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 September 30, 2006
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
(State or other jurisdiction of incorporation or organization)
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51-0510250
(I.R.S. Employer Identification No.) |
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122 West Washington Avenue
Madison, Wisconsin 53703
(Address of principal executive offices)
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53703
(Zip Code) |
(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 30,510,308 as of November 6,
2006.
Great Wolf Resorts, Inc.
Quarterly Report on Form 10-Q
For the Quarter Ended September 30, 2006
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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September 30, |
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December 31, |
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2006 |
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2005 |
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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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$ |
48,960 |
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$ |
54,782 |
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Accounts receivable, net of allowance for doubtful accounts of $204 and $95 |
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1,965 |
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2,506 |
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Accounts
receivable affiliates |
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1,108 |
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12,825 |
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Inventory |
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2,316 |
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2,254 |
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Other current assets |
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6,907 |
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1,996 |
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Total current assets |
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61,256 |
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74,363 |
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Property and equipment, net |
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449,863 |
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385,391 |
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Investment in affiliates |
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25,709 |
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43,207 |
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Other assets |
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14,985 |
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11,741 |
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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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66,995 |
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66,995 |
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Total assets |
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$ |
642,637 |
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$ |
605,526 |
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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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$ |
2,000 |
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$ |
1,928 |
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Accounts payable |
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17,397 |
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18,183 |
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Accrued expenses |
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11,964 |
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9,311 |
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Accrued
expenses affiliates |
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494 |
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3,576 |
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Advance deposits |
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6,150 |
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5,680 |
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Gift certificates payable |
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1,605 |
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2,126 |
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Other current liabilities |
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126 |
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Total current liabilities |
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39,610 |
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40,930 |
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Mortgage debt |
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139,107 |
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102,542 |
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Junior
subordinated debentures |
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51,550 |
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51,550 |
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Other long-term debt |
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12,249 |
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12,308 |
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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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25,623 |
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25,800 |
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Deferred compensation liability |
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1,891 |
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1,501 |
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Total liabilities |
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270,421 |
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235,022 |
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Minority interest |
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6,404 |
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6,593 |
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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,
30,505,308 shares, and 30,277,308 issued and outstanding, at
September 30, 2006 and December 31, 2005, respectively |
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305 |
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303 |
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Additional paid in capital |
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396,219 |
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394,212 |
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Preferred stock, $0.01 par value, 10,000,000 shares authorized, no
shares issued or outstanding |
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Accumulated deficit |
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(28,512 |
) |
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(28,255 |
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Deferred compensation |
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(2,200 |
) |
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(2,349 |
) |
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Total stockholders equity |
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365,812 |
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363,911 |
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Total liabilities and stockholders equity |
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$ |
642,637 |
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$ |
605,526 |
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See accompanying notes to condensed consolidated financial statements.
3
GREAT WOLF RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; dollars in thousands, except per share data)
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Three months ended |
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Nine months ended |
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September 30, |
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September 30, |
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2006 |
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2005 |
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2006 |
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2005 |
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Revenues: |
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Rooms |
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$ |
24,363 |
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$ |
22,459 |
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$ |
68,503 |
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$ |
57,559 |
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Food and beverage |
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5,723 |
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5,268 |
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16,695 |
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14,487 |
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Other hotel operations |
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5,805 |
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5,423 |
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16,234 |
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14,132 |
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Management and other fees |
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888 |
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1,629 |
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Management and other fees related parties |
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853 |
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2,250 |
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Sales of condominiums |
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25,862 |
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25,862 |
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37,632 |
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59,012 |
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105,311 |
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112,040 |
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Other revenue from managed properties |
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3,147 |
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9,131 |
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Total revenues |
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40,779 |
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59,012 |
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114,442 |
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112,040 |
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Operating expenses by department: |
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Rooms |
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3,134 |
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2,884 |
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9,008 |
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8,478 |
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Food and beverage |
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4,682 |
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4,454 |
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14,037 |
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12,444 |
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Other |
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4,529 |
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3,958 |
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12,868 |
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11,204 |
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Other operating expenses: |
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Selling, general and administrative |
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9,382 |
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5,173 |
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31,983 |
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19,738 |
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Property operating costs |
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5,313 |
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6,393 |
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14,888 |
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16,799 |
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Depreciation and amortization |
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6,430 |
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6,286 |
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18,697 |
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19,520 |
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Cost of sales of condominiums |
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16,780 |
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16,780 |
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Loss on sale of property |
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375 |
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953 |
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33,845 |
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45,928 |
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102,434 |
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104,963 |
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Other expenses from managed properties |
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3,147 |
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9,131 |
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Total operating expenses |
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36,992 |
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45,928 |
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111,565 |
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104,963 |
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Net operating income |
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3,787 |
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13,084 |
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|
2,877 |
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|
7,077 |
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Interest income |
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(863 |
) |
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|
(319 |
) |
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(2,315 |
) |
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|
(967 |
) |
Interest expense |
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1,817 |
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|
1,720 |
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5,399 |
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4,744 |
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Income (loss) before income taxes, minority interests, and equity
in loss (earnings) of unconsolidated affiliates |
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2,833 |
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11,683 |
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(207 |
) |
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3,300 |
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Income tax expense (benefit) |
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|
1,102 |
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|
4,674 |
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(83 |
) |
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|
1,330 |
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Minority interests, net of tax |
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(77 |
) |
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(2 |
) |
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(114 |
) |
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(2 |
) |
Equity in loss (earnings) of unconsolidated affiliates, net of tax |
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(280 |
) |
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247 |
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Net income (loss) |
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$ |
2,088 |
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$ |
7,011 |
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$ |
(257 |
) |
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$ |
1,972 |
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Net income (loss) per share-basic |
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$ |
0.07 |
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$ |
0.23 |
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$ |
(0.01 |
) |
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$ |
0.07 |
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Net income (loss) per share-diluted |
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$ |
0.07 |
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$ |
0.23 |
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$ |
(0.01 |
) |
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$ |
0.07 |
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Weighted average common shares outstanding: |
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Basic |
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30,370,229 |
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30,132,896 |
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30,272,674 |
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30,132,896 |
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Diluted |
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30,370,229 |
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30,132,936 |
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30,272,674 |
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30,234,887 |
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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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Nine months ended |
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September 30, |
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2006 |
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2005 |
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Operating activities: |
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Net income (loss) |
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$ |
(257 |
) |
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$ |
1,972 |
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Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
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Depreciation and amortization |
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18,697 |
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19,520 |
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Non-cash employee compensation expense (revenue) |
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2,392 |
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(1,553 |
) |
Loss on sale of property |
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|
953 |
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Equity in loss of unconsolidated affiliates |
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411 |
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Minority interests |
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(190 |
) |
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|
(3 |
) |
Deferred tax
(benefit) expenses |
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(176 |
) |
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|
1,331 |
|
Changes in operating assets and liabilities: |
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Accounts receivable and other assets |
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1,956 |
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(2,727 |
) |
Accounts payable, accrued expenses and other liabilities |
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(7,716 |
) |
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(9,741 |
) |
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Net cash provided by operating activities |
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|
16,070 |
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|
8,799 |
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Investing activities: |
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Capital expenditures for property and equipment |
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(77,197 |
) |
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(95,692 |
) |
Cash distributions from unconsolidated affiliates |
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18,902 |
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Investment in affiliates |
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(357 |
) |
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Proceeds from sale of assets |
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2,045 |
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Increase in restricted cash |
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(1,257 |
) |
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|
(1,295 |
) |
Decrease in escrows |
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|
554 |
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|
1,024 |
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Net cash used in investing activities |
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|
(57,310 |
) |
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|
(95,963 |
) |
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Financing activities: |
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Principal payments on long-term debt |
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|
(1,360 |
) |
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|
(49,597 |
) |
Proceeds from issuance of long-term debt |
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|
37,938 |
|
|
|
75,677 |
|
Payment of loan costs |
|
|
(1,160 |
) |
|
|
(1,678 |
) |
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|
|
|
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|
Net cash provided by financing activities |
|
|
35,418 |
|
|
|
24,402 |
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|
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Net decrease in cash and cash equivalents |
|
|
(5,822 |
) |
|
|
(62,762 |
) |
Cash and cash equivalents, beginning of period |
|
|
54,782 |
|
|
|
79,409 |
|
|
|
|
|
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|
|
Cash and cash equivalents, end of period |
|
$ |
48,960 |
|
|
$ |
16,647 |
|
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|
|
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|
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|
Supplemental Cash Flow Information- |
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Cash paid for interest, net of capitalized interest |
|
$ |
4,527 |
|
|
$ |
3,595 |
|
Cash paid for income taxes |
|
$ |
329 |
|
|
$ |
1,128 |
|
Non-cash items: |
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|
|
|
|
|
|
Land contributed for minority interest |
|
$ |
|
|
|
$ |
6,660 |
|
Construction in process accruals |
|
$ |
5,785 |
|
|
$ |
11,534 |
|
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 and
meeting space. We also generate revenues from licensing arrangements, management fees and other
fees with respect to properties owned in whole or in part by third parties.
The following table presents an overview of our portfolio of operating resorts and resorts
announced or under construction. As of September 30, 2006, we operate seven Great Wolf Lodge
resorts (our signature northwoods-themed resorts), and one Blue Harbor Resort (a nautical-themed
property).
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indoor |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment |
|
|
Ownership |
|
|
|
|
|
Guest |
|
Condo |
|
Area(1) |
|
|
Percentage |
|
Opening |
|
Suites |
|
Units |
|
(Approx. sq.ft) |
|
|
|
Existing Resorts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wisconsin Dells, WI |
|
|
30 |
% |
|
|
1997 |
|
|
|
309 |
|
|
|
77 |
|
|
|
102,000 |
|
Sandusky, OH |
|
|
30 |
% |
|
|
2001 |
|
|
|
271 |
|
|
|
|
|
|
|
41,000 |
|
Traverse City, MI |
|
|
100 |
% |
|
|
2003 |
|
|
|
281 |
|
|
|
|
|
|
|
51,000 |
|
Kansas City, KS |
|
|
100 |
% |
|
|
2003 |
|
|
|
281 |
|
|
|
|
|
|
|
49,000 |
|
Sheboygan, WI |
|
|
100 |
% |
|
|
2004 |
|
|
|
183 |
|
|
|
64 |
|
|
|
54,000 |
|
Williamsburg, VA |
|
|
100 |
% |
|
|
2005 |
|
|
|
301 |
(2) |
|
|
|
|
|
|
66,000 |
|
Pocono Mountains, PA |
|
|
100 |
% |
|
|
2005 |
|
|
|
401 |
|
|
|
|
|
|
|
91,000 |
|
Niagara Falls, ONT (3) |
|
|
|
|
|
April 2006 |
|
|
406 |
|
|
|
|
|
|
|
94,000 |
|
Resorts Announced or Under Construction: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mason, OH (4) |
|
|
84 |
% |
|
Late 2006 |
|
|
401 |
|
|
|
|
|
|
|
93,000 |
|
Grapevine, TX(5) |
|
|
100 |
% |
|
Late 2007 |
|
|
404 |
|
|
|
|
|
|
|
98,000 |
|
Grand Mound, WA(6) |
|
|
49 |
% |
|
Early 2008 |
|
|
393 |
|
|
|
|
|
|
|
78,000 |
|
6
|
|
|
(1) |
|
Our indoor entertainment areas generally include our indoor waterpark, game arcade,
childrens activity room and fitness room, as well as our Aveda concept spa in the resorts
that have such amenities. |
|
(2) |
|
We plan to add an additional 103 guest suites as well as new waterpark attractions at our
Williamsburg property. Construction for the expansion began in May 2006 with expected
completion of the waterpark attractions in late 2006 and the additional guest suites in early
2007. |
|
(3) |
|
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. |
|
(4) |
|
We have entered into a joint venture agreement with a subsidiary of CBS Corporation (CBS), to
build this resort and attached conference center. We will operate the resort under our Great
Wolf Lodge brand and have a majority of the equity in the project. CBS has a minority equity
interest in the development. Construction on the resort began in July 2005 with expected
completion of the resort in late 2006 and the conference center in early 2007. |
|
(5) |
|
We are developing a Great Wolf Lodge resort in Grapevine, Texas. The northwoods themed,
six-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. |
|
(6) |
|
We have entered into a joint venture agreement with The Confederated Tribes of the Chehalis
Reservation to build this resort. We will operate the resort under our Great Wolf Lodge brand.
The Confederated Tribes of the Chehalis Reservation 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. |
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General We have prepared these unaudited 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, 2005.
The accompanying unaudited condensed consolidated interim financial statements reflect all
adjustments, which are of a normal and recurring nature, necessary for a fair presentation of the
financial condition and results of operations and cash flows for the periods presented. The
preparation of financial statements in accordance with accounting principles generally accepted in
the United States of America requires us to make estimates and assumptions. Such estimates and
assumptions affect the reported amounts of assets and liabilities, as well as the disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts
of 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.
Investment
in Affiliates We use the equity method to account for our investments in
unconsolidated joint ventures, as we do not have a controlling interest. Net income or loss is
allocated between the partners in the joint ventures based on the hypothetical liquidation at book
value method (HLBV). Under the HLBV method, net income or loss is allocated between the partners
based on the difference between each partners claim on the net assets of the partnership at the
end
7
and beginning of the period, after taking into account contributions and distributions. Each
partners share of the net assets of the partnership is calculated as the amount that the partner
would receive if the partnership were to liquidate all of its assets at net book value and
distribute the resulting cash to creditors and partners in accordance with their respective
priorities.
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.
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.
SegmentsWe are organized into a single operating division. Within that operating division,
we have three reportable segments in 2006: resort ownership/operation, resort third-party
management and condominium sales. The resort ownership/operation segment derives its revenues from
the ownership/operation of our consolidated owned resorts; the resort third-party management
segment derives its revenue from management, license and other related fees from unconsolidated
managed resorts; and the condominium sales segment derives its revenues from sales of condominium
units to third-part owners. We evaluate the performance of each segment based on earnings before
interest, income taxes, and depreciation and amortization (EBITDA), excluding minority interests
and equity in earnings of unconsolidated affiliates.
The following summarizes significant financial information regarding our segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resort |
|
|
Resort Third- |
|
|
|
|
|
|
|
|
|
|
Totals per |
|
|
|
Ownership/ |
|
|
Party |
|
|
Condominium |
|
|
|
|
|
|
Financial |
|
|
|
Operation |
|
|
Management |
|
|
Sales |
|
|
Other |
|
|
Statements |
|
Three months ended September
30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
35,891 |
|
|
$ |
4,888 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
40,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA, excluding certain items |
|
|
9,865 |
|
|
|
1,741 |
|
|
|
(120 |
) |
|
|
(1,269 |
) |
|
$ |
10,217 |
|
Depreciation and amortization |
|
|
(6,294 |
) |
|
|
|
|
|
|
|
|
|
|
(136 |
) |
|
|
(6,430 |
) |
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(954 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes,
minority interests, and equity
in earnings of unconsolidated
affiliates |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to long-lived assets |
|
|
27,248 |
|
|
|
|
|
|
|
|
|
|
|
194 |
|
|
$ |
27,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resort |
|
|
Resort Third- |
|
|
|
|
|
|
|
|
|
|
Totals per |
|
|
|
Ownership/ |
|
|
Party |
|
|
Condominium |
|
|
|
|
|
|
Financial |
|
|
|
Operation |
|
|
Management |
|
|
Sales |
|
|
Other |
|
|
Statements |
|
Nine months ended September
30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
101,432 |
|
|
$ |
13,010 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
114,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA, excluding certain items |
|
|
26,473 |
|
|
|
3,879 |
|
|
|
(268 |
) |
|
|
(8,510 |
) |
|
$ |
21,574 |
|
Depreciation and amortization |
|
|
(18,336 |
) |
|
|
|
|
|
|
|
|
|
|
(361 |
) |
|
|
(18,697 |
) |
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,084 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes,
minority interests, and equity
in loss of unconsolidated
affiliates |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(207 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to long-lived assets |
|
|
76,682 |
|
|
|
|
|
|
|
|
|
|
|
515 |
|
|
$ |
77,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
527,692 |
|
|
|
|
|
|
|
|
|
|
|
114,945 |
|
|
$ |
642,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resort |
|
|
Resort Third- |
|
|
|
|
|
|
|
|
|
|
Totals per |
|
|
|
Ownership/ |
|
|
Party |
|
|
Condominium |
|
|
|
|
|
|
Financial |
|
|
|
Operation |
|
|
Management |
|
|
Sales |
|
|
Other |
|
|
Statements |
|
Three months ended September
30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
33,150 |
|
|
$ |
|
|
|
$ |
25,862 |
|
|
$ |
|
|
|
$ |
59,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA, excluding certain items |
|
|
18,032 |
|
|
|
|
|
|
|
9,082 |
|
|
|
(7,744 |
) |
|
$ |
19,370 |
|
Depreciation and amortization |
|
|
(6,128 |
) |
|
|
|
|
|
|
|
|
|
|
(158 |
) |
|
|
(6,286 |
) |
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,401 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes,
minority interests, and equity
in unconsolidated affiliates |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to long-lived assets |
|
|
39,526 |
|
|
|
|
|
|
|
|
|
|
|
104 |
|
|
$ |
39,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resort |
|
|
Resort Third- |
|
|
|
|
|
|
|
|
|
|
Totals per |
|
|
|
Ownership/ |
|
|
Party |
|
|
Condominium |
|
|
|
|
|
|
Financial |
|
|
|
Operation |
|
|
Management |
|
|
Sales |
|
|
Other |
|
|
Statements |
|
Nine months ended September
30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
86,178 |
|
|
$ |
|
|
|
$ |
25,862 |
|
|
$ |
|
|
|
$ |
112,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA, excluding certain items |
|
|
26,131 |
|
|
|
|
|
|
|
9,082 |
|
|
|
(8,616 |
) |
|
$ |
26,597 |
|
Depreciation and amortization |
|
|
(19,055 |
) |
|
|
|
|
|
|
|
|
|
|
(465 |
) |
|
|
(19,520 |
) |
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,777 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes,
minority interests, and equity
in unconsolidated affiliates |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to long-lived assets |
|
|
95,283 |
|
|
|
|
|
|
|
|
|
|
|
409 |
|
|
$ |
95,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
625,756 |
|
|
|
|
|
|
|
|
|
|
|
23,891 |
|
|
$ |
649,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Other items in the table above represent corporate-level activities that do not constitute
a reportable segment. Total assets at the corporate level primarily consist of cash, our
investment in affiliates, and intangibles. Goodwill is included in our resort ownership/operation
segment.
9
Recent Accounting Pronouncements In July 2006, the FASB issued FASB
Interpretation No. 48 (FIN 48) Accounting for Uncertainty in Income Taxes which prescribes a
recognition threshold and measurement process for recording in the financial statements uncertain
tax positions taken or expected to be taken in a tax return. Additionally, FIN 48 provides guidance
on the derecognition, classification, accounting in interim periods and disclosure requirements for
uncertain tax positions. The accounting provisions of FIN 48 will be effective for us beginning
January 1, 2007. We are currently evaluating the impact of the adoption of this statement.
In September 2006, the FASB issued Statement of Financial Accounting Standards 157, Fair
Value Measurements (SFAS 157). 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.
3. INVESTMENT IN AFFILIATES
On March 2, 2006, our joint venture with CNL entered into a loan agreement and borrowed
$63,000. The loan is secured by the joint ventures interests in its owned Great Wolf Lodge
resorts in Wisconsin Dells, Wisconsin and Sandusky, Ohio. Pursuant to the joint venture agreement,
the joint venture distributed to us 30% of the net loan proceeds, or approximately $18,600.
4. SHARE-BASED COMPENSATION
Effective January 1, 2006, we adopted Statement of Financial Accounting Standards 123(R),
Share-Based Payment (SFAS 123(R)), 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 $720 and $2,392, net of estimated forfeitures, in share-based compensation
expense (revenue) for the three and nine months ended
September 30, 2006, respectively. The total income tax
benefit (expense) recognized related to share-based compensation was $288 and $957 for the three
and nine months ended September 30, 2006, 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 September 30, 2006, total unrecognized compensation cost related to
share-based compensation awards was $5,188, which we expect to recognize over a weighted average
period of approximately 2.6 years.
The Great Wolf Resorts 2004 Incentive Stock Plan (the Plan) authorizes us to grant up to
3,380,520 options, stock appreciation rights or shares of our common stock to employees and
directors. At September 30, 2006, there were 1,909,926 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 $305 and $1,292 for the three and nine months ended
September 30, 2006, respectively. The per share weighted average fair value of stock options granted during the
nine months ended September 30, 2005
was
10
$9.38. There were no stock options granted during the
nine months ended September 30, 2006. We estimated the fair value of each stock option on the date
of grant using the Black-Scholes pricing model and the following assumptions:
|
|
|
|
|
|
|
Nine months ended |
|
|
September 30, 2005 |
Dividend yield |
|
|
|
|
Weighted average, risk free interest rate |
|
|
3.65 |
% |
Weighted average, expected life of option |
|
6.0 years |
Expected stock price volatility |
|
|
40.00 |
% |
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 U.S. Treasury note rate at the beginning of the period. The
weighted average expected life of our options is based on the simplified calculation allowed
under SFAS 123(R). Due to our formation in December 2004, our expected stock price volatility
is estimated using daily returns data for the five-year period ending on the grant date for a
group of peer companies.
A summary of stock option activity during the nine months ended September 30, 2006 is:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
Average |
|
|
|
|
|
|
Average |
|
Remaining |
|
|
|
|
|
|
Exercise |
|
Contractual |
|
|
Shares |
|
Price |
|
Life |
|
|
|
Number of shares under option: |
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of period |
|
|
1,471,834 |
|
|
$ |
17.45 |
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(353,333 |
) |
|
$ |
17.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period |
|
|
1,118,501 |
|
|
$ |
17.58 |
|
|
8.25 years |
Exercisable at end of period |
|
|
418,853 |
|
|
$ |
17.51 |
|
|
8.25 years |
At September 30, 2006, all of our option grant prices were above our stock price. Therefore, we
believe there was no intrinsic value for our outstanding or exercisable shares at September 30,
2006.
Market Condition Share Awards
Certain officers and key employees are eligible to receive shares of our common stock in
payment of market condition share awards granted to them in accordance with the terms thereof.
During the nine months ended September 30, 2006, 81,820 market condition share awards were granted.
No market condition share awards were granted during the three months ended September 30, 2006.
Grantees of market condition shares will be eligible to receive shares of our common stock based on
our common stocks performance in calendar year 2006 relative to a small cap stock index, as
designated by the Compensation Committee of the Board of Directors. No market condition share
awards were outstanding as of September 30, 2005.
We recorded share based expense of $129 and $353 for the three and nine months ended September
30, 2006, respectively. The per share fair value of market condition shares granted during the nine months ended
September 30, 2006 was $5.76 and 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 |
% |
11
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.
Performance Share Awards
Certain officers and key employees are eligible to receive shares of our common stock in
payment of performance share awards granted to them in accordance with the terms thereof. During
the nine months ended September 30, 2006, 27,273 performance share awards were granted. No
performance share awards were granted during the three months ended September 30, 2006. Grantees
of performance shares will be eligible to receive shares of our common stock based on the
achievement of certain individual and departmental performance criteria in 2006. We recorded share
based expense of $82 and $228 for the three and nine months ended September 30, 2006, respectively. The per share
fair value of performance shares granted during the nine months ended September 30, 2006 was
$11.03, which represents the fair value of our common stock on the grant date. No performance
share awards were outstanding as of September 30, 2005.
Deferred Compensation Awards
Pursuant to their employment arrangements, certain executives received bonuses upon completion
of the initial public offering of our common stock in 2004 (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 expense (revenue) of ($6)
and $214 for the three and nine months ended September 30, 2006, respectively and shared based revenue of $1,307
and $1,553 for the three and nine months ended September 30, 2005, respectively.
Non-vested Shares
We have granted non-vested shares to certain employees and our directors. Shares vest between
three and five years. We valued the non-vested shares at the closing market value of our common
stock on the date of grant.
A summary of non-vested shares activity for the nine months ended September 30, 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
Grant Date |
|
Aggregate |
|
|
Shares |
|
Fair Value |
|
Intrinsic Value |
|
|
|
Non-vested shares balance at beginning of period |
|
|
15,000 |
|
|
$ |
10.09 |
|
|
|
|
|
Granted |
|
|
231,000 |
|
|
$ |
11.43 |
|
|
|
|
|
Forfeited |
|
|
(3,000 |
) |
|
|
|
|
|
|
|
|
Vested |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested shares balance at end of period |
|
|
243,000 |
|
|
$ |
11.47 |
|
|
$ |
99 |
|
12
We recorded share based expense of $210 and $305 for the three and nine months ended September
30, 2006, respectively. There were no non-vested shares outstanding at September 30, 2005.
Prior Year Pro Forma Expense
The following table illustrates the effect on net income and earnings per share as if the fair
value-based method provided by SFAS No. 123, Accounting for Stock-Based Compensation, had been
applied for all outstanding and unvested awards for periods prior to the adoption of SFAS 123(R):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine months ended |
|
|
|
September 30, 2005 |
|
|
September 30, 2005 |
|
Net income, as reported |
|
$ |
7,011 |
|
|
$ |
1,972 |
|
Compensation expense, SFAS 123 fair value method |
|
|
(382 |
) |
|
|
(1,069 |
) |
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
6,629 |
|
|
$ |
903 |
|
|
|
|
|
|
|
|
Pro forma net income per share basic |
|
$ |
0.22 |
|
|
$ |
0.03 |
|
Pro forma net income per share diluted |
|
$ |
0.22 |
|
|
$ |
0.03 |
|
Actual net
income per share basic |
|
$ |
0.23 |
|
|
$ |
0.07 |
|
Actual net
income per share diluted |
|
$ |
0.23 |
|
|
$ |
0.07 |
|
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Land and improvements |
|
$ |
31,458 |
|
|
$ |
38,735 |
|
Building and improvements |
|
|
147,986 |
|
|
|
150,184 |
|
Furniture, fixtures and equipment |
|
|
183,433 |
|
|
|
167,691 |
|
Construction in process |
|
|
123,390 |
|
|
|
46,448 |
|
|
|
|
|
|
|
|
|
|
|
486,267 |
|
|
|
403,058 |
|
Less accumulated depreciation |
|
|
(36,404 |
) |
|
|
(17,667 |
) |
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
449,863 |
|
|
$ |
385,391 |
|
|
|
|
|
|
|
|
Depreciation expense was $6,326 and $6,103 for the three months ended September 30, 2006 and 2005,
respectively. Depreciation expense was $18,737 and $16,851 for the nine months ended September 30,
2006 and 2005, respectively.
6. LONG-TERM DEBT
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Long-Term Debt: |
|
|
|
|
|
|
|
|
Traverse City/Kansas City mortgage loan |
|
$ |
73,106 |
|
|
$ |
73,979 |
|
Sheboygan mortgage loan |
|
|
28,541 |
|
|
|
28,939 |
|
Mason construction loan |
|
|
37,937 |
|
|
|
|
|
Other mortgage debt |
|
|
1,523 |
|
|
|
1,552 |
|
Junior subordinated debentures |
|
|
51,550 |
|
|
|
51,550 |
|
Other Debt: |
|
|
|
|
|
|
|
|
City of Sheboygan bonds |
|
|
8,346 |
|
|
|
8,288 |
|
City of Sheboygan loan |
|
|
3,903 |
|
|
|
4,020 |
|
|
|
|
|
|
|
|
|
|
|
204,906 |
|
|
|
168,328 |
|
Less current portion of long-term debt |
|
|
(2,000 |
) |
|
|
(1,928 |
) |
|
|
|
|
|
|
|
|
|
$ |
202,906 |
|
|
$ |
166,400 |
|
|
|
|
|
|
|
|
13
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, representing the
combined EBITDA (adjusted for non-recurring items, unusual items, infrequent items and asset
impairment charges) of the two resorts divided by their combined annual interest expense and
principal amortization. The loan also has customary prohibitions on our ability to prepay the loan
prior to maturity. We were in compliance with all covenants under this loan at September 30, 2006.
Sheboygan Mortgage Loan This loan is secured by our Sheboygan resort. The loan matures in
January 2008, bears interest at a floating rate of prime plus 200 basis points (total rate of
10.25% as of September 30, 2006), and is subject to a 20-year principal amortization schedule. The
loan has customary covenants associated with a single asset mortgage. There are no prohibitions or
fees associated with the prepayment of the loan principal. We were in compliance with the mortgage
loan covenants at September 30, 2006.
Mason Construction Loan In December 2005 we closed on a $76,800 loan to construct the Great
Wolf Lodge in Mason, Ohio. The loan is secured by a first mortgage on the Mason, Ohio property and
matures in December 2008. The loan also has two one-year extensions after the initial 3-year term
available at our option. The lenders have a construction and debt service guaranty from us. In
conjunction with the debt service guaranty, we must maintain a maximum ratio of long-term debt to
consolidated trailing twelve month adjusted EBITDA of 6.50x and a minimum tangible net worth of
$200,000 or greater. The construction guaranty expires at the opening date of the resort and the
debt service guaranty
expires once the resort achieves a trailing cash flow threshold. 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
September 30, 2006). The loan is interest only during the initial three-year term and then is
subject to a 25-year amortization schedule in the extension years. The loan has
14
customary
covenants associated with an individual mortgaged property. There are no prohibitions or fees
associated with the repayment of the loan principal. We were in compliance with the loan covenants
at September 30, 2006.
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 (the Trust), 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 the Trusts common securities, representing 3% of the
total capitalization of the Trust.
The Trust 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 trust preferred offering totaled $1,600, including $1,500 of
underwriting commissions and expenses and $100 of costs incurred directly by the Trust. The Trust
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 trust preferred offering and
our investment in the Trust, were $48,400. We used the net proceeds to retire the Pocono Mountains
construction loan.
As a result of the issuance of a revision to FASB Interpretation No. 46R, Consolidation of
Variable Interest Entities and the accounting professions application of the guidance provided by
the FASB, issue trusts, like the Trust, are generally variable interest entities. We have
determined that we are not the primary beneficiary under the Trust, and accordingly we do not
include the financial statements of the Trust in our consolidated financial statements.
Based on the foregoing accounting authority, our consolidated financial statements present the
debentures issued to the Trust as long-term debt. Our investment in the Trust is accounted as a
cost investment and is 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 bond anticipation notes 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 2005 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 and other long-term
liabilities are as follows:
|
|
|
|
|
|
|
Through |
|
|
|
September 30, |
|
2007 |
|
$ |
2,000 |
|
2008 |
|
|
29,445 |
|
2009 |
|
|
39,559 |
|
2010 |
|
|
1,742 |
|
2011 |
|
|
1,872 |
|
Thereafter |
|
|
130,288 |
|
|
|
|
|
Total |
|
$ |
204,906 |
|
|
|
|
|
7. EARNINGS PER SHARE
We calculate our basic earnings per common share by dividing net income (loss) available to
common shareholders by the weighted average number of shares of common stock outstanding. Our
diluted earnings per common share assumes the issuance of common stock for all potentially dilutive
stock equivalents outstanding using the treasury stock method. In periods in which we incur a net
loss, we exclude potentially dilutive stock equivalents from the computation of diluted weighted
average shares outstanding as the effect of those potentially dilutive items is anti-dilutive.
The trust that holds the assets to pay obligations under our deferred compensation plan has
129,412 shares of our common stock. In accordance with the provisions of EITF Issue No. 97-14,
Accounting for Deferred Compensation 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 |
|
Nine months ended |
|
|
September 30, |
|
September 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Net income (loss) attributable to common shares |
|
$ |
2,088 |
|
|
$ |
7,011 |
|
|
$ |
(257 |
) |
|
$ |
1,972 |
|
Weighted average common shares outstanding basic |
|
|
30,370,229 |
|
|
|
30,132,896 |
|
|
|
30,272,674 |
|
|
|
30,132,896 |
|
Weighted average common shares outstanding
diluted |
|
|
30,370,229 |
|
|
|
30,132,936 |
|
|
|
30,272,674 |
|
|
|
30,234,887 |
|
Net income (loss) per share basic |
|
$ |
0.07 |
|
|
$ |
0.23 |
|
|
$ |
(0.01 |
) |
|
$ |
0.07 |
|
Net income (loss) per share diluted |
|
$ |
0.07 |
|
|
$ |
0.23 |
|
|
$ |
(0.01 |
) |
|
$ |
0.07 |
|
Options to purchase 1,118,501 shares of common stock were not included in the computations of
diluted earnings per share for the three months and nine months ended September 30, 2006, because
the exercise prices for the options were greater than the average market price of the common shares
during that period. There were 109,093 shares of common stock that were not included in the
computation of diluted earnings per share for the three and nine months ended September 30, 2006,
because the market and/or performance criteria related to these shares had not been met at
September 30, 2006.
15
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 and
meeting space. We also generate revenues from licensing arrangements, management fees and other
fees with respect to properties owned in whole or in part by third parties.
The following table presents an overview of our portfolio of operating resorts and resorts
announced or under construction. As of September 30, 2006, we operate seven Great Wolf Lodge
resorts (our signature northwoods-themed resorts), and one Blue Harbor Resort (a nautical-themed
property).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indoor |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment |
|
|
|
Ownership |
|
|
|
|
|
|
Guest |
|
|
Condo |
|
|
Area(1) |
|
|
|
Percentage |
|
|
Opening |
|
|
Suites |
|
|
Units |
|
|
(Approx. sq.ft) |
|
|
|
|
Existing Resorts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wisconsin Dells, WI |
|
|
30 |
% |
|
|
1997 |
|
|
|
309 |
|
|
|
77 |
|
|
|
102,000 |
|
Sandusky, OH |
|
|
30 |
% |
|
|
2001 |
|
|
|
271 |
|
|
|
|
|
|
|
41,000 |
|
Traverse City, MI |
|
|
100 |
% |
|
|
2003 |
|
|
|
281 |
|
|
|
|
|
|
|
51,000 |
|
Kansas City, KS |
|
|
100 |
% |
|
|
2003 |
|
|
|
281 |
|
|
|
|
|
|
|
49,000 |
|
Sheboygan, WI |
|
|
100 |
% |
|
|
2004 |
|
|
|
183 |
|
|
|
64 |
|
|
|
54,000 |
|
Williamsburg, VA |
|
|
100 |
% |
|
|
2005 |
|
|
|
301 |
(2) |
|
|
|
|
|
|
66,000 |
|
Pocono Mountains, PA |
|
|
100 |
% |
|
|
2005 |
|
|
|
401 |
|
|
|
|
|
|
|
91,000 |
|
Niagara Falls, ONT (3) |
|
|
|
|
|
April 2006 |
|
|
406 |
|
|
|
|
|
|
|
94,000 |
|
Resorts Announced or Under Construction: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mason, OH (4) |
|
|
84 |
% |
|
Late 2006 |
|
|
401 |
|
|
|
|
|
|
|
93,000 |
|
Grapevine, TX(5) |
|
|
100 |
% |
|
Late 2007 |
|
|
404 |
|
|
|
|
|
|
|
98,000 |
|
Grand Mound, WA(6) |
|
|
49 |
% |
|
Early 2008 |
|
|
393 |
|
|
|
|
|
|
|
78,000 |
|
|
|
|
(1) |
|
Our indoor entertainment areas generally include our indoor waterpark, game arcade,
childrens activity room and fitness room, as well as our Aveda concept spa in the resorts
that have such amenities. |
|
(2) |
|
We plan to add an additional 103 guest suites as well as new waterpark attractions at our
Williamsburg property. Construction for the expansion began in May 2006 with expected
completion of the waterpark attractions in late 2006 and the additional guest suites in early
2007. |
|
(3) |
|
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. |
|
(4) |
|
We have entered into a joint venture agreement with a subsidiary of CBS Corporation (CBS), to
build this resort and attached conference center. We will operate the resort under our Great
Wolf Lodge brand and have a majority of the equity in the project. CBS has a minority equity
interest in the development. Construction on the resort began in July 2005 with expected
completion of the resort in late 2006 and the conference center in early 2007. |
|
(5) |
|
We are developing a Great Wolf Lodge resort in Grapevine, Texas. The northwoods themed,
six-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. |
|
(6) |
|
We have entered into a joint venture agreement with The Confederated Tribes of the Chehalis
Reservation to build this resort. We will operate the resort under our Great Wolf Lodge brand.
The Confederated Tribes of the Chehalis Reservation 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. |
16
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
16 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 this
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.
17
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 30,000 square feet, as well as a variety of water slides and other
water-based attractions, to be competitive with our resorts. A recent survey by Hotel & Leisure
Advisors identified a total of 12 indoor waterpark destination resorts in the United States that
are expected to open in 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 that they
can drive to have increased in recent years.
Outlook. We believe that only Great Wolf Resorts has established a U.S.-wide portfolio of
family entertainment resorts featuring indoor waterparks and no other operator or developer has
such a portfolio. 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. Several of our resorts
compete directly with other similar family entertainment 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 10-15 resorts over the next six years with us being the sole or partial
owner, selectively consider opportunities to sell partial or whole interests in our owned and
operating properties, 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 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.
During the third quarter of 2006, we experienced operating results of key consolidated
operating metrics within the ranges we had projected for the period. For the remainder of 2006, we
do expect, however, that our Traverse City and Sandusky resorts will continue to be affected by
adverse general economic circumstances in the Michigan/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/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 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
18
our cash flows and profitability. Rooms revenue
accounted for approximately 68% of our total resort revenue for the nine months ended September 30,
2006. 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; |
|
|
|
|
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. |
19
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 nine months ended September 30, 2006, approximately 32% 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 FASB Interpretation No. 48 (FIN 48) Accounting for Uncertainty
in Income Taxes which prescribes a recognition threshold and measurement process for recording in
the financial statements uncertain tax positions taken or expected to be taken in a tax return.
Additionally, FIN 48 provides guidance on the derecognition, classification, accounting in interim
periods and disclosure requirements for uncertain tax positions. The accounting provisions of FIN
48 will be effective for us beginning January 1, 2007. We are currently evaluating the impact of
the adoption of this statement.
In September 2006, the FASB issued Statement of Financial Accounting Standards 157, Fair
Value Measurements (SFAS 157). 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.
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:
20
|
|
|
a significant portion of our assets consists of property and equipment that are
depreciated over their remaining useful lives in accordance with GAAP. Because depreciation
and amortization are non-cash items, we believe that presentation of EBITDA is a useful
measure of our operating performance; |
|
|
|
|
it is widely used in the hospitality and entertainment industries to measure operating
performance without regard to items such as depreciation and amortization; and |
|
|
|
|
we believe it helps investors meaningfully evaluate and compare the results of our
operations from period to period by removing the impact of items directly resulting from our
asset base, primarily depreciation and amortization, from our operating results. |
Our management uses EBITDA:
|
|
|
as a measurement of operating performance because it assists us in comparing our
operating performance on a consistent basis as it removes the impact of items directly
resulting from our asset base, primarily depreciation and amortization, from our operating
results; |
|
|
|
|
for planning purposes, including the preparation of our annual operating budget; |
|
|
|
|
as a valuation measure for evaluating our operating performance and our capacity to incur
and service debt, fund capital expenditures and expand our business; and |
|
|
|
|
as one measure in determining the value of other acquisitions and dispositions. |
Using a measure such as EBITDA has material limitations. 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 income (loss) to EBITDA for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Net income (loss) |
|
$ |
2,088 |
|
|
$ |
7,011 |
|
|
$ |
(257 |
) |
|
$ |
1,972 |
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
954 |
|
|
|
1,401 |
|
|
|
3,084 |
|
|
|
3,777 |
|
Income tax expense (benefit) |
|
|
1,340 |
|
|
|
4,675 |
|
|
|
(172 |
) |
|
|
1,332 |
|
Depreciation and amortization |
|
|
6,430 |
|
|
|
6,286 |
|
|
|
18,697 |
|
|
|
19,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
10,812 |
|
|
$ |
19,373 |
|
|
$ |
21,352 |
|
|
$ |
26,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
Results of Operations
General
Our results of operations for the three months ended September 30, 2006 and 2005 are not
directly comparable due to the opening of our Great Wolf Lodge in the Pocono Mountains in October
2005, and the sale of 70% interests in each of our Wisconsin Dells and Sandusky resorts in October
2005 to a third party.
Our financial information includes:
|
|
|
our corporate entity that provides resort development and management services; |
|
|
|
|
our Wisconsin Dells, Sandusky, Traverse City, Kansas City, Sheboygan, Williamsburg,
Pocono Mountains, and Niagara Falls operating resorts (we sold 70% interests in each of our
Wisconsin Dells and Sandusky resorts in October 2005); |
|
|
|
|
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:
|
|
|
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 and license 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 September 30, 2006 compared with the three months ended September 30, 2005
The following table shows key operating statistics for our resorts for the three months ended
September 30, 2006 and 2005:
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Properties (a) |
|
Same Store Comparison (b) |
|
|
Three months |
|
Three months |
|
Three months |
|
|
|
|
ended |
|
ended |
|
ended |
|
Increase (Decrease) |
|
|
September 30, |
|
September 30, |
|
September 30, |
|
$ |
|
% |
|
|
2006 |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
|
Occupancy |
|
|
73.4 |
% |
|
|
73.7 |
% |
|
|
67.3 |
% |
|
|
N/A |
|
|
|
9.5 |
% |
ADR |
|
$ |
242.67 |
|
|
$ |
218.21 |
|
|
$ |
223.19 |
|
|
$ |
(4.98 |
) |
|
|
(2.2 |
)% |
RevPAR |
|
$ |
178.17 |
|
|
$ |
160.76 |
|
|
$ |
150.13 |
|
|
$ |
10.63 |
|
|
|
7.1 |
% |
Total RevPOR |
|
$ |
358.76 |
|
|
$ |
320.43 |
|
|
$ |
327.60 |
|
|
$ |
(7.17 |
) |
|
|
(2.2 |
)% |
Total RevPAR |
|
$ |
263.40 |
|
|
$ |
236.07 |
|
|
$ |
220.37 |
|
|
$ |
15.70 |
|
|
|
7.1 |
% |
|
|
|
(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 2006 and
2005 (that is, our Wisconsin Dells, Sandusky, Traverse City, Kansas City, Sheboygan, and
Williamsburg resorts). |
In 2005 we opened two resorts: our Williamsburg resort opened in March 2005 and our Pocono
Mountains resort opened in October 2005. Also in October 2005 we sold 70% equity interests in our
Wisconsin Dells and Sandusky resorts to a third party. Following the sale of the 70% interests in
these two resorts, we no longer consolidate those resorts operations in our operating results, but
instead account for them under the equity method, through equity in unconsolidated affiliates. As
a result, total revenue, rooms revenue and other revenue for the three month periods ended
September 30, 2006 and September 30, 2005 are not directly comparable.
Presented below are selected amounts from the statements of operations for the three months
ended September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
September 30, |
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
2006 |
|
2005 |
|
(Decrease) |
Revenues |
|
$ |
40,779 |
|
|
$ |
59,012 |
|
|
$ |
(18,233 |
) |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Departmental operating expenses |
|
|
12,345 |
|
|
|
11,296 |
|
|
|
1,049 |
|
Selling, general and administrative |
|
|
9,382 |
|
|
|
5,173 |
|
|
|
4,209 |
|
Property operating costs |
|
|
5,313 |
|
|
|
6,393 |
|
|
|
(1,080 |
) |
Depreciation and amortization |
|
|
6,430 |
|
|
|
6,286 |
|
|
|
144 |
|
Cost of sales of condominiums |
|
|
|
|
|
|
16,780 |
|
|
|
(16,780 |
) |
Net operating income |
|
|
3,787 |
|
|
|
13,084 |
|
|
|
(9,297 |
) |
Net interest expense |
|
|
954 |
|
|
|
1,401 |
|
|
|
(447 |
) |
Income tax expense |
|
|
1,102 |
|
|
|
4,674 |
|
|
|
(3,572 |
) |
Net income |
|
|
2,088 |
|
|
|
7,011 |
|
|
|
(4,923 |
) |
Revenues. Total revenues decreased primarily due to our having no revenue related to sales of
condominiums during the three months ended September 30, 2006 when we had such sales revenue in
2005, and by the reduction in resort revenue due to the sale of 70% of our equity interests in our
Wisconsin Dells and Sandusky resorts in October 2005. These decreases were partially offset by
revenues related to the Pocono Mountains resort, which opened in October 2005, and management and
other fees and other revenues from managed properties related to our joint venture with CNL Income
Properties, Inc. (CNL).
|
|
|
Revenue from sales of condominiums at our Wisconsin Dells resort was $25,862 for the
three months ended September 30, 2005. We had no similar revenue during the three
months ended September 30, 2006. |
23
|
|
|
Total revenues for the Pocono Mountains resort for the three months ended September
30, 2006 were $1,210 greater than total revenues for the Wisconsin Dells and Sandusky
resorts for the three months ended September 30, 2005. Our Williamsburg resort revenues
increased $1,702 for the three months ended September 30, 2006 as compared to September
30, 2005 due to increased marketing efforts. |
|
|
|
|
Total management and other fees related to the CNL joint venture were $853 for the
three months ended September 30, 2006. |
|
|
|
|
Other revenue from managed properties was $3,147 for the three months ended September
30, 2006. We had no similar revenue for the three months ended September 30, 2005. |
Operating expenses. Total operating expenses decreased primarily due to our having no cost of
sales of condominiums during the three months ended September 30, 2006 when we had such costs in
2005, and by the reduction in resort expenses due to the sale of our Wisconsin Dells and Sandusky
resorts in October 2005. These decreases were partially offset by an increase in expenses related
to the Pocono Mountains resort, which opened in October 2005 and other expense from managed
properties related to the CNL joint venture.
|
|
|
Total departmental operating expenses for the Pocono Mountains resort for the three
months ended September 30, 2006 were $559 greater than total departmental expenses for the
Wisconsin Dells and Sandusky resorts for the three months ended September 30, 2005. |
|
|
|
|
Total selling, general and administrative expenses for the Pocono Mountains resort for
the three months ended September 30, 2006 were $733 greater than total selling, general and
administrative expenses for the Wisconsin Dells and Sandusky resorts for the three months
ended September 30, 2005. During the three months ended September 30, 2006 our corporate
selling, general and administrative expenses included increases over the three months ended
September 30, 2005 related to share based compensation of $2,027. |
|
|
|
|
Total property operating costs (exclusive of opening costs) for the Pocono Mountains
resort for the three months ended September 30, 2006 were $712 less than total property
operating costs (exclusive of opening costs) for the resorts in Wisconsin Dells and Sandusky
for the three months ended September 30, 2005. Opening costs primarily related to our Mason
Family, Grapevine and Grand Mound resorts were $1,282 for the three months ended September
30, 2006, as compared to $2,142 for the three months ended September 30, 2005 related to our
resorts in the Pocono Mountains and the condominiums in Wisconsin Dells. |
|
|
|
|
Total depreciation increased due to the opening of our resort in the Pocono Mountains and
additional property and equipment purchases at our other resorts. Total depreciation and
amortization for the Pocono Mountains resort for the three months ended September 30, 2006
was $101 greater than total depreciation and amortization for the Wisconsin Dells and
Sandusky resorts for the three months ended September 30, 2005. |
|
|
|
|
Cost of sales of condominiums of $16,780 relates to the condominiums sold at our
Wisconsin Dells resort during the three months ended September 30, 2005. We did not incur
similar charges during the three months ended September 30, 2006. |
Net operating income. Net operating income for the three months ended September 30, 2006
decreased $9,297 to $3,787 from $13,084 for the three months ended September 30, 2005.
Net income. Net income decreased due to the following:
|
|
|
A decrease in operating income from $13,084 for the three months ended September 30, 2005
to $3,787 for the three months ended September 30, 2006. |
24
This decrease was partially offset by:
|
|
|
A decrease in net interest expense of $447 mainly due to higher interest income in the
three months ended September 30, 2006 as compared to the three months ended September 30,
2005. |
|
|
|
|
A reduction of $3,572 in income tax expense recorded in the three months ended September
30, 2006 as compared to the three months ended September 30, 2005. |
Nine months ended September 30, 2006 compared with the nine months ended September 30, 2005
The following table shows key operating statistics for our resorts for the nine months ended
September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Properties (a) |
|
Same Store Comparison (b) |
|
|
Nine months |
|
Nine months |
|
Nine months |
|
Increase (Decrease) |
|
|
ended |
|
ended |
|
ended |
|
|
|
|
|
|
September 30, |
|
September 30, |
|
September 30, |
|
$ |
|
% |
|
|
2006 |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
|
Occupancy |
|
|
67.8 |
% |
|
|
66.6 |
% |
|
|
65.5 |
% |
|
|
N/A |
|
|
|
1.7 |
% |
ADR |
|
$ |
237.85 |
|
|
$ |
198.48 |
|
|
$ |
206.12 |
|
|
$ |
(7.64 |
) |
|
|
(3.7 |
)% |
RevPAR |
|
$ |
161.29 |
|
|
$ |
132.22 |
|
|
$ |
135.01 |
|
|
$ |
(2.79 |
) |
|
|
(2.1 |
)% |
Total RevPOR |
|
$ |
355.76 |
|
|
$ |
299.71 |
|
|
$ |
306.99 |
|
|
$ |
(7.28 |
) |
|
|
(2.4 |
)% |
Total RevPAR |
|
$ |
241.24 |
|
|
$ |
199.66 |
|
|
$ |
201.08 |
|
|
$ |
(1.42 |
) |
|
|
(0.7 |
)% |
|
|
|
(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 2006 and
2005 (that is, our Wisconsin Dells, Sandusky, Traverse City, Kansas City, and Sheboygan
resorts). |
In 2005 we opened two resorts: our Williamsburg resort opened in March 2005 and our Pocono
Mountains resort opened in October 2005. Also in October 2005 we sold 70% equity interests in our
Wisconsin Dells and Sandusky resorts to a third party. Following the sale of the 70% interests in
these two resorts, we no longer consolidated those resorts operations in our operating results,
but instead accounted for them under the equity method, through equity in unconsolidated
affiliates. As a result, total revenue, rooms revenue and other revenue for the nine month periods
ended September 30, 2006 and September 30, 2005 are not directly comparable.
Presented below are selected amounts from the statements of operations for the nine months
ended September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
September 30, |
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
2006 |
|
2005 |
|
(Decrease) |
Revenues |
|
$ |
114,442 |
|
|
$ |
112,040 |
|
|
$ |
2,402 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Departmental operating expenses |
|
|
35,913 |
|
|
|
32,126 |
|
|
|
3,787 |
|
Selling, general and administrative |
|
|
31,983 |
|
|
|
19,738 |
|
|
|
12,245 |
|
Property operating costs |
|
|
14,888 |
|
|
|
16,799 |
|
|
|
(1,911 |
) |
Depreciation and amortization |
|
|
18,697 |
|
|
|
19,520 |
|
|
|
(823 |
) |
Cost of sales of condominiums |
|
|
|
|
|
|
16,780 |
|
|
|
(16,780 |
) |
Loss on sale of assets |
|
|
953 |
|
|
|
|
|
|
|
953 |
|
Net operating income |
|
|
2,877 |
|
|
|
7,077 |
|
|
|
(4,200 |
) |
Net interest expense |
|
|
3,084 |
|
|
|
3,777 |
|
|
|
(693 |
) |
Income tax expense (benefit) |
|
|
(83 |
) |
|
|
1,330 |
|
|
|
(1,413 |
) |
Net income (loss) |
|
|
(257 |
) |
|
|
1,972 |
|
|
|
(2,229 |
) |
25
Revenues. Total revenues increased primarily due to revenues related to the Williamsburg and
Pocono Mountains resorts, which opened in March 2005 and October 2005, respectively; and management
and other fees and other revenues from managed properties related to our joint venture with CNL
Income Properties, Inc. (CNL). These increases were partially offset by there being no revenue
related to sales of condominiums during the nine months ended September 30, 2006, as there was for
the nine months ended September 30, 2005, and by the reduction in resort revenue due to the sale of
70% of our equity interests in our Wisconsin Dells and Sandusky resorts in October 2005.
|
|
|
Total revenues for the Williamsburg and Pocono Mountains resorts were $59,955 for the
nine months ended September 30, 2006 as compared to $13,049 for the nine months ended
September 30, 2005. |
|
|
|
|
Total management and other fees related to the CNL joint venture were $2,250 for the
nine months ended September 30, 2006. |
|
|
|
|
Other revenue from managed properties was $9,131 for the nine months ended September
30, 2006. We had no similar revenue for the nine months ended September 30, 2005. |
|
|
|
|
Revenue from sales of condominiums at our Wisconsin Dells resort was $25,862 for the
nine months ended September 30, 2005. We had no similar revenue during the nine months
ended September 30, 2006. |
|
|
|
|
Total revenues for the Wisconsin Dells and Sandusky resorts were $29,607 for the nine
months ended September 30, 2005. |
Operating expenses. Total operating expenses increased primarily due to the increase in
operating expenses in Williamsburg and Pocono Mountains resorts, which opened in March 2005 and
October 2005, respectively; and other expense from managed properties related to the CNL joint
venture. These increases were partially offset by there being no cost of sales of condominiums
during the nine months ended September 30, 2006, as there was for the nine months ended September
30, 2005 and by the reduction in resort expenses due to the sale of our Wisconsin Dells and
Sandusky resorts in October 2005.
|
|
|
Total departmental operating expenses for the Williamsburg and Pocono Mountains resorts
were $21,154 for the nine months ended September 30, 2006 as compared to $5,563 for the nine
months ended September 30, 2005. Total departmental expenses for the Wisconsin Dells and
Sandusky resorts were $10,892 for the nine months ended September 30, 2005. |
|
|
|
|
Total selling, general and administrative expenses for the Williamsburg and Pocono
Mountains resorts were $12,782 for the nine months ended September 30, 2006 as compared to
$2,644 for the nine months ended September 30, 2005. Total selling, general and
administrative expenses for the Wisconsin Dells and Sandusky resorts were $6,620 for the
nine months ended September 30, 2005. During the nine months ended September 30, 2006 our
corporate selling, general and administrative expenses included increases over that of the
nine months ended September 30, 2005 related to share based compensation of $3,945,
compensation-related expenses of $1,646 due to increased staffing at our corporate office
and $1,811 related to professional fees. |
|
|
|
|
Total property operating costs (exclusive of opening costs) for the Williamsburg and
Pocono Mountains resorts were $5,405 for the nine months ended September 30, 2006. Total
property operating costs (exclusive of opening |
26
|
|
|
costs) for the resorts in Wisconsin Dells and Sandusky were $4,144 for the nine months ended
September 30, 2005. Opening costs related primarily to our Pocono Mountains, Mason Family,
Grapevine and Grand Mound resorts and the resort in Niagara Falls were $3,021 for the nine
months ended September 30, 2006, as compared to $6,282 for the nine months ended September 30,
2005 related to our resorts in Williamsburg and the Pocono Mountains and the condominiums in
Wisconsin Dells. |
|
|
|
|
Total depreciation and amortization for the Williamsburg and Pocono Mountains resorts was
$9,791 for the nine months ended September 30, 2006 as compared to $5,390 for the nine
months ended September 30, 2005. Total depreciation and amortization for the Wisconsin Dells
and Sandusky resorts was $5,772 for the nine months ended September 30, 2005. During the
nine months ended September 30, 2005 we also had amortization expense of $2,116 related to
loan fee write offs. There were no similar write offs during the nine months ended
September 30, 2006. |
|
|
|
|
Cost of sales of condominiums of $16,780 relates to the condominiums sold at our
Wisconsin Dells resort during the nine months ended September 30, 2005. We did not incur a
similar charge during the nine months ended September 30, 2006. |
|
|
|
|
Loss on sale of real estate of $953 during the nine months ended September 30, 2006
relates to finalization of the accounting for the sale of 70% of our equity interests in the
Wisconsin Dells and Sandusky resorts in October 2005. No similar loss was recognized during
the nine months ended September 30, 2005. |
Net operating income. Net operating income for the nine months ended September 30, 2006
decreased $4,200 to $2,877 from $7,077 for the nine months ended September 30, 2005.
Net loss. We had a net loss for the nine months ended September 30, 2006 as compared to net
income for the nine months ended September 30, 2005 due to the following:
|
|
|
A decrease in operating income from $7,077 for the nine months ended September 30, 2005
to $2,877 for the nine months ended September 30, 2006. |
This decrease was partially offset by:
|
|
|
A decrease in net interest expense of $693 mainly due to higher interest income during
the nine months ended September 30, 2006 as compared to the nine months ended September 30,
2005. |
|
|
|
|
A reduction of $1,413 in income tax expense recorded in the nine months ended September
30, 2006 as compared to the nine months ended September 30, 2005. |
Segments
We are organized into a single operating division. Within that operating division, we have
three reportable segments in 2006: resort ownership/operation, resorts third-party management and
condominium sales. The resort ownership/operation segment derives its revenues from the
ownership/operation of our consolidated owned resorts; the resort third-party management segment
derives its revenue from management, license and other related fees from unconsolidated managed
resorts; and the condominium sales segment derives its revenues from sales of condominium units to
third-party owners. We evaluate the performance of each segment based on earnings before interest,
income taxes, and depreciation and amortization (EBITDA), excluding minority interests and equity
in earnings of unconsolidated affiliates.
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
Nine months ended September 30, |
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
|
|
|
|
|
Increase |
|
|
2006 |
|
2005 |
|
(Decrease) |
|
2006 |
|
2005 |
|
(Decrease) |
Resort Ownership/Operation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
35,891 |
|
|
$ |
33,150 |
|
|
$ |
2,741 |
|
|
$ |
101,432 |
|
|
$ |
86,178 |
|
|
$ |
15,254 |
|
EBITDA, excluding
certain items |
|
|
9,865 |
|
|
|
18,032 |
|
|
|
(8,167 |
) |
|
|
26,473 |
|
|
|
26,131 |
|
|
|
342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resort Third-Party Mgmt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
4,888 |
|
|
|
|
|
|
|
4,888 |
|
|
|
13,010 |
|
|
|
|
|
|
|
13,010 |
|
EBITDA, excluding
certain items |
|
|
1,741 |
|
|
|
|
|
|
|
1,741 |
|
|
|
3,879 |
|
|
|
|
|
|
|
3,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condominium Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
25,862 |
|
|
|
(25,862 |
) |
|
|
|
|
|
|
25,862 |
|
|
|
(25,862 |
) |
EBITDA, excluding
certain items |
|
|
(120 |
) |
|
|
9,082 |
|
|
|
(9,202 |
) |
|
|
(268 |
) |
|
|
9,082 |
|
|
|
(9,350 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA, excluding
certain items |
|
|
(1,269 |
) |
|
|
(7,744 |
) |
|
|
6,475 |
|
|
|
(8,510 |
) |
|
|
(8,616 |
) |
|
|
106 |
|
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 $204,906 and $168,328 as of September 30, 2006 and December 31,
2005, respectively as summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Long-Term Debt: |
|
|
|
|
|
|
|
|
Traverse City/Kansas City mortgage loan |
|
$ |
73,106 |
|
|
$ |
73,979 |
|
Sheboygan mortgage loan |
|
|
28,541 |
|
|
|
28,939 |
|
Mason construction loan |
|
|
37,937 |
|
|
|
|
|
Other mortgage debt |
|
|
1,523 |
|
|
|
1,552 |
|
Junior subordinated debentures |
|
|
51,550 |
|
|
|
51,550 |
|
Other Debt: |
|
|
|
|
|
|
|
|
City of Sheboygan bonds |
|
|
8,346 |
|
|
|
8,288 |
|
City of Sheboygan loan |
|
|
3,903 |
|
|
|
4,020 |
|
|
|
|
|
|
|
|
|
|
|
204,906 |
|
|
|
168,328 |
|
Less current portion of long-term debt |
|
|
(2,000 |
) |
|
|
(1,928 |
) |
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
202,906 |
|
|
$ |
166,400 |
|
|
|
|
|
|
|
|
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, representing the
combined EBITDA (adjusted for non-recurring items, unusual items, infrequent items and asset
impairment charges) of the two resorts divided by their combined annual interest expense and
principal amortization. The loan also has customary prohibitions on our ability to prepay the loan
prior to maturity. We were in compliance with all covenants under this loan at September 30, 2006.
Sheboygan Mortgage Loan This loan is secured by our Sheboygan resort. The loan matures in
January 2008, bears interest at a floating rate of prime plus 200 basis points (total rate of
10.25% as of September 30, 2006), and is subject to a 20-year principal amortization schedule. The
loan has customary covenants associated with a single asset mortgage. There
28
are no prohibitions or fees associated with the prepayment of the loan principal. We were in
compliance with the mortgage loan covenants at September 30, 2006.
Mason Construction Loan In December 2005 we closed on a $76,800 loan to construct the Great
Wolf Lodge in Mason, Ohio. The loan is secured by a first mortgage on the Mason, Ohio property and
matures in December 2008. The loan also has two one-year extensions after the initial 3-year term
available at our option. The lenders have a construction and debt service guaranty from us. In
conjunction with the debt service guaranty, we must maintain a maximum ratio of long-term debt to
consolidated trailing twelve month adjusted EBITDA of 6.50x and a minimum tangible net worth of
$200,000 or greater. The construction guaranty expires at the opening date of the resort and the
debt service guaranty expires once the resort achieves a trailing cash flow threshold. 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 September 30, 2006). The loan is interest only during the initial three-year term and
then is subject to a 25-year amortization schedule in the extension years. The loan has customary
covenants associated with an individual mortgaged property. There are no prohibitions or fees
associated with the repayment of the loan principal. We were in compliance with the loan covenants
at September 30, 2006.
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 (the Trust), 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 the Trusts common securities, representing 3% of the
total capitalization of the Trust.
The Trust 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 trust preferred offering totaled $1,600, including $1,500 of
underwriting commissions and expenses and $100 of costs incurred directly by the Trust. The Trust
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 trust preferred offering and
our investment in the Trust, were $48,400. We used the net proceeds to retire the Pocono Mountains
construction loan.
As a result of the issuance of a revision to FASB Interpretation No. 46R, Consolidation of
Variable Interest Entities and the accounting professions application of the guidance provided by
the FASB, issue trusts, like the Trust, are generally variable interest entities. We have
determined that we are not the primary beneficiary under the Trust, and accordingly we do not
include the financial statements of the Trust in our consolidated financial statements.
Based on the foregoing accounting authority, our consolidated financial statements present the
debentures issued to the Trust as long-term debt. Our investment in the Trust is accounted as a
cost investment and is 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 bond anticipation notes 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 2005 in conjunction with the construction of the Blue Harbor Resort in Sheboygan, Wisconsin. The
loan is noninterest bearing and
29
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 |
|
|
|
September 30, |
|
2007 |
|
$ |
2,000 |
|
2008 |
|
|
29,445 |
|
2009 |
|
|
39,559 |
|
2010 |
|
|
1,742 |
|
2011 |
|
|
1,872 |
|
Thereafter |
|
|
130,288 |
|
|
|
|
|
Total |
|
$ |
204,906 |
|
|
|
|
|
Short-Term Liquidity Requirements
Our short-term liquidity requirements consist primarily of funds necessary to pay operating
expenses, 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 requirements for working capital, capital expenditures and
debt service for the next twelve months.
Long-Term Liquidity Requirements
Our long-term liquidity requirements consist primarily of funds necessary to pay for:
|
|
|
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
(such as the sale of newly-constructed condominiums at our existing resorts or sale of majority
ownership interest in certain resorts), 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.
30
Our largest long-term expenditures are expected to be for capital expenditures for development
of future resorts. Our capital expenditures for resorts currently operating and under development
were $77,196 for the nine months ended September 30, 2006. We expect to have approximately $43,000
of such expenditures in the remainder of 2006 and $123,000 in 2007. 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.
Off Balance Sheet Arrangements
We have a joint venture in which we are a limited partner with a 30% ownership interest. We
account for this unconsolidated joint venture using the equity method of accounting. At September
30, 2006, 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. This joint
venture owns two resorts, Great Wolf Lodge-Wisconsin Dells, Wisconsin and Great Wolf
Lodge-Sandusky, Ohio. As capital may be required to fund the activities of these resorts, we may
be required to fund in the future the joint ventures share of the costs not funded by the majority
owner of the joint venture, the joint ventures operations or outside financing. Based on the
nature of the activities conducted in the joint venture, 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 this joint venture will have an adverse
effect on our financial condition, however, as we do not expect to make significant future capital
contributions to this joint venture.
Contractual Obligations
The following table summarizes our contractual obligations as of September 30, 2006:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Terms |
|
|
|
|
|
|
|
Less |
|
|
|
|
|
|
|
|
|
|
More |
|
|
|
|
|
|
|
Than |
|
|
1-3 |
|
|
3-5 |
|
|
Than |
|
|
|
Total |
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
5 Years |
|
Debt Obligations(1) |
|
$ |
204,906 |
|
|
$ |
2,000 |
|
|
$ |
69,004 |
|
|
$ |
3,614 |
|
|
$ |
130,288 |
|
Operating Lease Obligations |
|
|
1,274 |
|
|
|
426 |
|
|
|
818 |
|
|
|
30 |
|
|
|
|
|
Construction Contracts |
|
|
65,995 |
|
|
|
52,950 |
|
|
|
13,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
272,175 |
|
|
$ |
55,376 |
|
|
$ |
82,867 |
|
|
$ |
3,644 |
|
|
$ |
130,288 |
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|
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|
(1) |
|
Includes $8,346 of fixed rate debt recognized as a liability related to certain bonds issued
by the City of Sheboygan and $3,903 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 $48,960 of available cash and cash equivalents and working capital of $21,646 (current
assets less current liabilities) at September 30, 2006, compared to the $54,782 of available cash
and cash equivalents and $33,433 of working capital at December 31, 2005.
Cash Flows
31
Nine months ended September 30, 2006 compared with the nine months ended September 30, 2005
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|
|
Increase |
|
|
2006 |
|
2005 |
|
(Decrease) |
Net cash provided by operating activities |
|
$ |
16,070 |
|
|
$ |
8,799 |
|
|
$ |
7,271 |
|
Net cash used in investing activities |
|
|
(57,310 |
) |
|
|
(95,963 |
) |
|
|
38,653 |
|
Net cash provided by financing activities |
|
|
35,418 |
|
|
|
24,402 |
|
|
|
11,016 |
|
Operating Activities. The increase in net cash provided by operating activities resulted
primarily from the difference in our non-cash employee compensation expense of $2,392 for the nine
months ended September 30, 2006, as compared to non-cash employee compensation revenue of $1,553
for the nine months ended September 30, 2005, and in the change in accounts receivable and other
assets.
Investing Activities. The decrease in net cash used in investing activities for the nine
months ended September 30, 2006, as compared to the nine months ended September 30, 2005, resulted
primarily from a cash distribution of approximately $18,600 from the CNL joint venture representing
our share of proceeds from a mortgage loan placed on the joint venture resorts and a decrease in
capital expenditures.
Financing Activities. The increase in net cash provided by financing activities resulted
primarily from an increase in loan proceeds net of principal payments in the nine months ended
September 30, 2006 versus the nine months ended September 30, 2005.
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
upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes
in market prices and interest rates. In the future, 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 and anticipate entering into derivative contracts only with
major financial institutions with investment grade credit ratings.
Our earnings are also affected by the changes in our 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. As of September 30, 2006, we had total indebtedness of
approximately $204,906. This debt consisted of:
|
|
|
$73,106 of fixed rate debt secured by two of our resorts. This debt bears interest at
6.96%. |
|
|
|
|
$28,541 of variable rate debt secured by one of our resorts. This debt bears interest at
a floating rate equal to prime plus 200 basis points. The total rate was 10.25% at September
30, 2006. |
|
|
|
|
$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. |
|
|
|
|
$37,937 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 September 30, 2006. |
32
|
|
|
$8,346 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 $3,903 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 |
|
|
|
|
$1,523 of other fixed rate debt. |
As of September 30, 2006, we estimate the total fair value of the indebtedness described above
to be $14,568 less than their total carrying values, due to the terms of the existing debt being
different than those terms we believe would currently be available to us for indebtedness with
similar risks and remaining maturities.
If 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 $667 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 $667 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 third
quarter of 2006. In making this evaluation, we considered matters discussed below relating to
internal control over financial reporting. After consideration of the matters discussed below, we
have concluded that our disclosure controls and procedures were not effective as of September 30,
2006, because of the material weakness related to controls around the determination and reporting
of the provision for income taxes, as described below. As reported in our Annual Report on Form
10-K for the fiscal year ended December 31, 2005, we identified a material weakness in our internal
control over financial reporting related to the collection of sufficient and reliable data
necessary to determine the deferred tax accounts and income tax provision in circumstances where we
have entered into significant non-routine business transactions. As of September 30, 2006, we have
not fully remediated this material weakness. As we may be unable to confirm fully whether we have
remediated this material weakness until preparation of our 2006 annual tax provision, we anticipate
that this material weakness may continue to exist through the end of 2006 or later.
Remediation of Material Weaknesses
As discussed in Item 9A of our Form 10-K for the year ended December 31, 2005, there was a
material weakness in our internal control over financial reporting related to the collection of
sufficient and reliable data necessary to determine the deferred tax accounts and income tax
provision in circumstances where we have entered into significant non-routine business
transactions. Through the date of this filing, we have taken steps to improve our internal
controls
33
around our tax accounting and tax accounts reconciliation processes, procedures and controls,
including reconciling all current and deferred tax asset and liability accounts quarterly and
planning to reconcile the associated temporary differences to underlying support at least annually.
We believe we have taken appropriate steps necessary to begin to remediate this material weakness
relating to our tax accounting and tax reconciliation processes, procedures and controls. Certain
of the corrective processes, procedures and controls, however, relate to annual controls that
cannot be tested until the preparation of our 2006 annual tax provision. Accordingly, we will
continue to monitor the effectiveness of these processes, procedures and controls and will make any
further changes we deem appropriate.
Changes In Internal Control
During the period covered by this quarterly report on Form 10-Q, other than as noted above in
this item 4, 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.
34
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 the Company 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, 2005, which could materially affect our business, financial condition or
future results. The risks described in our Annual Report on Form 10-K are not the only risks
facing us. Additional risks and uncertainties not currently known to us or that we currently deem
to be immaterial also may materially adversely affect our business, financial condition and/or
operating results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
The exhibits listed below are incorporated herein by reference to prior SEC filings by the
Registrant or are included as exhibits in
this 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) |
35
|
|
|
Exhibit |
|
|
Number |
|
Description |
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 9-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) |
|
|
|
10.1
|
|
Loan Agreement, dated July 28, 2006, between Great Wolf Lodge of
Grapevine, LLC, as borrower and Merrill Lynch Capital and HSH Nordbank, as
lender (incorporate by reference to Exhibit 99.1 to the Companys Current
Report on Form 9-K filed July 31, 2006) |
|
|
|
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 |
36
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
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|
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|
|
|
|
GREAT WOLF RESORTS, INC.
|
|
|
|
|
/s/ James A. Calder |
|
|
|
|
|
|
|
|
|
James A. Calder |
|
|
|
|
Chief Financial Officer |
|
|
|
|
(Duly authorized officer) |
|
|
|
|
(Principal Financial and Accounting Officer) |
|
|
Dated: November 6, 2006
37