##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the Quarterly period ended September 30, 2005
 OR
 o
    
    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)
 
 Delaware(State or other jurisdiction of
incorporation or organization)
    
    51-0510250(I.R.S. Employer
Identification No.)
 122 West Washington Avenue
Madison, Wisconsin 53703(Address of principal executive offices)
    
    53703(Zip Code)
 Registrants telephone number, including area code
608 661-4700
 o þ
 o þ
 o þ




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Great Wolf Resorts, Inc.
 Quarterly Report on Form 10-Q
For the Quarter Ended September 30, 2005
 INDEX
 PageNo.PART I. FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited)Condensed Consolidated Balance Sheets for Great Wolf Resorts, Inc. and subsidiaries as of September 30, 2005 and December 31, 2004 (as restated)
    
    
    4Condensed Consolidated Statements of Operations for Great Wolf Resorts, Inc. and
Subsidiaries for the three months ended and nine months ended September 30, 2005,
and the Combined Statements of Operations for Great Lakes Predecessor for the three
months ended and the nine months ended September 30, 2004
    
    
    5Condensed Consolidated Statement of Cash Flows for Great Wolf Resorts, Inc. and
Subsidiaries for the nine months ended September 30, 2005, and the Combined
Statement of Cash Flows for Great Lakes Predecessor for the nine months ended
September 30, 2004
    
    
    6Notes to Condensed Consolidated and Combined Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    30Item 4. Controls and Procedures
    
    
    31PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    33Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    33Item 3. Defaults Upon Senior Securities
    
    
    33Item 4. Submission of Matters to a Vote of Security Holders
    
    
    33Item 5. Other Information
    
    
    33Item 6. Exhibits
    
    
    33CertificationCertificationCertificationCertification
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EXPLANATORY NOTE
     3




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 GREAT WOLF RESORTS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 September 30,
    
    
    December 31,2005
    
    
    2004(as restated,see Note 9)(Dollars in thousands, except pershare amounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    16,647
    
    
    $
    79,409Accounts receivable, net of allowance for doubtful accounts of $85 and $183
    
    
    1,298
    
    
    
    881Inventory
    
    
    2,591
    
    
    
    1,848Condominiums
under development
    
    
    
    
    
    
    2,412Other current assets
    
    
    6,719
    
    
    
    5,929Total current assets
    
    
    27,255
    
    
    
    90,479Property and equipment, net
    
    
    452,989
    
    
    
    347,374Other assets
    
    
    11,520
    
    
    
    9,862Other intangible assets
    
    
    19,114
    
    
    
    19,114Goodwill
    
    
    138,769
    
    
    
    155,196Total assets
    
    $
    649,647
    
    
    $
    622,025LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt
    
    $
    1,587
    
    
    $
    27,794Accounts payable
    
    
    16,856
    
    
    
    31,506Accrued expenses
    
    
    7,917
    
    
    
    10,075Advance deposits
    
    
    3,768
    
    
    
    3,129Other current liabilities
    
    
    1,522
    
    
    
    2,138Total current liabilities
    
    
    31,650
    
    
    
    74,642Long-term debt
    
    
    154,865
    
    
    
    102,813Other long-term debt
    
    
    12,293
    
    
    
    12,058Other long-term liabilities
    
    
    391
    
    
    
    391Deferred tax liability
    
    
    52,097
    
    
    
    40,909Deferred compensation liability
    
    
    1,460
    
    
    
    2,891Total liabilities
    
    
    252,756
    
    
    
    233,704Minority Interest
    
    
    6,597
    
    
    
    Commitments and contingenciesStockholders Equity:Common stock, $0.01 par value, 250,000,000 shares authorized,
30,262,308 shares issued and outstanding
    
    
    303
    
    
    
    303Additional paid in capital
    
    
    394,060
    
    
    
    394,060Preferred stock, $0.01 par value, 10,000,000 shares authorized, no
shares issued or outstanding
    
    
    
    
    
    
    Accumulated deficit
    
    
    (1,869
    )
    
    
    (3,842
    )Shares of common stock held in deferred compensation plan
    
    
    (2,200
    )
    
    
    (2,200
    )Total stockholders equity
    
    
    390,294
    
    
    
    388,321Total liabilities and stockholders equity
    
    $
    649,647
    
    
    $
    622,025
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GREAT WOLF RESORTS, INC. AND SUBSIDIARIES AND
GREAT LAKES PREDECESSOR
 
 CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
 Great Wolf
    
    
    
    
    
    
    Great WolfResorts, Inc.
    
    
    Predecessor
    
    
    Resorts, Inc.
    
    
    PredecessorThree months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Unaudited, dollars in thousands, except per share data)Revenues:Rooms
    
    $
    22,459
    
    
    $
    11,209
    
    
    $
    57,559
    
    
    $
    25,893Food and beverage
    
    
    5,268
    
    
    
    2,793
    
    
    
    14,487
    
    
    
    6,517Other resort operations
    
    
    5,423
    
    
    
    2,845
    
    
    
    14,132
    
    
    
    6,307Management fees  related parties
    
    
    
    
    
    
    499
    
    
    
    
    
    
    
    1,208Development and other fees  related parties
    
    
    
    
    
    
    781
    
    
    
    
    
    
    
    1,289Sales of condominiums
    
    
    25,862
    
    
    
    
    
    
    
    25,862
    
    
    
    59,012
    
    
    
    18,127
    
    
    
    112,040
    
    
    
    41,214Other revenue from managed properties
    
    
    
    
    
    
    4,031
    
    
    
    
    
    
    
    11,040Total revenues
    
    
    59,012
    
    
    
    22,158
    
    
    
    112,040
    
    
    
    52,254Operating expenses by department:Rooms
    
    
    2,884
    
    
    
    1,588
    
    
    
    8,478
    
    
    
    3,848Food and beverage
    
    
    4,454
    
    
    
    2,426
    
    
    
    12,444
    
    
    
    5,613Other
    
    
    3,958
    
    
    
    2,009
    
    
    
    11,204
    
    
    
    4,815Other operating expenses:Selling, general and administrative
    
    
    5,173
    
    
    
    7,969
    
    
    
    19,738
    
    
    
    14,589Property operating costs
    
    
    6,393
    
    
    
    1,672
    
    
    
    16,799
    
    
    
    5,810Depreciation and amortization
    
    
    6,286
    
    
    
    3,501
    
    
    
    19,520
    
    
    
    9,415Cost of sales of condominiums
    
    
    16,780
    
    
    
    
    
    
    
    16,780
    
    
    
    45,928
    
    
    
    19,165
    
    
    
    104,963
    
    
    
    44,090Other expenses from managed properties
    
    
    
    
    
    
    4,031
    
    
    
    
    
    
    
    11,040Total operating expenses
    
    
    45,928
    
    
    
    23,196
    
    
    
    104,963
    
    
    
    55,130Net operating income (loss)
    
    
    13,084
    
    
    
    (1,038
    )
    
    
    7,077
    
    
    
    (2,876
    )Interest income
    
    
    (319
    )
    
    
    (41
    )
    
    
    (967
    )
    
    
    (202
    )Interest expense
    
    
    1,720
    
    
    
    1,725
    
    
    
    4,744
    
    
    
    4,537Gain on sale of real estate
    
    
    
    
    
    
    (581
    )
    
    
    
    
    
    
    (1,653
    )Interest income on mandatorily redeemable shares
    
    
    
    
    
    
    (1,091
    )
    
    
    
    
    
    
    1,075Distributions in excess of minority interest capital
    
    
    
    
    
    
    48
    
    
    
    
    
    
    
    48Income (loss) before income taxes and minority interests
    
    
    11,683
    
    
    
    (1,098
    )
    
    
    3,300
    
    
    
    (6,681
    )Income tax expense
    
    
    4,675
    
    
    
    
    
    
    
    1,331
    
    
    
    Minority interests
    
    
    (3
    )
    
    
    71
    
    
    
    (3
    )
    
    
    53Income (loss) from continuing operations
    
    
    7,011
    
    
    
    (1,169
    )
    
    
    1,972
    
    
    
    (6,734
    )Income from discontinued operations
    
    
    
    
    
    
    938
    
    
    
    
    
    
    
    1,773Net income (loss)
    
    $
    7,011
    
    
    $
    (231
    )
    
    $
    1,972
    
    
    $
    (4,961
    )Net income per share-basic
    
    $
    0.23
    
    
    
    
    
    
    $
    0.07Net income per share-diluted
    
    $
    0.23
    
    
    
    
    
    
    $
    0.07Weighted average common shares outstanding:Basic
    
    
    30,132,896
    
    
    
    
    
    
    
    30,132,896Diluted
    
    
    30,132,936
    
    
    
    
    
    
    
    30,234,887
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GREAT WOLF RESORTS, INC. AND SUBSIDIARIES AND
GREAT LAKES PREDECESSOR
 
 CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
 Great WolfResorts, Inc.
    
    
    PredecessorNine months endedSeptember 30,2005
    
    
    2004(Unaudited, dollars in thousands)Operating activities:Net income (loss)
    
    $
    1,972
    
    
    $
    (4,961
    )Adjustments to reconcile net income (loss) to net cash used in operating activities:Depreciation and amortization
    
    
    19,520
    
    
    
    10,088Non-cash employee compensation expense
    
    
    (1,553
    )
    
    
    Gain on sale of assets
    
    
    
    
    
    
    (6,980
    )Minority interests
    
    
    (3
    )
    
    
    2,680Deferred tax expense
    
    
    1,331
    
    
    
    Changes in operating assets and liabilities:Prepaid expenses and other assets
    
    
    (2,727
    )
    
    
    (6,221
    )Accounts payable, accrued expenses and other liabilities
    
    
    (9,741
    )
    
    
    4,970Net cash used in operating activities
    
    
    8,799
    
    
    
    (424
    )Investing activities:Capital expenditures for property and equipment
    
    
    (95,692
    )
    
    
    (81,706
    )Proceeds from sale of assets
    
    
    
    
    
    
    32,173Increase in equity escrow
    
    
    
    
    
    
    9,205Increase in restricted cash
    
    
    (1,295
    )
    
    
    Decrease (increase) in escrows
    
    
    1,024
    
    
    
    (784
    )Net cash used in investing activities
    
    
    (95,963
    )
    
    
    (41,112
    )Financing activities:Principal payments on long-term debt
    
    
    (49,597
    )
    
    
    (19,070
    )Proceeds from issuance of long-term debt
    
    
    75,677
    
    
    
    49,513Payment of loan costs
    
    
    (1,678
    )
    
    
    (2,395
    )Member contributions
    
    
    
    
    
    
    25,618Member distributions
    
    
    
    
    
    
    (11,236
    )Changes in mandatorily redeemable ownership interests
    
    
    
    
    
    
    1,075Net distributions to minority investors
    
    
    
    
    
    
    (3,058
    )Net cash provided by financing activities
    
    
    24,402
    
    
    
    40,447Net decrease in cash and cash equivalents
    
    
    (62,762
    )
    
    
    (1,089
    )Cash and cash equivalents, beginning of period
    
    
    79,409
    
    
    
    3,490Cash and cash equivalents, end of period
    
    $
    16,647
    
    
    $
    2,401Supplemental Cash Flow InformationCash paid for interest, net of capitalized interest
    
    $
    3,595
    
    
    $
    4,729Land contributed for minority interest
    
    $
    6,660
    
    
    $
    
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GREAT WOLF RESORTS, INC. AND SUBSIDIARIES AND
GREAT LAKES PREDECESSOR
 
 NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
 1. ORGANIZATION
  Formation
   
    
    The Predecessor contributed its hotel management and multifamily housing management and
development assets, which were unrelated to the resort business, to two subsidiaries of the
Predecessor and then distributed the interests in those subsidiaries to the former
shareholders of The Great Lakes Companies, Inc. (GLC) (one of the Predecessors entities).
    
    We acquired GLC and seven resort-owning entities. Pursuant to these acquisitions,
investors of GLC and the resort-owning entities received cash, unregistered shares of our
common stock or a combination of cash and unregistered shares of our common stock. We issued
13,901,947 shares of our common stock and paid approximately $97,600 in cash in connection
with these acquisitions.
    
    We issued an aggregate of 130,949 shares of unregistered common stock to holders of
tenant in common interests in two of our resorts.
   Business Summary
   7




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IndoorOwnership
    
    
    
    
    
    
    Guest
    
    
    Condo
    
    
    EntertainmentPercentage
    
    
    Opening
    
    
    Suites
    
    
    Units
    
    
    Area(1)(Approx. ft2)Existing Resorts:Wisconsin Dells, WI (2)
    
    
    100
    %
    
    
    1997
    
    
    
    309
    
    
    
    77
    
    
    
    64,000
    (3)Sandusky, OH (2)
    
    
    100
    %
    
    
    2001
    
    
    
    271
    
    
    
    
    
    
    
    41,000Traverse City, MI
    
    
    100
    %
    
    
    2003
    
    
    
    281
    
    
    
    64
    
    
    
    51,000Kansas City, KS
    
    
    100
    %
    
    
    2003
    
    
    
    281
    
    
    
    
    
    
    
    49,000Sheboygan, WI
    
    
    100
    %
    
    
    2004
    
    
    
    183
    
    
    
    
    
    
    
    54,000Williamsburg, VA
    
    
    100
    %
    
    
    2005
    
    
    
    301
    (4)
    
    
    
    
    
    
    66,000Resorts Announced or Under Construction:Pocono Mountains, PA
    
    
    100
    %
    
    October 2005
    
    
    400
    
    
    
    
    
    
    
    91,000Niagara Falls, ONT
    
    
    
    
    
    Spring 2006
    
    
    406
    
    
    
    
    
    
    
    94,000Mason, OH (5)
    
    
    84
    %
    
    Late 2006
    
    
    401
    
    
    
    
    
    
    
    92,000Chehalis, WA(6)
    
    
    49
    %
    
    Mid 2007
    
    
    317
    
    
    
    
    
    
    
    65,000Grapevine, TX(7)
    
    
    100
    %
    
    Fall 2007
    
    
    400
    
    
    
    
    
    
    
    80,000
 
 (1)
    
    Our indoor entertainment areas generally include our indoor waterpark, game arcade,
childrens activity room and fitness room, as well as our Aveda concept spa, 3D virtual
reality theatre, Wileys Woods and party room in the resorts that have such amenities.(2)
    
    See Note 8 regarding the joint venture transaction involving these properties.(3)
    
    Our Wisconsin Dells property has started a 35,000 square foot waterpark expansion.
Construction on the expansion began in June 2005 with expected completion in Spring 2006.(4)
    
    Our Williamsburg property will be adding an additional 100 guest suites. Construction for the
expansion is expected to start in Fall 2005 with expected completion in Fall 2006.(5)
    
    We have entered into a joint venture with Paramount Parks, Inc., a unit of Viacom Inc., to
build this resort. We will operate the resort under our Great Wolf Lodge brand and will
maintain a majority of the equity position in the project. Paramount will have a minority
equity interest in the development by contributing the land needed for the resort.
Construction on the resort began in July 2005 with expected completion in late 2006.(6)
    
    We have entered into a joint venture with The Confederated Tribes of the Chehalis
Reservation. We will operate the resort under our Great Wolf Lodge brand. The Confederated
Tribes of the Chehalis Reservation will contribute the land needed for the resort, and they
will have a majority equity interest in the joint venture. Construction on the resort is
expected to begin in Fall 2005 with expected completion in 2007.(7)
    
    We announced on September 13, 2005 plans to develop a Great Wolf Lodge resort in Grapevine,
Texas. The northwoods themed, six-story, approximately 400-suite resort will provide a
comprehensive package of first-class destination lodging amenities and activities.
Construction on the approximately 400,000 square-foot building is scheduled to begin spring
2006 with a grand opening slated for in 2007. 8




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##### Table of Contents





2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


General




Principles of Consolidation


Income Taxes


Stock Based Compensation


Three months
    
    
    Nine months endedended
    
    
    September 30,September 30, 2005
    
    
    2005Net income, as reported
    
    $
    7,011
    
    
    $
    1,972Compensation expense, SFAS 123 fair value method
    
    
    (382
    )
    
    
    (1,069
    )Pro forma net income
    
    $
    6,629
    
    
    $
    903Pro forma net income per share  Basic
    
    $
    0.22
    
    
    $
    0.03Pro forma net income per share  Diluted
    
    $
    0.22
    
    
    $
    0.03




Dividend yield
    
    
    Weighted-average, risk free interest rate
    
    
    3.65
    %Weighted-average, expected life of option
    
    
    6.5 yearsExpected stock price volatility
    
    
    40
    %


Segments




Resort Ownership/
    
    
    
    
    
    
    
    
    
    
    Totals perOperation/
    
    
    Condominium
    
    
    
    
    
    
    FinancialManagement
    
    
    Sales
    
    
    Other
    
    
    StatementsThree months ended
September 30, 2005:Revenues
    
    $
    33,150
    
    
    $
    25,862
    
    
    $
    
    
    
    $
    59,012EBITDA
    
    
    11,332
    
    
    
    9,082
    
    
    
    (1,041
    )
    
    $
    19,373Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,286
    )Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,401
    )Income before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    11,686Additions to long-lived assets
    
    
    39,630
    
    
    
    
    
    
    
    
    
    
    $
    39,630Nine months ended
September 30, 2005:Revenues
    
    
    86,178
    
    
    
    25,862
    
    
    
    
    
    
    $
    112,040EBITDA
    
    
    23,295
    
    
    
    9,082
    
    
    
    (5,777
    )
    
    $
    26,600Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,520
    )Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,777
    )Income before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    3,303Additions to long-lived assets
    
    
    95,692
    
    
    
    
    
    
    
    
    
    
    $
    95,692Total assets
    
    
    625,756
    
    
    
    
    
    
    
    23,891
    
    
    $
    649,647




9



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##### Table of Contents



Recent Accounting Pronouncements
 Minority Interest 
 Other Intangible Assets 
 3. PURCHASE ACCOUNTING IN CONNECTION WITH THE IPO
   
    
    Recorded property and equipment, other assets, debt,
intangible assets and other liabilities at their
preliminarily estimated fair values;
    
    Recorded a deferred tax liability resulting from the difference between the preliminarily
estimated fair values and the tax bases of assets acquired from the five resort-owning
entities. We recorded this liability at our anticipated effective tax rate of 40%;
    
    Eliminated mandatorily redeemable interests of the Predecessor due to the conversion of
those ownership interests to our common stock in conjunction with the Formation
Transactions; and
    
    Recorded as goodwill the excess of consideration in the purchase transaction over the
fair value of net tangible and identifiable intangible assets acquired from the five resort-owning entities.
  Value of Great Wolf Resorts common stock issued
    
    $
    80,840Cash paid
    
    
    73,042Total cost of acquisition
    
    
    153,882Fair value of debt assumed
    
    
    181,415Fair value of property and equipment acquired
    
    
    (189,427
    )Fair value of
intangible assets
    
    
    (10,296
    )Deferred tax liability recorded
    
    
    11,297Fair value of other assets and liabilities
    
    
    8,325Goodwill
    
    $
    155,196
  10




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##### Table of Contents




    
    During the three months ended March 31, 2005, we recorded adjustments to the estimated
fair market values of property and equipment acquired, resulting in an increase to property
and equipment of $30,700, an increase to accrued expenses of $301, an increase in deferred
tax liability of $12,059, and a decrease in goodwill of $18,340.
    
    During the three months ended June 30, 2005, we recorded adjustments to the estimated
fair market values of property and equipment acquired, resulting in a decrease to property
and equipment of $3,012, an increase to accrued expenses of $69, a decrease in deferred tax
liability of $1,205, and an increase in goodwill of $1,876.
    
    During the three months ended September 30, 2005, we recorded adjustments that increased
accrued expenses of $37 and an increase in goodwill of $37.
   
    
    Recorded all identifiable tangible and intangible assets at their estimated fair values
as of December 20, 2004;
    
    Allocated the excess consideration paid over the estimated fair value of the net assets
acquired to all identifiable tangible and intangible assets pro rata based on their
estimated fair values;
    
    Recorded a deferred tax liability resulting from the difference between the total
estimated fair values (including the excess amount described in the previous item) and the
tax bases of the assets acquired from the two resort-owning entities. We recorded this
liability at our anticipated effective tax rate of 40%.
 4. PROPERTY AND EQUIPMENT
  September 30, 2005
    
    
    December 31, 2004(as restated,see Note 9)Land
    
    $
    33,529
    
    
    $
    12,064Building and improvements
    
    
    136,403
    
    
    
    89,294Furniture, fixtures and equipment
    
    
    140,595
    
    
    
    82,470Construction in process
    
    
    159,928
    
    
    
    164,160470,455
    
    
    
    347,988Less accumulated depreciation
    
    
    (17,466
    )
    
    
    (614
    )Property and equipment, net
    
    $
    452,989
    
    
    $
    347,374
  5. LONG-TERM DEBT AND OTHER LONG-TERM DEBT
  September 30,
    
    
    December 31,2005
    
    
    2004Long-Term Debt:Senior credit facility
    
    $
    
    
    
    $
    Traverse City/Kansas City Mortgage Loan
    
    
    74,264
    
    
    
    75,000Sheboygan Mortgage Loan
    
    
    29,083
    
    
    
    29,475Junior Subordinated Debentures
    
    
    51,550
    
    
    
    Other debt
    
    
    1,555
    
    
    
    1,523Williamsburg Construction Loan
    
    
    
    
    
    
    19,011
 11




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##### Table of Contents



September 30,
    
    
    December 31,2005
    
    
    2004Poconos Construction Loan
    
    
    
    
    
    
    5,598Other Long-Term Debt:City of Sheboygan bonds
    
    
    8,252
    
    
    
    8,063City of Sheboygan loan
    
    
    4,041
    
    
    
    3,995168,745
    
    
    
    142,665Less current portion of long-term debt
    
    
    (1,587
    )
    
    
    (27,794
    )$
    167,158
    
    
    $
    114,871
 Senior Credit Facility
 Traverse City/Kansas City Mortgage Loan
 Sheboygan Mortgage Loan
 Junior Subordinated Debentures
    Williamsburg Construction Loan
 Poconos Construction Loan
 12




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##### Table of Contents



City of Sheboygan Bonds
 City of Sheboygan Loan
  Future Maturities
 ThroughSeptember 30,2006
    
    $
    1,5872007
    
    
    1,7232008
    
    
    29,9842009
    
    
    1,6242010
    
    
    1,736Thereafter
    
    
    132,091Total
    
    $
    168,745
 6. EARNINGS PER SHARE
   13




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##### Table of Contents



Three months
    
    
    Nine monthsended
    
    
    endedSeptember 30, 2005
    
    
    September 30, 2005Net income attributable to common shares
    
    $
    7,011
    
    
    $
    1,972Weighted average common shares outstanding  basic
    
    
    30,132,896
    
    
    
    30,132,896Weighted average common shares outstanding  diluted
    
    
    30,132,936
    
    
    
    30,234,887Net income per share  basic
    
    $
    0.23
    
    
    $
    0.07Net income per share  diluted
    
    $
    0.23
    
    
    $
    0.07
  7. DISCONTINUED OPERATIONS
    Three monthsended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2004
    
    
    2004Revenues
    
    $
    966
    
    
    $
    4,430Expenses
    
    
    (2,289
    )
    
    
    (5,357
    )Gain on sale
    
    
    4,779
    
    
    
    5,327Minority interest
    
    
    (2,518
    )
    
    
    (2,627
    )Income from discontinued operations
    
    $
    938
    
    
    $
    1,773
 8. SUBSEQUENT EVENTS
   9. RESTATEMENT
  
    
    The acquisition of each of our Williamsburg and Pocono Mountains resorts in
conjunction with the Formation Transactions in December 2004 did not constitute an
acquisition of a business, as that term is defined in
Emerging Issues Task Force
(EITF) Issue No. 98-3, Determining Whether a Non-Monetary
Transaction Involves Receipt of Productive Assets of a Business, and that we
should have recorded each of those acquisitions as a purchase of assets, rather than a
purchase of a business. As a result, the amounts previously recorded as goodwill in
connection with the Williamsburg and Poconos resorts have now been recorded as increases
to identifiable intangible assets, and property and equipment.
    
    The provisions of EITF Issue No. 01-4, Accounting
for Preexisting Relationships between the Parties to a Business
Combination, were applicable to us as of the date of the
Formation Transactions in December 2004, and that some portion of the amounts previously
recorded as goodwill in connection with the five operating resorts purchased at that
time should have been recorded as increases to identifiable intangible assets.
 14




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##### Table of Contents



AsPreviouslyDecember 31, 2004:
    
    Reported
    
    
    As RestatedCash and
cash equivalents
    
    $
    81,417
    
    
    $
    79,409Condominiums
under development
    
    
    
    
    
    
    2,412Other
current assets
    
    
    3,921
    
    
    
    5,929Property and equipment, net
    
    
    275,758
    
    
    
    347,374Other Intangible Asset
    
    
    
    
    
    
    19,114Goodwill
    
    
    218,727
    
    
    
    155,196Deferred tax liability
    
    
    11,298
    
    
    
    40,909
 
 ITEM 2. MANAGEMENTS 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
  Formation.
  
    
    The Predecessor contributed its hotel management and multifamily housing management and
development assets, which were unrelated to the resort business, to two subsidiaries of the
Predecessor and then distributed the interests in those subsidiaries to the former
shareholders of The Great Lakes Companies, Inc. (GLC) (one of the Predecessors entities).
    
    We acquired GLC and seven resort-owning entities. Pursuant to these acquisitions,
investors of GLC and the resort-owning entities received cash, unregistered shares of our
common stock or a combination of cash and unregistered shares of our common stock. We issued
13,901,947 shares of our common stock and paid approximately $97,600 in cash in connection
with these acquisitions.
    
    We issued an aggregate of 130,949 shares of unregistered common stock to holders of
tenant in common interests in two of our resorts.
   15




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##### Table of Contents



Business.
   IndoorOwnership
    
    
    
    
    
    
    Guest
    
    
    
    
    
    
    EntertainmentPercentage
    
    
    Opening
    
    
    Suites
    
    
    Condo Units
    
    
    Area(1)(Approx. ft(2)Existing Resorts:Wisconsin Dells, WI (2)
    
    
    100
    %
    
    
    1997
    
    
    
    309
    
    
    
    77
    
    
    
    64,000
    (3)Sandusky, OH (2)
    
    
    100
    %
    
    
    2001
    
    
    
    271
    
    
    
    
    
    
    
    41,000Traverse City, MI
    
    
    100
    %
    
    
    2003
    
    
    
    281
    
    
    
    64
    
    
    
    51,000Kansas City, KS
    
    
    100
    %
    
    
    2003
    
    
    
    281
    
    
    
    
    
    
    
    49,000Sheboygan, WI
    
    
    100
    %
    
    
    2004
    
    
    
    183
    
    
    
    
    
    
    
    54,000Williamsburg, VA
    
    
    100
    %
    
    
    2005
    
    
    
    301
    (4)
    
    
    
    
    
    
    66,000Resorts Announced or Under Construction:Pocono Mountains, PA
    
    
    100
    %
    
    October 2005
    
    
    400
    
    
    
    
    
    
    
    91,000Niagara Falls, ONT
    
    
    
    
    
    Spring 2006
    
    
    406
    
    
    
    
    
    
    
    94,000Mason, OH (5)
    
    
    84
    %
    
    Late 2006
    
    
    401
    
    
    
    
    
    
    
    92,000Chehalis, WA(6)
    
    
    49
    %
    
    Mid 2007
    
    
    317
    
    
    
    
    
    
    
    65,000Grapevine, TX(7)
    
    
    100
    %
    
    Fall 2007
    
    
    400
    
    
    
    
    
    
    
    80,000
 
 (1)
    
    Our indoor entertainment areas generally include our indoor waterpark, game arcade,
childrens activity room and fitness room, as well as our Aveda concept spa, 3D virtual
reality theatre, Wileys Woods and party room in the resorts that have such amenities.(2)
    
    See Note 8 regarding the joint venture transaction involving these properties.(3)
    
    Our Wisconsin Dells property has started a 35,000 square foot waterpark expansion.
Construction on the expansion began in June 2005 with expected completion in Spring 2006.(4)
    
    Our Williamsburg property will be adding an additional 100 guest suites. Construction for the
expansion is expected to start in Fall 2005 with expected completion in Fall 2006.(5)
    
    We have entered into a joint venture with Paramount Parks, Inc., a unit of Viacom Inc. to
build this resort. We will operate the resort under our Great Wolf Lodge brand and will
maintain a majority of the equity position in the project. Paramount will have a minority
equity interest in the development by contributing the land needed for the resort.
Construction on the resort began in July 2005 with expected completion in late 2006.(6)
    
    We have entered into a joint venture with The Confederated Tribes of the Chehalis
Reservation. We will operate the resort under our Great Wolf Lodge brand. The Confederated
Tribes of the Chehalis Reservation will contribute the land needed for the resort, 16




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##### Table of Contents



and they will have a majority equity interest in the joint venture. Construction on the resort is
expected to begin in Fall 2005 with expected completion in 2007.(7)
    
    We announced on September 13, 2005 plans to develop a Great Wolf Lodge resort in Grapevine,
Texas. The northwoods themed, six-story, approximately 400-suite resort will provide a
comprehensive package of first-class destination lodging amenities and activities.
Construction on the approximately 400,000 square-foot building is scheduled to begin spring
2006 with a grand opening slated for in 2007. Industry Trends
 Outlook.
     
    
    A slower-than-expected summer vacation season in the Midwest. In
particular, our Sandusky and Traverse City resorts are highly impacted
by consumer spending in the Ohio and Michigan regions. We believe that
adverse general economic circumstances in those regions (such as
bankruptcies of several major companies and/or large announced layoffs
by major employers) have negatively impacted overall discretionary
consumer spending in those regions.
    
    Competitive pressures at some of our resorts, most notably our
Sandusky property. The Sandusky market has been impacted by an
increase in the number of competitive rooms of indoor waterpark
resorts. During the second quarter of 2004, our 271-room resort was
the only indoor waterpark resort in that market, but at September 30,
2005, indoor waterpark resorts have more than 800 rooms in this
market. Although our long-term view of the Sandusky market is positive
based on our experience with competition in the Wisconsin Dells
market, we believe the absorption of the new supply of indoor
waterpark rooms in the Sandusky market will occur over time with a
gradual increase in overall demand.
 17




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##### Table of Contents




    
    A slower-than-expected occupancy ramp-up at our Sheboygan, Wisconsin
property. This resort opened in June 2004, but the overall development
of Sheboygan as a tourist destination continues to lag behind our
initial expectations. This has impacted the consumer demand for our
indoor waterpark resort in that market.
    
    A shortening of the booking window for customers making reservations
at our resorts. This change from prior years decreases our ability to
project demand trends and patterns at our resorts, thereby lessening
our capacity to selectively increase room rates during periods of peak
demand.
 18




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##### Table of Contents




    
    We have implemented revised, targeted marketing programs, including
new programs specifically focused on increasing consumer awareness of
our resorts for the December holiday season, at each of our resorts
for the remainder of 2005 to address the softness in demand we
witnessed at our locations in the second and third quarters.
    
    We have reforecast revenues for all of our resorts for the remainder
of 2005, based on current market conditions and trends. Our revised
revenue projections for the remainder of 2005 remain significantly
lower than our initial 2005 projections. We have also reviewed all of
our resorts operating budgets for the remainder of 2005 and have
taken steps to reduce or eliminate certain operating costs in order to
more closely align our cost structure with our revised revenue
expectations.
    
    We have increased our corporate operations staffing in order to better
understand and respond to current demand, customer booking and
operating trends. We have implemented internal monitoring and
reporting processes that provide enhanced information on demand, in
order to maximize our ability to best price room rates in an
environment with shorter customer booking windows.
    
    We have entered into a joint venture in October 2005 with CNL Income
Properties. The joint venture acquired our Wisconsin Dells and
Sandusky resorts. Under the joint venture, CNL has purchased a 70
percent equity interest in the joint venture, with us retaining the
remaining 30 percent. We have received approximately $80,000 in
proceeds from CNL for their purchase of the 70 percent joint venture
interest, and we expect to receive a distribution of approximately
$18,000 from the joint venture upon the placement of mortgage
financing on the joint ventures two resorts in the fourth quarter. We
will continue to operate the properties and license the Great Wolf
Lodge brand to the joint venture under 25-year agreements. We believe
this transaction provides significant benefits by:
 
    
    Monetizing a majority interest in our two most mature assets and providing approximately
$98 million in capital we can recycle and use for future development of resorts.
    
    Reducing our exposure to the potential volatility of ongoing operating results in two
markets by decreasing our ownership interests in the two resorts from 100 percent to 30
percent.
    
    Creating more predictable, long-term income streams through the new management and
licensing contracts on these two resorts.
 Revenue and Key Performance Indicators.
 
    
    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.
 19




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##### Table of Contents




    
    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 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 is calculated by dividing total revenue by rooms available
    
    Total Rev POR is calculated by dividing total revenue by occupied rooms
    Recent Accounting Pronouncements
  20




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##### Table of Contents



Non-GAAP Financial Measures
    
    
    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
    
    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.
  
    
    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.
    Great Wolf
    
    
    
    
    
    
    Great WolfResorts
    
    
    Predecessor
    
    
    Resorts
    
    
    PredecessorThree months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income (loss)
    
    $
    7,011
    
    
    $
    (231
    )
    
    $
    1,972
    
    
    $
    (4,961
    )Adjustments:Interest expense, net
    
    
    1,401
    
    
    
    1,895
    
    
    
    3,777
    
    
    
    5,130Income tax expense
    
    
    4,675
    
    
    
    
    
    
    
    1,331
    
    
    
    Depreciation and amortization
    
    
    6,286
    
    
    
    3,519
    
    
    
    19,520
    
    
    
    10,088EBITDA
    
    $
    19,373
    
    
    $
    5,183
    
    
    $
    26,600
    
    
    $
    10,257
 21




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##### Table of Contents



Results of Operations
 General
  Great Wolf Resorts Financial Information
  
    
    our corporate entity that provides resort development and management services;
    
    our Wisconsin Dells, Sandusky, Traverse City, Kansas City, Sheboygan, and Williamsburg operating resorts; and
    
    our resorts that are under construction.
 Revenues.
 Operating Expenses.
  
    
    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; and
    
    depreciation and amortization.
 Great Lakes Predecessor Financial Information
  
    
    GLC and its consolidated subsidiaries, including development of, ownership interests in,
and management contracts with respect to, resorts and certain non-resort hotels and
multifamily housing development and management assets;
    
    the entities that owned our Traverse City, Kansas City and Sheboygan operating resorts; and
    
    the entities that owned our Williamsburg and Pocono Mountains resorts that were under construction.
   Revenues.
 
    
    lodging revenue, which consists of rooms, food and beverage and other department revenues
from its consolidated and combined hotels and resorts;
 22




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##### Table of Contents




    
    management fee revenue from both resort activity and non-resort activity, which includes
fees received under its management agreements; and
    
    other revenue, which consists of accounting fees, development fees, central Reservation
fees, construction management fees and other fees.
  Operating Expenses.
  
    
    selling, general and administrative expenses, which were associated with the management
of hotels and 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;
    
    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, 2005, for Great Wolf Resorts compared with the three months ended
September 30, 2004, for the Predecessor
  All Properties (a)
    
    
    Same Store Comparison (b)Three months ended
    
    
    Three months ended
    
    
    Three months ended
    
    
    Increase (Decrease)September 30, 2005
    
    
    September 30, 2005
    
    
    September 30, 2004
    
    
    $
    
    
    %Occupancy
    
    
    67.3
    %
    
    
    67.0
    %
    
    
    74.3
    %
    
    
    N/A
    
    
    
    (9.8
    )%ADR
    
    $
    223.19
    
    
    $
    217.88
    
    
    $
    224.56
    
    
    $
    (6.68
    )
    
    
    (3.0
    )%RevPAR
    
    $
    150.13
    
    
    $
    145.89
    
    
    $
    166.76
    
    
    $
    (20.87
    )
    
    
    (12.5
    )%Total RevPOR
    
    $
    327.60
    
    
    $
    318.80
    
    
    $
    321.94
    
    
    $
    (3.14
    )
    
    
    (1.0
    )%Total RevPAR
    
    $
    220.37
    
    
    $
    213.46
    
    
    $
    239.07
    
    
    $
    (25.61
    )
    
    
    (10.7
    )%
 
 (a)
    
    Includes results for properties that were open for any portion of the period.(b)
    
    Same store comparison includes properties that were open for the full periods in 2004 and
2005 (that is, our Wisconsin Dells, Sandusky, Traverse City, Kansas City, and Sheboygan
resorts).  23




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##### Table of Contents



Three months endedSeptember 30,Great Wolf Resorts
    
    
    Predecessor2005
    
    
    2004
    
    
    Increase (Decrease)Revenues
    
    $
    59,012
    
    
    $
    22,158
    
    
    $
    36,854Departmental operating expenses
    
    
    11,296
    
    
    
    6,023
    
    
    
    5,273Selling, general and administrative
    
    
    5,173
    
    
    
    7,969
    
    
    
    (2,796
    )Property operating costs
    
    
    6,393
    
    
    
    1,672
    
    
    
    4,721Depreciation and amortization
    
    
    6,286
    
    
    
    3,501
    
    
    
    2,785Cost of sales of condominiums
    
    
    16,780
    
    
    
    
    
    
    
    16,780Net operating income (loss)
    
    
    13,084
    
    
    
    (1,038
    )
    
    
    14,122Gain on sale of real estate
    
    
    
    
    
    
    (581
    )
    
    
    (581
    )Net interest expense
    
    
    1,401
    
    
    
    1,684
    
    
    
    (283
    )Interest expense on mandatorily redeemable shares
    
    
    
    
    
    
    (1,091
    )
    
    
    1,091Income tax expense
    
    
    4,675
    
    
    
    
    
    
    
    4,675Income from discontinued operations
    
    
    
    
    
    
    938
    
    
    
    (938
    )Net income (loss)
    
    
    7,011
    
    
    
    (231
    )
    
    
    7,242
 Revenues.
 Operating expenses.
 
    
    Total departmental expenses for the resorts in Wisconsin Dells, Sandusky and Williamsburg
were $6,311 for the three months ended September 30, 2005.
    
    Total selling, general and administrative expenses for the resorts in Wisconsin Dells,
Sandusky and Williamsburg were $3,216 for the three months ended September 30, 2005.
Selling, general and administrative expenses in the three months ended September 30, 2004,
included $3,120 of IPO related charges and a $1,147 write off of development related
expenses. Similar charges were not incurred during the three months ended September 30,
2005. Also, selling, general and administrative expenses in the period ending September 30,
2005, included a reduction of a previously-recognized employee
compensation expense of $1,307. A similar reduction was not recorded during the three months ended September 30, 2004.
    
    Total property operating costs for the resorts in Wisconsin Dells, Sandusky and
Williamsburg were $2,968 for the three months ended September 30, 2005. Property operating
costs also included pre-opening costs related to our Poconos resort of $1,094 for the three
months ended September 30, 2005, as compared to $73 for the three months ended September 30,
2004. Also, property tax/insurance expense and utility expense for our resort in Kansas City
increased by $262 and $126 during the three months ended September 30, 2005, as compared to
the three months ended September 30, 2004.
    
    Total depreciation and amortization for the resorts in Wisconsin Dells, Sandusky and
Williamsburg was $3,310 for the three months ended September 30, 2005. The net increase in
depreciation and amortization also includes the effect of a change made in the first quarter
of 2005 to the estimate of useful lives used to depreciate our property and equipment, which
resulted in a decrease in depreciation for our resorts in Traverse City, Kansas City and
Sheboygan in the three months ended September 30, 2005, as compared to September 30, 2004.
    
    Cost of sales of condominiums of $16,780 relates to the condominiums at our Wisconsin
Dells Resort. A similar type charge was not incurred during the three months ended September
30, 2004.
 24




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##### Table of Contents



Net income (loss).
 
    
    Increase in net operating income in the three months ended September 30, 2005.
  
    
    Income tax expense in the three months ended September 30, 2005 with no income taxes in
the three months ended September 30, 2004, reflecting our structure after the IPO as a C
Corporation that pays income taxes, as opposed to the Predecessors pass-through entities
with no income tax obligations in the three months ended September 30, 2004.
    
    Interest on mandatorily redeemable shares incurred in the three months ended September
30, 2004 was not incurred in the three months ended September 30, 2005 due to the conversion
of the mandatorily redeemable interests to common stock in conjunction with the Formation
Transactions.
    
    Income from discontinued operations in the three months ended September 30, 2004 was not
incurred in the three months ended September 30, 2005.
 Nine months ended September 30, 2005, for Great Wolf Resorts compared with the nine months ended
September 30, 2004, for the Predecessor
  All Properties (a)
    
    
    Same Store Comparison (b)Nine months ended
    
    
    Nine months ended
    
    
    Nine months ended
    
    
    Increase (Decrease)September 30, 2005
    
    
    September 30, 2005
    
    
    September 30, 2004
    
    
    $
    
    
    %Occupancy
    
    
    65.0
    %
    
    
    65.5
    %
    
    
    69.9
    %
    
    
    N/A
    
    
    
    (6.3
    )%ADR
    
    $
    210.58
    
    
    $
    206.12
    
    
    $
    212.85
    
    
    $
    (6.73
    )
    
    
    (3.2
    )%RevPAR
    
    $
    136.81
    
    
    $
    135.01
    
    
    $
    148.85
    
    
    $
    (13.84
    )
    
    
    (9.3
    )%Total RevPOR
    
    $
    313.85
    
    
    $
    306.99
    
    
    $
    307.00
    
    
    $
    (0.01
    )
    
    
    (0.0
    )%Total RevPAR
    
    $
    203.90
    
    
    $
    201.08
    
    
    $
    214.69
    
    
    $
    (13.61
    )
    
    
    (6.3
    )%
 
 (a)
    
    Includes results for properties that were open for any portion of the period.(b)
    
    Same store comparison includes properties that were open for the full periods in 2004 and
2005 (that is, our Wisconsin Dells, Sandusky, Traverse City and Kansas City resorts).   Nine months endedSeptember 30,Great Wolf Resorts
    
    
    Predecessor2005
    
    
    2004
    
    
    Increase (Decrease)Revenues
    
    $
    112,040
    
    
    $
    52,254
    
    
    $
    59,786Departmental operating expenses
    
    
    32,126
    
    
    
    14,276
    
    
    
    17,850Selling, general and administrative
    
    
    19,738
    
    
    
    14,589
    
    
    
    5,149Property operating costs
    
    
    16,799
    
    
    
    5,810
    
    
    
    10,989Depreciation and amortization
    
    
    19,520
    
    
    
    9,415
    
    
    
    10,105Cost of sales of condominiums
    
    
    16,780
    
    
    
    
    
    
    
    16,780Net operating income (loss)
    
    
    7,077
    
    
    
    (2,876
    )
    
    
    9,953Net interest expense
    
    
    3,777
    
    
    
    4,335
    
    
    
    (558
    )Gain on sale of investments
    
    
    
    
    
    
    (1,653
    )
    
    
    (1,653
    )
 25




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##### Table of Contents



Nine months endedSeptember 30,Great Wolf Resorts
    
    
    Predecessor2005
    
    
    2004
    
    
    Increase (Decrease)Interest on mandatorily redeemable shares
    
    
    
    
    
    
    1,075
    
    
    
    (1,075
    )Income tax expense
    
    
    1,331
    
    
    
    
    
    
    
    1,331Income from discontinued operations
    
    
    
    
    
    
    1,773
    
    
    
    (1,773
    )Net income (loss)
    
    
    1,972
    
    
    
    (4,961
    )
    
    
    6,933
 Revenues.
 Operating expenses.
 
    
    Total departmental expenses for the resorts in Wisconsin Dells, Sandusky, Sheboygan, and
Williamsburg were $21,038 for the nine months ended September 30, 2005. Departmental
expenses for the resort in Sheboygan were $2,673 for the nine months ended September 30,
2004.
    
    Total selling, general and administrative expenses for the resorts in Wisconsin Dells,
Sandusky, Sheboygan, and Williamsburg were $12,562 for the nine months ended September 30,
2005. Selling, general and administrative expenses for the resort in Sheboygan were $895 for
the nine months ended September 30, 2004. Selling, general and administrative expenses in
the nine months ended September 30, 2004, included $3,580 of IPO related charges and a
$1,147 write off of development related expenses. Similar charges were not incurred during
the nine months ended September 30, 2005. Also, selling, general and administrative expenses
in the period ending September 30, 2005, included a reduction of
a previously-recognized employee compensation
expense of $1,553. A similar reduction was not recorded during the nine months ended
September 30, 2004
    
    Total property operating costs for the resorts in Wisconsin Dells, Sandusky, Sheboygan,
and Williamsburg were $10,396 for the nine months ended September 30, 2005. Included in this
amount is $2,927 of pre-opening costs related to our Williamsburg resort. Property operating
costs and pre-opening costs for the resort in Sheboygan were $2,000 and $1,534,
respectively, for the nine months ended September 30, 2004. Property operating costs also
included pre-opening costs related to our Poconos resort of $1,372 for the nine months ended
September 30, 2005, as compared to $73 for the nine months ended September 30, 2004. Also,
property tax/insurance expense and utility expense for our resort in Kansas City increased
by $599 and $273 during the nine months ended September 30, 2005, as compared to the nine
months ended September 30, 2004.
    
    Total depreciation and amortization for the resorts in Wisconsin Dells, Sandusky,
Sheboygan, and Williamsburg was $12,282 for the nine months ended September 30, 2005.
Included in this amount are loan fees of $731 and $1,385 for Williamsburg and Poconos,
respectively, which were written off to amortization expense at the time the construction
loans were paid off during period. Depreciation and amortization for the resort in Sheboygan
was $1,322 for the nine months ended September 30, 2004. The net increase in depreciation
and amortization also includes the effect of a change made in the first quarter of 2005 to
the estimate of useful lives used to depreciate our property and equipment, which resulted
in a decrease in depreciation for our resorts in Traverse City, Kansas City, and Sheboygan
in the nine months ended September 30, 2005, as compared to September 30, 2004.
    
    Cost of sales of condominiums of $16,780 relates to the condominiums at our Wisconsin
Dells Resort. A similar type charge was not incurred during the nine months ended September
20, 2004.
 Net income (loss).
 
    
    Our decreased net operating loss in the nine months ended September 30, 2005.
 26




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##### Table of Contents




    
    Interest on mandatorily redeemable shares incurred in the nine months ended September 30,
2004 was not incurred in the nine months ended September 30, 2005 due to the conversion of
the mandatorily redeemable interests to common stock in conjunction with the Formation
Transactions.
  
    
    Income from discontinued operations in the nine months ended September 30, 2004 was not
recorded in the nine months ended September 30, 2005.
    
    Income tax expense in the nine months ended September 30, 2005 with no income tax expense
in the nine months ended September 30, 2004, reflecting our structure after the IPO as a C
Corporation that pays income taxes, as opposed to the Predecessors pass-through entities
with no income tax obligations in the nine months ended September 30, 2004.
 Liquidity and Capital Resources
  September 30,2005Long-Term Debt:Senior credit facility
    
    $
    Traverse City/Kansas City Mortgage Loan
    
    
    74,264Sheboygan Mortgage Loan
    
    
    29,083Junior Subordinated Debentures
    
    
    51,550Other debt
    
    
    1,555Other Long-Term Liabilities:City of Sheboygan bonds
    
    
    8,252City of Sheboygan loan
    
    
    4,041168,745Less current portion of long-term debt
    
    $
    1,587$
    167,158
 Senior Credit Facility
 Traverse City/Kansas City Mortgage Loan
 Sheboygan Mortgage Loan
 Junior Subordinated Debentures
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##### Table of Contents



City of Sheboygan Bonds
 City of Sheboygan Loan
  Short-Term Liquidity Requirements
  
    
    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
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##### Table of Contents




    
    income taxes.
  Long-Term Liquidity Requirements
   Contractual Obligations
  Payment TermsLess Than
    
    
    
    
    
    
    
    
    
    
    More ThanTotal
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 YearsDebt Obligations(1)
    
    $
    168,745
    
    
    $
    1,587
    
    
    $
    31,707
    
    
    $
    3,360
    
    
    $
    132,091Operating Lease Obligations
    
    
    1,698
    
    
    
    437
    
    
    
    816
    
    
    
    445
    
    
    
    Construction Contracts
    
    
    73,949
    
    
    
    73,949
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    244,392
    
    
    $
    75,973
    
    
    $
    32,523
    
    
    $
    3,805
    
    
    $
    132,091
 
 (1)
    
    Includes $8,252 of fixed rate debt recognized as a liability related to certain bonds issued
by the City of Sheboygan and $4,041 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.  Working Capital
  Cash Flows
 Nine months ended September 30, 2005, for Great Wolf Resorts compared with the nine months ended
September 30, 2004, for the Predecessor
 29




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##### Table of Contents



Increase2005
    
    
    2004
    
    
    (Decrease)Net cash
provided by (used in) operating activities
    
    $
    8,799
    
    
    $
    (424
    )
    
    $
    9,223Net cash used in investing activities
    
    
    (95,963
    )
    
    
    (41,112
    )
    
    
    (54,851
    )Net cash provided by financing activities
    
    
    24,402
    
    
    
    40,447
    
    
    
    (16,045
    )
 Operating
Activities.
 Investing Activities.
 Financing Activities.
 Inflation
  
 ITEM 3 . QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
    
    $74,264 of fixed rate debt secured by two of our resorts. This debt bears interest at
6.96%.
    
    $29,083 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 8.75% at September
30, 2005.
    
    $51,550 of debentures that bear interest at a fixed rate of 7.80% through March 2015 and
then at a floating rate of LIBOR + 310 basis points thereafter. The securities mature in
March 2035.
    
    $8,252 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 $4,041 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
    
    $1,555 of other fixed rate debt.
   30




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
   Material Weakness in Internal Control Over Financial Reporting
     Changes In Internal Control
  31




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##### Table of Contents



Remediation Measures for Identified Material Weakness
  1.
    
    We will require continuing education over the next 12 months for our accounting and
finance staff who are responsible for financial reporting to ensure compliance with current
and emerging financial reporting and compliance practices.2.
    
    We will utilize outside consultants, other than our Independent Registered Public
Accounting Firm, to assist us in our evaluation of complex accounting transactions and
related reporting, specifically in the area of purchase accounting, in cases where we believe such additional expertise is
appropriate.3.
    
    We will assess staff expertise in our accounting and finance areas and take any steps
necessary to staff our accounting and finance departments
appropriately.4.
    
    We and our Audit Committee, as necessary, will consider additional items, or will alter
the planned steps above, in order to remediate further the material weakness described
above.
 32




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##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
 10-Q.
 ExhibitNumber
    
    Description3.1
    
    
    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 Companys Registration Statement on Form
S-1 filed August 12, 2004)3.2
    
    
    Form of Amended and Restated Bylaws of Great Wolf Resorts, Inc. effective December 20, 2004
(incorporated herein by reference to Exhibit 3.2 to the Companys Registration Statement on Form S-1
filed August 12, 2004)4.1
    
    
    Form of the Common Stock Certificate of Great Wolf Resorts, Inc. (incorporated herein by reference to
Exhibit 4.1 to the Companys 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 JPMorgan
Chase Bank, National Association, as trustee (incorporated herein by reference to Exhibit 4.1 to the
Companys 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; JPMorgan Chase10.1
    
    
    Venture Formation and Contribution Agreement by and between CNL Income Partners, LP, Great Bear Lodge of
Wisconsin Dells, LLC, Great Bear Lodge of Sandusky, LLC and Great Wolf Resorts, Inc., dated October 3,
2005 (incorporated herein by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed
October 7, 2005)31.1*
    
    
    Certification of Chief Executive Officer of Periodic Report Pursuant to Rule 13a14(a) and Rule 15d14(a)
 33




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##### Table of Contents



ExhibitNumber
    
    Description31.2*
    
    Certification of Chief Financial Officer of Periodic Report Pursuant to Rule 13a14(a) and Rule 15d14(a)32.1*
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C Section 135032.2*
    
    Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
 
 *
    
    Filed herewith. 34




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##### Table of Contents



SIGNATURE
  GREAT WOLF RESORTS, INC.
/s/ James A. CalderJames A. Calder
Chief Financial Officer
(Duly authorized officer)
(Principal Financial and Accounting Officer)
  35