
|
Total depreciation and amortization increased mainly due to the opening of our Mason
resort and the expansion at our Williamsburg resort. The total increase in depreciation and
amortization at these two resorts was $2,247 during the three months ended June 30, 2007 as
compared to three months ended June 30, 2006. |
26
Net operating income. During the three months ended June 30, 2007, we had net operating
income of $811 as compared to a net operating loss of ($370) for the three months ended June 30,
2006.
Net loss. Net loss increased due to the following:
|
|
|
An increase in net interest expense of $1,972 mainly due to mortgage debt related our
Pocono Mountains and Mason resorts. |
This increase was partially offset by:
|
|
|
An increase in operating income from $(370) for the three months ended June 30, 2006, to
$811 for the three months ended June 30, 2007; and |
|
|
|
|
An increase of $406 in income tax benefit recorded in the three months ended June 30,
2007, as compared to the three months ended June 30, 2006. |
Six months ended June 30, 2007, compared with the six months ended June 30, 2006
The following table shows key operating statistics for our resorts for the six months ended June
30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Properties (a) |
|
Same Store Comparison (b) |
|
|
Six months ended |
|
Six months ended |
|
Six months ended |
|
Increase (Decrease) |
|
|
June 30, 2007 |
|
June 30, 2007 |
|
June 30, 2006 |
|
$ |
|
% |
Occupancy |
|
|
62.7 |
% |
|
|
64.5 |
% |
|
|
64.7 |
% |
|
|
N/A |
|
|
|
(0.3 |
)% |
ADR |
|
$ |
242.88 |
|
|
$ |
241.63 |
|
|
$ |
234.77 |
|
|
$ |
6.86 |
|
|
|
2.9 |
% |
RevPAR |
|
$ |
152.18 |
|
|
$ |
155.79 |
|
|
$ |
151.78 |
|
|
$ |
4.01 |
|
|
|
2.6 |
% |
Total RevPOR |
|
$ |
368.71 |
|
|
$ |
364.61 |
|
|
$ |
353.94 |
|
|
$ |
10.67 |
|
|
|
3.0 |
% |
Total RevPAR |
|
$ |
231.02 |
|
|
$ |
235.09 |
|
|
$ |
228.83 |
|
|
$ |
6.26 |
|
|
|
2.7 |
% |
|
|
|
(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 2007 and
2006 (that is, our Wisconsin Dells, Sandusky, Traverse City, Kansas City, Sheboygan,
Williamsburg, and Poconos resorts). |
In December 2006 we opened our resort in Mason, Ohio. As a result, total revenue, rooms
revenue and other revenue for the six month periods ended June 30, 2007 and 2006 are not directly
comparable.
Presented below are selected amounts from the statements of operations for the six months
ended June 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
June 30, |
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
2007 |
|
2006 |
|
(Decrease) |
Revenues |
|
$ |
94,807 |
|
|
$ |
73,663 |
|
|
$ |
21,144 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Departmental operating expenses |
|
|
32,690 |
|
|
|
23,567 |
|
|
|
9,123 |
|
Selling, general and administrative |
|
|
24,579 |
|
|
|
22,603 |
|
|
|
1,976 |
|
Property operating costs |
|
|
14,172 |
|
|
|
9,575 |
|
|
|
4,597 |
|
Depreciation and amortization |
|
|
17,462 |
|
|
|
12,267 |
|
|
|
5,195 |
|
Loss on sale of property |
|
|
|
|
|
|
578 |
|
|
|
(578 |
) |
Net operating income (loss) |
|
|
66 |
|
|
|
(912 |
) |
|
|
978 |
|
Net interest expense |
|
|
5,461 |
|
|
|
2,130 |
|
|
|
3,331 |
|
Income tax benefit |
|
|
(1,961 |
) |
|
|
(1,185 |
) |
|
|
(776 |
) |
Net loss |
|
|
(3,661 |
) |
|
|
(2,345 |
) |
|
|
(1,316 |
) |
27
Revenues. Total revenues increased primarily due to the opening of our Mason resort in
December 2006, our construction of 104 additional guest suites at our Williamsburg resort and
increased marketing efforts at our Williamsburg and Pocono Mountains resorts. Revenues increased
at these resorts by $21,615 for the six months ended June 30, 2007, as compared to the six months
ended June 30, 2006.
Operating expenses. Total operating expenses increased primarily due to the opening of our
Mason resort in December 2006, our construction of 104 additional guest suites at our Williamsburg
resort and increased marketing efforts at our Williamsburg and Pocono Mountains resorts.
|
|
|
Departmental expenses increased by $9,473 for the six months ended June 30, 2007, as
compared to the six months ended June 20, 2006, due to the opening of our Mason resort, the
expansion of our Williamsburg resort and increased marketing efforts at our Williamsburg and
Pocono Mountains resorts. |
|
|
|
|
Total selling, general and administrative expenses increased by $1,976 for the six months
ended June 30, 2007, as compared to the six months ended June 30, 2006. Selling, general
and administrative expenses increased by $5,006 due to the opening of our Mason resort, the
expansion of our Williamsburg resort and increased marketing efforts at our Williamsburg and
Pocono Mountains resorts, while corporate selling, general and administrative expenses
decreased by $1,831 due to decreased legal costs; more capitalizable
labor, due to increased development activity; and higher level
of start-up costs (which are included in property operating costs) for the six months ended
June 30, 2007, as compared to the six months ended June 30, 2006 |
|
|
|
|
Total property operating costs (exclusive of opening costs) increased $2,914 for the
six months ended June 30, 2007, as compared to June 20, 2006, mainly due to the opening of
our Mason resort, as well as increased repairs and maintenance expense, and increased
utilities expense related to the expansion of our Williamsburg resort and amenity additions
to several of our other resorts. Opening costs related to our resorts were $3,423 for the
six months ended June 30, 2007, as compared to $1,740 for the six months ended June 30,
2006. |
|
|
|
|
Total depreciation and amortization increased mainly due to the opening of our Mason
resort and the expansion at our Williamsburg resort. The total increase in depreciation and
amortization at these two resorts was $4,488 during the six months ended June 30, 2007, as
compared to six months ended June 30, 2006. |
Net operating income. During the six months ended June 30, 2007, we had net operating income
of $66 as compared to a net operating loss of ($912) for the six months ended June 30, 2006.
Net loss. Net loss increased due to the following:
|
|
|
An increase in net interest expense of $3,331 mainly due to mortgage debt related to our
Pocono Mountains and Mason resorts. |
This increase was partially offset by:
|
|
|
An increase in operating income from $(912) for the six months ended June 30, 2006, to
$66 for the six months ended June 30, 2007. |
|
|
|
|
An increase of $776 in income tax benefit recorded in the six months ended June 30, 2007,
as compared to the six months ended June 30, 2006. |
28
Segments
We are organized into a single operating division. Within that operating division, we have
two reportable segments in 2007 and 2006:
|
|
|
resort ownership/operation-revenues derived from our consolidated owned resorts; and |
|
|
|
|
resort third-party management-revenues derived from management, license and other
related fees from unconsolidated managed resorts. |
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 affiliates. See our Segments section in our Summary of Significant Accounting
Policies for a reconciliation of these measures to their most directly comparable GAAP measure.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
Six months ended June 30, |
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
|
|
|
|
|
Increase |
|
|
2007 |
|
2006 |
|
(Decrease) |
|
2007 |
|
2006 |
|
(Decrease) |
Resort Ownership/Operation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
41,887 |
|
|
$ |
31,561 |
|
|
$ |
10,326 |
|
|
$ |
85,533 |
|
|
$ |
65,540 |
|
|
$ |
19,993 |
|
EBITDA, excluding certain items |
|
|
9,085 |
|
|
|
7,943 |
|
|
|
1,142 |
|
|
|
17,507 |
|
|
|
16,044 |
|
|
|
1,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resort Third-Party Mgmt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
4,460 |
|
|
|
4,266 |
|
|
|
194 |
|
|
|
9,274 |
|
|
|
8,123 |
|
|
|
1,151 |
|
EBITDA, excluding certain items |
|
|
1,658 |
|
|
|
1,263 |
|
|
|
395 |
|
|
|
3,436 |
|
|
|
2,138 |
|
|
|
1,298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA, excluding certain items |
|
|
(1,114 |
) |
|
|
(3,407 |
) |
|
|
2,293 |
|
|
|
(3,415 |
) |
|
|
(6,827 |
) |
|
|
3,412 |
|
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 $343,323 and $289,389 as of June 30, 2007, and December 31, 2006,
respectively, summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Long-Term Debt: |
|
|
|
|
|
|
|
|
Traverse City/Kansas City mortgage loan |
|
$ |
72,174 |
|
|
$ |
72,801 |
|
Mason mortgage loan |
|
|
71,648 |
|
|
|
55,792 |
|
Pocono Mountains mortgage loan |
|
|
97,000 |
|
|
|
97,000 |
|
Grapevine construction loan |
|
|
9,769 |
|
|
|
|
|
Junior subordinated debentures |
|
|
80,545 |
|
|
|
51,550 |
|
Other Debt: |
|
|
|
|
|
|
|
|
City of Sheboygan bonds |
|
|
8,410 |
|
|
|
8,383 |
|
City of Sheboygan loan |
|
|
3,777 |
|
|
|
3,863 |
|
|
|
|
|
|
|
|
|
|
|
343,323 |
|
|
|
289,389 |
|
|
|
|
|
|
|
|
|
|
Less current portion of long-term debt |
|
|
(1,470 |
) |
|
|
(1,432 |
) |
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
341,853 |
|
|
$ |
287,957 |
|
|
|
|
|
|
|
|
29
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, including a minimum debt service coverage ratio. 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 June 30, 2007.
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 (total rate of 7.97% as of June 30,
2007). The loan matures in December 2008 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. 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 June 30, 2007.
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.
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 June 30, 2007.
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 (total rate of 7.92% as of June 30, 2007). 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 June 30, 2007.
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 + 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
30
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 + 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 FASB Interpretation 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 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 |
|
|
|
June 30, |
|
2008 |
|
$ |
1,470 |
|
2009 |
|
|
3,178 |
|
2010 |
|
|
5,059 |
|
2011 |
|
|
74,107 |
|
2012 |
|
|
10,819 |
|
Thereafter |
|
|
248,690 |
|
|
|
|
|
Total |
|
$ |
343,323 |
|
|
|
|
|
31
Short-Term Liquidity Requirements
Our short-term liquidity requirements 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 consist primarily of funds necessary to pay for the
following items for periods beyond the next 12 months:
|
|
|
scheduled debt maturities; |
|
|
|
|
capital contributions and loans to unconsolidated joint ventures; |
|
|
|
|
renovations, expansions and other non-recurring capital expenditures that need to be
made periodically to our resorts; and |
|
|
|
|
costs associated with the development of new resorts. |
We expect to meet these needs through existing working capital, cash provided by operations and a
combination of mortgage financing on properties being developed, proceeds from investing
activities, additional borrowings under future credit facilities, and the issuance of equity
instruments, including common stock, or additional or replacement debt, if market conditions
permit. We believe these sources of capital will be sufficient to provide for our long-term capital
needs.
Our largest long-term expenditures are expected to be for capital expenditures for development
of future resorts and capital contributions to joint ventures owning
resorts under construction or development.
Such expenditures were $121,519 for the six months ended June 30, 2007. We expect to have
approximately $90,100 of such expenditures in the remainder of 2007 and $82,000 in 2008. As
discussed above, we expect to meet these requirements through a combination of cash provided by
operations, cash on hand, proceeds from investing activities and new and/or existing mortgage
financing on properties being developed.
32
Off Balance Sheet Arrangements
We have two unconsolidated joint venture arrangements at June 30, 2007. 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 June 30, 2007, the
joint venture had aggregate outstanding indebtedness to third parties of approximately
$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 is currently under construction and is
expected to open in early 2008. This joint venture is a limited liability company; we are
a member of that limited liability company with a 49% ownership interest. |
As capital may be required to fund the activities of these resorts, we may be required to fund in
the future the joint ventures shares of the costs not funded by the majority owner of the joint
venture, the joint ventures operations or outside financing.
Additionally, we expect to provide a partial or full guarantee on
mortgage debt to be obtained by the Grand Mound joint venture. 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 we do not expect to make significant future capital
contributions to these joint ventures.
Contractual Obligations
The following table summarizes our contractual obligations as of June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Terms |
|
|
|
|
|
|
|
Less |
|
|
|
|
|
|
|
|
|
|
More |
|
|
|
|
|
|
|
Than |
|
|
1-3 |
|
|
3-5 |
|
|
Than |
|
|
|
Total |
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
5 Years |
|
Debt obligations (1) |
|
$ |
343,323 |
|
|
$ |
1,470 |
|
|
$ |
8,237 |
|
|
$ |
84,926 |
|
|
$ |
248,690 |
|
Operating lease obligations |
|
|
950 |
|
|
|
403 |
|
|
|
547 |
|
|
|
|
|
|
|
|
|
Construction contracts |
|
|
40,836 |
|
|
|
40,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve on unrecognized tax benefits |
|
|
955 |
|
|
|
|
|
|
|
|
|
|
|
955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
386,064 |
|
|
$ |
42,709 |
|
|
$ |
8,784 |
|
|
$ |
85,881 |
|
|
$ |
248,690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $8,410 of fixed rate debt recognized as a liability related to certain bonds issued
by the City of Sheboygan and $3,777 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. |
As we develop future resorts, we expect to incur significant additional debt and construction
contract obligations.
Working Capital
We had $26,479 of available cash and cash equivalents and working capital deficit of $2,449
(current assets less current liabilities) at June 30, 2007, compared to the $96,778 of available
cash and cash equivalents and $55,365 of working capital at
December 31, 2006. The primary reason for the decline in our
working capital balance from December 31, 2006 to June 30,
2007 was the use of cash for capital expenditures and investments in
and advances to affiliates, for our properties under development.
33
Cash Flows
Six months ended June 30, 2007, compared with the six months ended June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
2007 |
|
|
2006 |
|
|
(Decrease) |
|
Net cash provided by operating activities |
|
$ |
8,075 |
|
|
$ |
7,589 |
|
|
$ |
486 |
|
Net cash used in investing activities |
|
|
(131,408 |
) |
|
|
(29,635 |
) |
|
|
101,773 |
|
Net cash provided by financing activities |
|
|
53,034 |
|
|
|
24,464 |
|
|
|
28,570 |
|
Operating Activities. The increase in net cash provided by operating activities resulted
primarily due to having net operating income of $66 during the six months ended June 30, 2007, as
compared to a net operating loss of ($912) during the six months ended June 30, 2006.
Investing Activities. The increase in net cash used in investing activities for the six months
ended June 30, 2007, as compared to the six months ended June 30, 2006, resulted primarily from
increased capital expenditures for our properties that are in service and our development
properties.
Financing Activities. The increase in net cash provided by financing activities resulted
primarily from the proceeds from our TPS transaction during the six months ended June 30, 2007.
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 June 30, 2007, we had total indebtedness of approximately $343,323. This debt consisted
of:
|
|
|
$72,174 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. |
34
|
|
|
$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% |
|
|
|
|
$71,648 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. The total rate was 7.97%
at June 30, 2007. $71,000 of this debt is effectively fixed at a rate of 7.65% due to the
interest rate swap described above. |
|
|
|
|
$9,769 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 7.92%
at June 30, 2007. |
|
|
|
|
$8,410 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 $3,777 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; and |
As of June 30, 2007, we estimate the total fair value of the indebtedness described above to
be $24,442 more 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 the prime rate and/or 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 $104 annually. If the prime rate were to decrease by 1% or 100 basis points, the
decrease in interest expense on our variable rate debt would be approximately $104 annually.
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 second
quarter of 2007. We have concluded that our disclosure controls and procedures were effective as
of June 30, 2007.
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, 2006, 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
At the annual meeting of stockholders on May 30, 2007, the following individuals were elected to
serve as members of our Board of Directors for a one-year term that will expire at our annual
meeting in 2008 or when their successors are duly qualified, each individual receiving the
indicated number of votes for his or her election, and the indicated number of votes withheld:
|
|
|
|
|
|
|
|
|
|
|
FOR |
|
WITHHELD |
Joseph Vittoria |
|
|
24,776,670 |
|
|
|
1,033,480 |
|
John Emery |
|
|
25,587,781 |
|
|
|
222,369 |
|
Elan Blutinger |
|
|
24,778,870 |
|
|
|
1,031,280 |
|
Randy Churchey |
|
|
23,524,932 |
|
|
|
2,285,218 |
|
Michael M. Knetter |
|
|
24,711,770 |
|
|
|
1,098,380 |
|
Alissa N. Nolan |
|
|
24,357,470 |
|
|
|
1,452,680 |
|
Edward Rensi |
|
|
24,665,422 |
|
|
|
1,144,728 |
|
Howard Silver |
|
|
24,366,927 |
|
|
|
1,443,223 |
|
As previously disclosed, on July 9, 2007, Alissa N. Nolan, resigned from the Board of
Directors and all committees of which she was a member in connection with her simultaneous
appointment as Executive Vice President and Managing Director of International for the Company.
36
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 Form 10-Q.
|
|
|
Exhibit |
|
|
Number |
|
Description |
2.1
|
|
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) |
|
|
|
2.2
|
|
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) |
|
|
|
3.1
|
|
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) |
|
|
|
3.2
|
|
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) |
|
|
|
4.1
|
|
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) |
|
|
|
4.2
|
|
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) |
|
|
|
4.3
|
|
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) |
|
|
|
4.4
|
|
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) |
|
|
|
4.5
|
|
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) |
37
|
|
|
Exhibit |
|
|
Number |
|
Description |
31.1*
|
|
Certification of Chief Executive Officer of Periodic Report Pursuant to
Rule 13a14(a) and Rule 15d14(a) |
|
|
|
31.2*
|
|
Certification of Chief Financial Officer of Periodic Report Pursuant to
Rule 13a14(a) and Rule 15d14(a) |
|
|
|
32.1*
|
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 |
|
|
|
32.2*
|
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 |
38
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.
|
|
|
|
|
|
GREAT WOLF RESORTS, INC.
|
|
|
/s/ James A. Calder
|
|
|
James A. Calder |
|
|
Chief Financial Officer
(Duly authorized officer)
(Principal Financial and Accounting Officer) |
|
|
Dated: August 7, 2007
39