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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form 10-K
 
 
 
 
     
(Mark One)    
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal period ended December 31, 2006
OR
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to          
 
Commission File Number 000-51064
 
 
 
 
GREAT WOLF RESORTS, INC.
(Exact name of issuer as specified in its charter)
 
     
Delaware   51-0510250
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
122 West Washington Avenue
  53703
Madison, Wisconsin 53703
  (Zip Code)
(Address of principal executive offices)
   
 
Registrant’s telephone number, including area code
608 661-4700
 
Securities registered pursuant to Section 12(b) of the Act:
None
 
Securities registered pursuant to Section 12(g) of the Act:
 
     
Title Of Each Class
 
Name of Exchange on Which Registered
 
Common Stock, par value $0.01 per share
  NASDAQ National Market
 
Indicate by check mark if the registrant is a well — known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.  Yes o     No þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Annual Report on Form 10-K or any amendment to this Annual Report on Form 10-K.  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
 
As of June 30, 2006, the aggregate market value of the voting and non-voting stock held by non-affiliates of the Registrant was approximately $342,125,111 based on the closing price on the NASDAQ National Market for such shares.
 
The number of shares outstanding of the issuer’s common stock was 30,562,550 as of March 5, 2007.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the Proxy Statement for the 2007 Annual Meeting of Stockholders are incorporated by reference into Part III. A definitive Proxy Statement pursuant to Regulation 14A will be filed with the Commission no later than April 30, 2007.
 


 

 
Great Wolf Resorts, Inc.
 
Annual Report on Form 10-K
For the Year Ended December 31, 2006
 
INDEX
 
                 
        Page
        No.
 
  Business   2
  Risk Factors   20
  Unresolved Staff Comments   31
  Properties   31
  Legal Proceedings   31
  Submission of Matters to a Vote of Security Holders   32
 
  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   32
  Selected Financial Data   34
  Management’s Discussion and Analysis of Financial Condition and Results of Operations   36
  Quantitative and Qualitative Disclosures About Market Risk   55
  Financial Statements and Supplementary Data   56
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   84
  Controls and Procedures   84
  Other Information   87
 
  Directors and Executive Officers of the Registrant   87
  Executive Compensation   87
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   87
  Certain Relationships and Related Transactions   87
  Principal Accountant Fees and Services   87
 
PART IV
  Exhibits and Financial Statement Schedules   87
  88
 List of Subsidiaries
 Consent of Deloitte & Touche LLP
 Certification of Chief Executive Officer
 Certification of Chief Financial Officer
 Section 1350 Certification of Chief Executive Officer
 Section 1350 Certification of Chief Financial Officer


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PART I
 
ITEM 1.   BUSINESS
 
Overview and Development
 
The terms “Great Wolf Resorts,” “us,” “we” and “our” are used in this report to refer to Great Wolf Resorts, Inc. and its wholly-owned subsidiaries. All dollar amounts used in this Annual Report on Form 10-K are in thousands, except per share amounts and operating statistics.
 
We are a family entertainment resort company that provides our guests with a high-quality vacation at an affordable price. We are the largest owner, 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, 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.
 
We own and operate seven Great Wolf Lodge resorts (our signature northwoods-themed resorts), four of which we own 100%, one of which is owned by a joint venture in which we have an 84% interest, two of which are owned by a joint venture in which we have a 30% interest, and one Blue Harbor Resort (a nautical-themed property), of which we own 100%. We are also the licensor and manager of an additional Great Wolf Lodge resort in Niagara Falls, Ontario that is owned by an affiliate of Ripley Entertainment Inc., or Ripley’s. We anticipate that most of our future resorts will be developed under our Great Wolf Lodge brand, but we may develop additional nautical-themed or other resorts in appropriate markets.
 
We are a Delaware Corporation formed in May 2004 to succeed to the family entertainment resort business of our predecessor companies, The Great Lakes Companies, Inc. and a number of its related entities. We refer to these entities collectively as Great Lakes. Great Lakes developed and operated hotels between 1995 and December 2004. In 1999, Great Lakes began its resort operations by purchasing the Great Wolf Lodge in Wisconsin Dells, Wisconsin and developing the Great Wolf Lodge in Sandusky, Ohio, which opened in 2001. In 2003, Great Lakes opened two additional Great Wolf Lodge resorts, one in Traverse City, Michigan and the other in Kansas City, Kansas. In June 2004, Great Lakes opened the Blue Harbor Resort in Sheboygan, Wisconsin. Immediately prior to the closing of our initial public offering of common stock, which we refer to as the IPO, Great Lakes had two additional Great Wolf Lodge resorts under construction, one in Williamsburg, Virginia and the other in the Pocono Mountains region of Pennsylvania. Our Williamsburg resort opened in March 2005 and our Pocono Mountains resort opened in October 2005.
 
On December 20, 2004, in connection with the closing of the IPO, we acquired each of these resorts and the resorts then under construction, as well as certain resort development and management operations, in exchange for an aggregate of 14,032,896 shares of our common stock and $97,600, in a series of transactions we refer to in this Annual Report on Form 10-K as the formation transactions. We also realized net proceeds of $248,700 from the sale of 16,100,000 shares of our common stock in the IPO.
 
Financial information regarding our reportable segments during 2006 may be found in Note 2 of our Notes to Consolidated and Combined Financial Statements.


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Properties — Overview
 
The following table presents an overview of our portfolio of operating resorts and resorts under construction. As of December 31, 2006, we operate eight Great Wolf Lodge resorts (our signature northwoods-themed resorts), and one Blue Harbor Resort (a nautical-themed property).
 
                                     
                          Indoor
 
    Ownership
                    Entertainment
 
    Percentage     Opening   Guest Suites     Condo Units     Area(1)  
                          (Approx. ft2)  
 
Existing Resorts:
                                   
Wisconsin Dells, WI(2)
    30 %   1997     309       77       102,000  
Sandusky, OH(2)
    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     182       64       54,000  
Williamsburg, VA
    100 %   2005     301 (3)           78,000  
Pocono Mountains, PA
    100 %   2005     401             91,000  
Niagara Falls, ONT(4)
        April 2006     406             94,000  
Mason, OH(5)
    84 %   December 2006     401             93,000  
Resorts Under Construction:
                                   
Grapevine, TX(6)
    100 %   Late 2007     404             98,000  
Grand Mound, WA(7)
    49 %   Early 2008     398             78,000  
 
 
(1) Our indoor entertainment areas generally include our indoor waterpark, game arcade, children’s activity room and fitness room, as well as our Aveda spa in the resorts that have such amenities.
 
(2) In 2005, we formed a joint venture with CNL Income Properties, Inc. (CNL), a real estate investment trust focused on leisure and lifestyle properties. The joint venture acquired our Wisconsin Dells and Sandusky resorts. CNL owns a 70% interest in the joint venture, and we retained a 30% interest. CNL paid us approximately $80 million for its 70% ownership interest. We continue to operate the properties and license the Great Wolf Lodge brand to the joint venture under 25-year agreements, subject to earlier termination in certain situations.
 
(3) Construction for the expansion of 104 additional guest suites, conference center space and waterpark attractions began in May 2006. The additional waterpark attractions were completed in December 2006. We expect to complete the additional guest suites and conference center space in Spring 2007.
 
(4) An affiliate of Ripley Entertainment, Inc. (Ripley), our licensee, owns this resort. We have granted Ripley a license to use the Great Wolf Lodge name for this resort through April 2016. We manage the resort on behalf of Ripley and also provide central reservation services.
 
(5) We have entered into a joint venture agreement with a subsidiary of CBS Corporation (CBS), to build this resort and attached conference center. We 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. This resort opened in December 2006. The conference center is expected to be completed in March 2007.
 
(6) We are developing a Great Wolf Lodge resort in Grapevine, Texas. The northwoods themed, eight-story resort will provide a comprehensive package of first-class destination lodging amenities and activities. Construction on the resort began in June 2006 with expected completion in late 2007.
 
(7) We have entered into a joint venture agreement with The Confederated Tribes of the Chehalis Reservation 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.


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Northwoods Lodge Theme.  Each of our Great Wolf Lodge resorts has a northwoods lodge theme. Our three-story, approximately 5,000 to 7,800 square-foot atrium lobbies are designed in a northwoods cabin motif with exposed timber beams, massive stone fireplaces, mounted wolves and other northwoods creatures and an animated two-story clocktower that provides theatrical entertainment for our younger guests. Throughout the common areas and in each guest suite, we use sturdy, rustic furniture that complements the northwoods theme. We believe that this consistent theme throughout our resorts creates a comfortable and relaxing environment and provides a sense of adventure and exploration that the entire family can enjoy.
 
Guest Suites.  All of our guest suites are themed luxury suites, ranging in size from approximately 385 square feet to 1,970 square feet. Substantially all of the rooms in our resorts also include a private deck or patio, although a lower percentage of rooms in our Grapevine and Grand Mound resorts will include this type of amenity. Our resorts offer up to nine room styles to meet the needs and preferences of our guests, including a selection of rooms with lofts, jacuzzis and fireplaces. Our standard rooms include two queen beds and a third queen bed in the sleeper sofa, a wet bar, microwave oven, refrigerator and dining and sitting area, and can accommodate up to seven people. Our specialty rooms can accommodate up to seven people and provide a separate area for children, including our KidCabin® suites that feature a log cabin bunk bed room, our Wolf Den suites that feature a themed den enclosure with bunk beds and our KidKamp suites that feature bunk beds in a themed tent enclosure. We also offer larger rooms, such as our Majestic Bear suite, which has a separate bedroom with a king bed, a large dining and living area and can accommodate up to eight people. Our guest suites have wallpaper, artwork and linens that continue the northwoods theme and provide for full room service, pay-per-view movies and pay-per-play video games.
 
Indoor Waterparks.  Our existing Great Wolf Lodge indoor waterparks are maintained at a warm and comfortable temperature, range in size from approximately 34,000 to 78,000 square feet and have a northwoods theme, including, decorative rockwork and plantings, all of which is contained in a five-story or taller wooden beam structure. The focus of each Great Wolf Lodge waterpark is our signature 12-level treehouse waterfort. The fort is an interactive water experience for the entire family that features over 60 water effects, including spray guns, fountains, valves and hoses, has cargo netting and suspension bridges and is capped by an oversized bucket that dumps between 700 and 1,000 gallons of water every five minutes. Our Blue Harbor Resort has a 43,000 square-foot Breaker Bay waterpark including our 12-level Lighthouse Pier waterfort featuring a 1,000-gallon tipping ship.
 
Our waterparks also feature high-speed body slides and inner tube waterslides that wind in and out of the building into a splash-down pool, smaller slides for younger children, zero-depth water activity pools for young children with geysers, a water curtain, fountains and tumble buckets, a lazy river, additional activity pools for basketball, open swimming and other water activities and two large free-form hot tubs, one of which is for adults only. Each waterpark is constructed with a special nonslip floor surface for maximum traction and has ample deck space and good sight lines to enhance parental oversight. Our resorts under construction will have indoor waterparks ranging in size from approximately 56,000 to 76,000 square feet.
 
Approximately one million gallons of water are cycled through each of our waterparks every hour in order to ensure cleanliness. Our primary operating equipment includes standard water pumps, tanks and filters, located in separate spaces to allow for quick repairs or replacement. Computerized water and air treatment systems and highly trained technicians continuously monitor the water and air quality of our waterparks in order to ensure a clean and safe environment. We seek to minimize the use of chlorine. Most of the water purification is performed by an advanced ozone water treatment system, which ensures the highest water quality and an absence of the typical chlorine odor found in indoor pools. In addition, the water within each area circulates every hour to maximize hygiene. Each waterpark area has its own water system so that a problem with any one area can be quickly contained and does not affect the operations of the rest of the waterpark.
 
We expect recurring annual capital expenditures for each resort to be approximately 3-4% of the resort’s revenues, including the repair and maintenance of our waterpark equipment. As much of the equipment used in our waterparks is designed for outdoor application and capable of withstanding intense physical use and the elements year-round, wear and tear is minimal and we believe our equipment has a long useful life. In


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addition, our water purification system minimizes airborne chemicals and their potentially corrosive effects on materials and equipment and helps extend the life of our equipment.
 
The safety of our guests is a primary focus in our waterparks. Our lifeguards receive one of the highest levels of training and certification in the industry, provided by Jeff Ellis & Associates, Inc. (Ellis & Associates), an international aquatic safety consulting company. Ellis & Associates conducts quarterly unannounced safety inspections at each of our resorts to ensure that proper safety measures and procedures are maintained. All of our on duty lifeguards perform daily training exercises under the supervision of a certified instructor. We also encourage our lifeguards to obtain EMT certification, and we reimburse them for the costs of the training.
 
Our indoor waterparks are generally open from 8:30 a.m. until 10:00 p.m. seven days a week and admission is generally only available to resort guests. Our general guests-only policy, which is in effect at all of our resorts other than our Sheboygan resort, allows our guests to avoid the long lines and other inconveniences of daily admission-based waterparks.
 
Amenities.  Each of our existing resorts features, and each of our resorts under construction will feature, a combination of the following amenities. Some of the amenities described below have different names at certain of our Great Wolf Lodge resorts. Our Blue Harbor resort amenities have similar appropriate nautical-themed names.
 
  •  Themed Restaurants.  Our resorts feature one or more full-service, themed restaurants and a themed bar and grille that serves alcoholic beverages and sandwiches. Our themed restaurants include the Gitchigoomie Grill, with a life-sized sea plane suspended over the dining area, Lumber Jack’s Cook Shanty, the Loose Moose Bar & Grill, and the Camp Critter Bar & Grille, which features a two-story realistic tree with a canopy of leaves and canvas-topped booths with hanging lanterns, giving guests the impression that they are dining in a northwoods forest campsite. Our Blue Harbor Resort features our On the Rocks Bar & Grille and Rusty Anchor Buffet.
 
  •  Ice Cream Shop and Confectionery.  Each of our Great Wolf Lodge resorts, with the exception of our Sandusky resort, has a Bear Claw Café ice cream shop and confectionery that provides sandwiches, Starbucks® coffee, pastries, ice cream, candies, home-made fudge and other snacks that families can share together. Our Blue Harbor Resort has a Sweetshop Landing confectionery.
 
  •  Snack Bar.  Each of our waterparks has a snack bar that offers a variety of sandwiches, pizzas and similar foods with ample seating so that our guests do not have to leave the warmth and comfort of the waterparks.
 
  •  Gift Shop.  Each of our resorts has a Buckhorn Exchange or Precious Cargo gift shop that provides unique themed gifts, including Great Wolf Lodge logo merchandise, souvenirs, collectibles and stuffed animals. The gift shop also offers resort toys, swimwear and personal necessities.
 
  •  Full-Service Spa.  Each of our resorts, with the exception of our Sandusky resort, has an Aveda or Cameo spa that provides a relaxing get-a-way with a full complement of massages, facials, manicures, pedicures and other spa treatments, as well as yoga classes and a wide selection of Aveda products.
 
  •  Game Arcade.  Our Youkon Jack’s or Northern Lights game arcades range in size from approximately 3,900 to 7,000 square feet, have over 70 games of skill and are divided into distinct areas with video and skill games that appeal to children of different ages. Tickets won from the games may be exchanged for a wide selection of merchandise that appeals to our younger guests.
 
  •  Cub Club.  Our Cub Club rooms are professionally staffed children’s activity rooms with programmed activities, including arts and crafts, games and nature hikes. Cub Club is a frequent guest program for our younger guests. Cub Club membership is open to all children who have stayed at one of our resorts and includes a periodic newsletter, exclusive offers, rewards for each stay and a free meal and dessert when members visit during their birthday month. We currently have approximately 40,000 Cub Club members. Our Blue Harbor Resort features a Crew Club frequent guest program and activities that are similar to our Cub Club.


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  •  Animated Clocktower.  Each of our Great Wolf Lodge resorts has a two-story animated clocktower located in the resort’s main atrium lobby. The clocktower provides daily theatrical entertainment through talking and singing trees, animals and northwoods figures. Our Blue Harbor Resort features a 2,000-gallon water fountain featuring a hand-blown glass sculpture and a music and light show located in its main atrium lobby.
 
  •  Outdoor Water Amenities.  Outdoor water amenities complement our indoor waterpark facilities and allow our guests to take advantage of favorable weather conditions. Our outdoor water amenities include activity pools and a large deck or patio area and are generally open from May until September. Our Wisconsin Dells resort also has outdoor waterslides.
 
  •  Fitness Room.  Our fitness rooms contain aerobic exercise equipment and weight-lifting machines with numerous televisions for active viewing.
 
  •  Meeting Space.  Our resorts offer meeting rooms ranging from approximately 3,000 to over 7,000 square feet that are available for guest meetings, including a 99-seat, state-of-the-art, symposium-style room at our Traverse City, Niagara, Williamsburg, and Pocono Mountains resorts. Our resorts under development or construction will have meeting, or conference space ranging in size from approximately 9,000 to 40,000 square feet.
 
  •  Conference Facility.  Our Blue Harbor Resort features an approximately 21,000 square-foot attached conference facility that provides spaces ranging from approximately 1,000 square feet to 10,000 square feet for a number of different types of conferences and conventions. Our Mason resort will feature a state-of-the-art 40,000 square-foot conference center, which will include an expansive Grand Ballroom, flexible meeting spaces, an executive boardroom, audio visual systems, and multiple pre-function concourses including an outdoor patio.
 
  •  Wiley’s Woods.  Wiley’s Woods is an interactive indoor live video game in a four-story, approximately 16,000 square-foot structure located at our Wisconsin Dells resort. Children ages three and older wear electronic wrist bands and gain points by navigating slides, bridges, nets and mazes and performing a variety of tasks on over 60 machines and gadgets. Admission to Wiley’s Woods is free for all resort guests and is open to the public for a fee.
 
  •  MagiQuest.  Our Pocono Mountains and Williamsburg resorts feature a MagiQuest® attraction. MagiQuest is a high-tech, interactive fantasy entertainment game that guests can play throughout the resort. We are evaluating the desirability of adding this attraction to some of our other resorts.
 
  •  Minigolf.  Our Niagara and Kansas City resorts features a custom-designed, outdoor 18 hole miniature golf course. We are evaluating the desirability of adding this attraction to some of our other resorts.
 
Operating Properties
 
The resorts we currently operate are located in Wisconsin Dells, Wisconsin; Sandusky, Ohio; Traverse City, Michigan; Kansas City, Kansas; Williamsburg, Virginia; Pocono Mountains, Pennsylvania; Niagara Falls, Ontario; Mason, Ohio, and Sheboygan, Wisconsin.
 
Great Wolf Lodge of Wisconsin Dells, Wisconsin
 
Our Great Wolf Lodge, located on 16 acres in Wisconsin Dells, Wisconsin, was originally constructed in 1997 and acquired by Great Lakes in 1999. In October 2005, we sold this resort to our joint venture with CNL Income Properties, Inc. We have a 30% interest in that joint venture.
 
Wisconsin Dells is a renowned family vacation destination that features a number of entertainment options, including amusement parks, museums, live entertainment and other indoor waterparks. According to the 2007 Travel & Tourism Market Research Handbook, the Wisconsin Dells area attracts over 2.9 million visitors each year and in 2006 visitor expenditures were an estimated $840,000. Wisconsin Dells is within a one-hour drive from Madison, Wisconsin; a two-hour drive from Milwaukee, Wisconsin; and a three and one-


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half hour drive from Chicago, Illinois. According to Applied Geographic Solutions, Inc., there are approximately 16.4 million people who live within 180 miles of the resort.
 
Great Wolf Lodge of Wisconsin Dells has 309 guest suites, with an additional 77 individually owned, one to four bedroom condominium units located adjacent to the resort, on a six-acre land parcel, and an approximately 76,000 square-foot indoor waterpark that includes our signature treehouse waterfort. The resort offers a number of revenue-enhancing amenities, including a themed restaurant, Loose Moose Bar & Grill, Bear Claw Café ice cream shop and confectionery, Youkon Jack’s game arcade, Buckhorn Exchange gift shop, full-service Aveda spa, Wiley’s Woods, and meeting rooms. The resort also includes non revenue-generating amenities, such as an animated two-story clocktower, Cub Club room and Iron Horse fitness center.
 
We currently manage, on behalf of the CNL joint venture, the rental of all of the condominium units at this resort. The CNL joint venture receives a rental management fee of approximately 38% of gross revenue, after deduction of certain expenses. In addition, the CNL joint venture receives reimbursement of certain waterpark and other expenses from the condominium association.
 
Great Wolf Lodge of Sandusky, Ohio
 
In March 2001, we opened our Great Bear Lodge® in Sandusky, Ohio, which has the same theming as each of our Great Wolf Lodge resorts and was re-named the Great Wolf Lodge of Sandusky in May 2004. In October 2005, we sold this resort to our joint venture with CNL Income Properties, Inc. We have a 30% interest in that joint venture.
 
Sandusky is a family destination near Cleveland, Ohio that is well known for its amusement parks. According to the Sandusky/FIB Erie County Visitors and Convention Bureau, Sandusky attracts approximately eight million visitors each year. Sandusky is within a one-hour drive from Cleveland, Ohio; a two-hour drive from Detroit, Michigan; a two and one-half-hour drive from Columbus, Ohio; and a three-hour drive from Pittsburgh, Pennsylvania. According to Applied Geographic Solutions, Inc., there are approximately 22.9 million people who live within 180 miles of the resort.
 
Great Wolf Lodge of Sandusky is located on approximately 15 acres and has 271 guest suites and an approximately 34,000 square-foot indoor waterpark that includes our signature treehouse waterfort, tube slides, body slides, hot tubs and a lazy river. The resort offers a number of revenue-enhancing amenities, including our Gitchigoomie Grill and Lumber Jack’s Cook Shanty themed restaurants, Northern Lights game arcade, Buckhorn Exchange gift shop and meeting rooms. The resort also includes non revenue-generating amenities such as our animated two-story clock tower, Cub Club room and Iron Horse fitness center.
 
Great Wolf Lodge of Traverse City, Michigan
 
In March 2003, we opened our Great Wolf Lodge in Traverse City, Michigan. Traverse City is a traditional family vacation destination with skiing and lake activities. According to the Traverse City Convention and Visitors Bureau, Traverse City attracts approximately two million visitors each year. Traverse City is within a three-hour drive from Grand Rapids, Michigan and the Saginaw/Flint, Michigan area and a four-hour drive from Detroit, Michigan. This resort also draws guests from Northern Indiana and Ohio. According to Applied Geographic Solutions, Inc., there are approximately 7.1 million people who live within 180 miles of the resort.
 
Great Wolf Lodge of Traverse City is located on approximately 48 acres and has 281 guest suites and an approximately 40,000 square-foot indoor waterpark that includes our signature treehouse waterfort and Howling Wolf family raft. The resort offers a number of revenue-enhancing amenities, including our Camp Critter Bar & Grille and Loose Moose Cottage themed restaurants, Northern Lights game arcade, full-service Aveda spa, Bear Claw Café ice cream shop and confectionery, Buckhorn Exchange gift shop and meeting rooms. The resort also includes non revenue-generating amenities such as our animated two-story clocktower, Cub Club room and Iron Horse fitness center.


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Great Wolf Lodge of Kansas City, Kansas
 
In May 2003, we opened our Great Wolf Lodge in Kansas City, Kansas as part of the Village West tourism district that includes a Cabela’s superstore, Nebraska Furniture Mart and the Kansas NASCAR Speedway. According to the 2007 Travel & Tourism Market Research Handbook, Kansas City attracts approximately five million visitors each year. Kansas City is within a one-hour drive from Topeka, Kansas; a two and one-half hour drive from Jefferson City, Missouri; and a three-hour drive from Lincoln, Nebraska. According to Applied Geographic Solutions, Inc., there are approximately 6.7 million people who live within 180 miles of the resort.
 
Great Wolf Lodge of Kansas City is located on approximately 17 acres and has 281 guest suites and an approximately 40,000 square-foot indoor waterpark that includes our signature treehouse waterfort. The resort offers a number of revenue-enhancing amenities, including our Camp Critter Bar & Grille themed restaurant, Bear Claw Café ice cream shop and confectionery, full-service Aveda spa, Northern Lights game arcade, Buckhorn Exchange gift shop and meeting rooms. The resort also includes non revenue-generating amenities such as our animated two-story clocktower, Cub Club room and Iron Horse fitness center.
 
Blue Harbor Resort of Sheboygan, Wisconsin
 
In June 2004, we opened our Blue Harbor Resort on an approximately 12-acre property on the shores of Lake Michigan in Sheboygan, Wisconsin. Sheboygan is a family vacation destination featuring lake activities and golf. Due to the nature of Sheboygan as a family vacation destination on the water, we designed this resort with a nautical theme rather than our typical northwoods lodge theme. This resort is styled as a grand beach resort and decorated in a manner consistent with that theme, including a nautical themed lobby and specialty rooms such as the KidAquarium Suite with bunk beds surrounded by walls of deep blue sea and schools of fish and the Boathouse Suite with rowboat bunk beds. According to the Sheboygan Convention and Visitors Bureau, visitors to Sheboygan County spent approximately $283,000 in 2005. Sheboygan is within a one-hour drive from Milwaukee and Green Bay, Wisconsin; a two-hour drive from Madison, Wisconsin; a three-hour drive from Chicago, Illinois; and a four-hour drive from Dubuque, Iowa. According to Applied Geographic Solutions, Inc., there are approximately 18.7 million people who live within 180 miles of the resort.
 
Blue Harbor Resort has 182 guest suites, with an additional 64 individually-owned, two and four bedroom condominium units located adjacent to the resort, and an approximately 43,000 square-foot Breaker Bay indoor waterpark with a 12-level Lighthouse Pier waterfort. The resort offers a number of revenue-enhancing amenities, including our nautical-themed On the Rocks Bar & Grille and Rusty Anchor Buffet restaurants, Sweetshop Landing ice cream shop and confectionery, full-service Aveda spa, Northern Lights game arcade and Precious Cargo gift shop. This resort also has an approximately 21,000 square-foot attached conference facility capable of seating 1,000 people. The resort offers non revenue-generating amenities such as our 2,000 gallon hand-blown glass water fountain featuring a music and light show, Crew Club for kids and Ship Shape Place fitness center. Admission to the indoor waterpark is available to residents of Sheboygan County for a fee.
 
We currently manage the rental of substantially all of the condominium units at this resort. We receive a rental management fee of approximately 38% of gross revenue. In addition, we receive reimbursement of certain waterpark expenses through the condominium association.
 
Great Wolf Lodge of Williamsburg, Virginia
 
In March 2005, we opened our Great Wolf Lodge in Williamsburg, Virginia on an 83-acre site. Williamsburg is a popular family vacation destination with amusement parks, waterparks and other entertainment attractions. According to the 2007 Travel & Tourism Market Research Handbook, the Williamsburg area attracts 4 million visitors each year, which bring in an estimated $632,000 in visitor spending. Williamsburg is a one-hour drive from Richmond, Virginia; a two and one-half-hour drive from Washington, D.C.; a three-hour drive from Baltimore, Maryland; and a three and one-half-hour drive from Raleigh, North Carolina. According to Applied Geographic Solutions, Inc., there are approximately 16.6 million people who live within 180 miles of the resort.


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The resort occupies approximately 36 acres of the site. We may sell a portion of the excess land as out-lots and retain the remaining acreage to support future expansion of the resort.
 
Great Wolf Lodge of Williamsburg has 301 guest suites and an approximately 67,000 square-foot indoor waterpark that includes our signature treehouse waterfort. We are currently constructing an expansion of 104 additional rooms as well as a conference center that will be approximately 10,000 square-feet. The resort offers a number of revenue-enhancing amenities, including themed restaurants, a full-service Aveda spa, game arcade, Bear Claw Café ice cream shop and confectionery, gift shop, MagiQuest and approximately 7,000 square feet of meeting rooms. The resort offers non revenue-generating amenities such as a two-story animated clocktower, Cub Club room and fitness center.
 
Great Wolf Lodge of the Pocono Mountains
 
In October 2005, we opened our Great Wolf Lodge in the Pocono Mountains on a 95-acre site near Stroudsburg, Pennsylvania. The Pocono Mountains area is a popular family vacation destination featuring family-oriented attractions and recreational activities. According to the 2007 Travel & Tourism Market Research Handbook, the Pocono Mountains region attracts approximately eight million visitors each year. The resort is located within a one and one-half-hour drive from New York, New York; a two- hour drive from Philadelphia, Pennsylvania; a three and one-half hour drive from Baltimore, Maryland and a four-hour drive from Washington, D.C. According to Applied Geographic Solutions, Inc., there are approximately 44.3 million people who live within 180 miles of the resort.
 
Our Great Wolf Lodge of the Pocono Mountains has 401 guest suites and an approximately 78,000 square-foot indoor waterpark that includes our signature treehouse waterfort. The resort offers a number of revenue-enhancing amenities, including a themed restaurant and bar and grille, full-service Aveda spa, game arcade, gift shop, MagiQuest and approximately 7,900 square feet of meeting rooms. The resort also includes non revenue-generating amenities such as a two-story animated clocktower, Cub Club room and fitness center.
 
Great Wolf Lodge of Niagara Falls, Ontario
 
In January 2004, Great Lakes entered into a license agreement with Ripley’s that authorizes Ripley’s to develop and operate a Great Wolf Lodge resort in Niagara Falls, Ontario. In addition, the agreement allows Ripley’s to use certain licensed trademarks, such as “Cub Club,” “KidCabin,” “Wiley’s Woods” and “Great Wolf Lodge.” The term of the license agreement is ten years, with the possibility of up to four successive five-year renewals. Under the license agreement, Ripley’s is required to pay a monthly license fee, a brand marketing fee that we are obligated to contribute to a marketing program and a fee related to furniture, fixtures and equipment start-up costs. We may terminate the license agreement at any time, upon notice, if Ripley’s fails to meet its material obligations under the agreement. These obligations require Ripley’s to meet payment obligations in a timely manner, maintain and operate the resort in a manner consistent with our operating standards and obtain our approval prior to the use of any of our licensed trademarks. In addition, these material obligations restrict Ripley’s to selling only products, goods and services that we approve and from developing or managing a hotel with an indoor waterpark within the United States until, at the earliest, January 2016.
 
In April 2006, we opened the Great Wolf Lodge in Niagara Falls. Niagara Falls is a popular family vacation destination. According to the City of Niagara Falls, Ontario website, Niagara Falls attracts over 14 million visitors each year. Niagara Falls is less than a one hour drive from Buffalo, New York; a one and one-half-hour drive from Toronto, Ontario; and a two and one-half-hour drive from Syracuse, New York. According to Applied Geographic Solutions, Inc., there are approximately 8.2 million people in the United States and 9.6 million people in Canada, who live within 180 miles of the resort.
 
Great Wolf Lodge of Niagara Falls has 406 guest suites with an approximately 82,000 square-foot indoor waterpark. The resort offers a number of revenue-enhancing amenities, including themed restaurants, ice cream shop and confectionery, full-service Aveda spa, game arcade, gift shop and meeting space. The resort also includes non revenue-generating amenities such as a two-story animated clocktower, Cub Club room and fitness center.


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Great Wolf Lodge of Mason, Ohio
 
In December 2006, we opened our Great Wolf Lodge in Mason, Ohio on a 39-acre land parcel at Kings Island, in Mason, Ohio. We will operate the resort under the Great Wolf Lodge brand and have a majority equity position in the project. A unit of CBS Corporation owns a minority equity interest in the development as a result of contributing the land needed for the resort. Mason is a popular family destination featuring family-oriented attractions and recreational activities. According to the 2007 Travel & Tourism Market Research Handbook, the Mason/Cincinnati metro area attract five million visitors per year, which brings in an estimated $3,400,000 in visitor spending. The resort is located within a thirty-minute dive from Cincinnati, Ohio. According to Applied Geographic Solutions, Inc., there are approximately 16.4 million people who live within 180 miles of the resort.
 
Our Great Wolf Lodge of Mason, Ohio has 401 guest suites and an approximately 75,000 square-foot indoor waterpark. The resort offers a number of revenue-enhancing amenities, including family restaurants, a full-service Aveda spa, game arcade, gift shop, and confectionery. The resort also includes non revenue-generating amenities such as a fitness center and outdoor recreation area. In March 2007 we expect to open a state-of-the-art 40,000 square-foot conference center, including an expansive Grand Ballroom, flexible meeting spaces, an executive boardroom, audio and visual systems, and multiple pre-function concourses including an outdoor patio.
 
Properties Under Construction
 
Great Wolf Lodge of Grapevine, Texas
 
In 2005, we purchased a 51-acre site in Grapevine, Texas, for development of a Great Wolf Lodge resort. Grapevine is a popular family destination featuring family-oriented attractions and recreational activities. The resort will be a thirty-minute drive from Dallas and Fort Worth. The Dallas and Fort Worth region is the 7th largest market area in the United States, and the resort will have a higher population within a 60-mile radius than any existing Great Wolf Lodge resort.
 
Upon completion, Great Wolf Lodge of Grapevine, Texas will have 404 guest suites and an approximately 76,000 square-foot indoor waterpark. The resort will offer a number of revenue-enhancing amenities, including family restaurants, a full-service Aveda spa, game arcade, gift shop and confectionery. The resort will also include non revenue-generating amenities such as a fitness center and outdoor recreation area. We anticipate that this resort will open in late 2007.
 
Great Wolf Lodge of Grand Mound, Washington
 
In 2005, we entered into a joint venture with The Confederated Tribes of the Chehalis Reservation to develop a Great Wolf Lodge resort and conference center on a 39-acre land parcel in Grand Mound, Washington. We expect that we will operate the resort under the Great Wolf Lodge brand, that The Confederated Tribes of the Chehalis Reservation will lease the land needed for the resort on very favorable terms, and that both parties will maintain equity positions in the joint venture. Construction on the resort began in October 2006. The resort will be the first family destination vacation resort with an indoor waterpark in the Pacific Northwest. Chehalis is an hour and half drive from Seattle, Washington and Portland, Oregon. There are approximately 7.7 million people who live within 180 miles of the resort.
 
Upon completion, Great Wolf Lodge of Chehalis, Washington will have 393 guest suites and an approximately 56,000 square-foot indoor waterpark. The resort will offer a number of revenue-enhancing amenities, including family restaurants, a full-service Aveda spa, game arcade, gift shop, confectionery and an approximately 30,000 square-foot conference center. The resort also will include non revenue-generating amenities such as a fitness center and outdoor recreation area. We anticipate that this resort will open in early 2008.


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Business and Growth Strategies
 
Our primary business objective is to increase long-term stockholder value by executing our internal and external growth strategies. Our primary internal growth strategies are to:
 
  •  Increase Total Resort Revenue.  We intend to increase total resort revenue by increasing:
 
  •  Average Room Rate:  We plan to increase our average room rate over time by driving demand for our resorts and focusing on yield management techniques. We intend to increase demand through intelligent sales, marketing and public relations efforts, by increasing our visibility and by enhancing our brand image. We plan to employ our yield management techniques to project demand in order to effectively direct our sales and marketing efforts and selectively increase room rates. We believe that our focus on optimizing the relationship between room rates and occupancies will allow us to maximize profitability.
 
  •  Average Occupancy:  We intend to maintain high occupancy levels during peak times and will focus on increasing our off-peak occupancies. Our off-peak occupancy levels generally occur in May, September and during the middle of the week. Our occupancy levels are affected by school calendars, with the summer months, weekends, spring break period and other school holidays achieving the highest occupancy levels. We will continue to seek to improve off-peak occupancy levels by holding special events and targeting group sales and conferences.
 
  •  Other Revenue:  We provide our guests with a self-contained vacation experience and attempt to capture a significant portion of their spending on food and beverage, entertainment and merchandise. Each of our resorts generally contains at least one themed restaurant, an ice cream shop and confectionery, snack shop, an Aveda spa, gift shop and game arcade. The average non-room revenue, including the revenue from these amenities, was approximately $122 per occupied room night for the year ended December 31, 2006. By providing these additional revenue-generating amenities, we seek to maximize the amount of time and money spent on-site by our guests. We have also entered into a number of co-marketing agreements with strategic partners and expect to enter into additional co-marketing agreements in the future in order to increase other revenue.
 
  •  Leverage Our Economies of Scale.  We will take advantage of the following economies of scale:
 
  •  Increased Purchasing Power:  We intend to capitalize on our increasing purchasing power with respect to operating supplies, food and beverage, insurance and employee benefits. As the number of resorts we own and operate increases, we expect to be able to leverage our increased buying volume and power to obtain more advantageous and predictable pricing on commodity goods and services. We have entered into an arrangement with a nationally-recognized hospitality procurement company to further leverage our buying power. In addition, we intend to continue to manage increases and fluctuations in the cost of electricity, water and natural gas for our resorts by entering into volume-based contracts where we are able to do so.
 
  •  Centralized Services:  By centralizing certain of our services, we focus on decreasing our per-unit costs, increasing our control over those services and be in a position to deliver a greater quality of service to our customers. For example, our central reservations call center operates every day of the year, has approximately 144 full and part-time employees and accepts reservations for all of our resorts. The call center also has the capacity to efficiently handle high call volumes and should require only limited additional incremental costs over the next several years as we increase our portfolio of resorts.
 
  •  Build Upon Our Existing Brand Awareness and Loyalty.  Our Great Wolf Lodge brand is symbolized by our distinctive and easily identifiable theming, from our captivating northwoods exterior, to our signature treehouse waterfort, to our mascots and recognizable logos and merchandise. We believe we have fostered strong customer and brand loyalty, which is evidenced by our high levels of repeat and referral guests. We will continue to focus on ensuring that each of our guests associates the Great Wolf Lodge brand with a memorable and consistent family vacation experience.


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Our primary external growth strategies are to:
 
  •  Capitalize on First-Mover Advantage.  We intend to be the first to develop and operate family entertainment resorts featuring indoor waterparks in our selected target markets. We intend to continue to leverage our development expertise, existing platform and model and our access to capital to take advantage of the significant barriers to entry associated with the development of large family entertainment resorts with indoor waterparks like our Great Wolf Lodge resorts. We will seek to set the standard for quality, build on visible sites and capitalize on the opportunity to be located near other popular local attractions that draw our target customers. We believe that the combination of our first mover advantage and the significant barriers to entry in our target markets provide us with a competitive advantage.
 
  •  Focus on Development and Strategic Growth Opportunities.  Family entertainment resorts featuring indoor waterparks are a relatively new concept and a growing segment of the resort and entertainment industries. We intend to focus on this growth opportunity by:
 
  •  Building in Target Markets:  We intend to develop additional resorts, including resorts in major domestic markets with us as the sole or majority owner, as well as licensed or minority-owned resorts in secondary U.S. and/or international markets. A new resort, from market selection to opening, can take over four years to develop and build. We believe that our experience will enable us to more efficiently develop and build new resorts in our target markets.
 
  •  Selective Sales of Ownership Interests/Recycling of Capital:  We will selectively consider opportunities to sell partial or whole interests in one or more of our owned and operated properties, as we did in our CNL joint venture. We intend to continue to manage all of our branded Great Wolf Lodge resorts, and we will consider transactions that allow us to maintain our management/licensing position at a resort while realizing value created through our development expertise. In those situations, we expect then to recycle capital generated by such transactions for investment in future growth opportunities.
 
  •  Licensing Our Resort Concept Internationally:  We plan to selectively seek licensing and management opportunities internationally. Similar to our arrangement with Ripley’s in Niagara Falls, Ontario, we intend to enter into license and management agreements with reputable companies that have local market knowledge in order to increase revenues and expand the reach of our Great Wolf Lodge brand.
 
  •  Forming Strategic Partnerships:  We will consider strategic partnerships on a selective basis. For example, we have entered into joint ventures with a unit of CBS Corporation, CNL Income Properties, and The Confederated Tribes of the Chehalis Reservation.
 
  •  Expanding and Enhancing Existing Resorts:  We intend to continue to focus on growth opportunities at our existing resorts by adding revenue-enhancing features that drive ancillary vacation spending to certain of our resorts and meet our target returns, including non-water based attractions. We also intend to continue to evaluate incremental revenue-generating opportunities, such as expanding the number of rooms and adding condominium units at certain of our resorts. In addition, we will consider adding conference centers at existing resorts to capture convention and other business travel revenue.
 
  •  Continue to Innovate.  We intend to leverage our in-house expertise, in conjunction with the knowledge and experience of our third-party suppliers and designers, to develop and implement the latest innovations in family entertainment activities and amenities, including waterpark attractions. We have received numerous industry awards for our guests’ experiences, our operations, innovative development, sales and marketing initiatives and materials, and employee retention.


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Our Competitive Strengths
 
We are the market leader for family entertainment resorts that feature indoor waterparks and other family-oriented amenities in North America. Our competitive strengths include:
 
  •  Unforgettable Family Resort Experience.  Each of our resorts provides a welcome opportunity for families to spend quality time together, relax and reconnect. In addition to our indoor waterparks, our resorts provide other activities and amenities that the entire family can enjoy together. Our family amenities and activities include themed restaurants, a game arcade, ice cream shop and confectionery, gift shop, snack shop, animated clocktower and fireside bedtime stories. We also have amenities and activities tailored to each member of the family, including our full-service Aveda spa, Cub Club for kids and fitness room. Our resorts also offer special events, including seasonal and holiday activities, wild animal and nature educational programs and other special events. We believe that our focus on delivering an unforgettable family resort experience appeals to our target customers and results in repeat visits and referrals. For the year ended December 31, 2006, we generated approximately 49% of our room revenue from repeat visitors and referral guests.
 
  •  Value, Comfort and Convenience.  Guest rooms at each of our resorts are spacious and comfortable suites that generally range in size from approximately 385 square feet to 1,970 square feet and include a wet bar, microwave, refrigerator and dining and sitting area. Many of the suites have specific themes that are geared toward enhancing our younger guests’ experience, including our KidCabin and Wolf Den Suites, which have a partitioned room with bunk beds designed as log cabins and northwoods forest dens, respectively. All of our resorts are within a convenient driving distance of our large target customer bases. Because our indoor waterparks and our other amenities generally are not impacted by weather conditions, we offer our guests a reliable experience. On average, a two-night stay at our resorts costs a family of four approximately $700, making it a very affordable family vacation option.
 
  •  Favorable Market Trends.  We believe recent vacation trends favor our Great Wolf Lodge concept as the number of families choosing to take shorter, more frequent vacations that they can drive to have increased in recent years. We believe that these trends will continue and that we are well positioned to take advantage of them. We believe our resorts are less affected by changes in economic cycles, as drive-to destinations are less expensive and more convenient than destinations that require air travel. In addition, we have identified over 50 markets in the United States that, according to Third Wave Research, each has a population in excess of five million people located within a convenient driving distance.
 
  •  Market Presence and Barriers to Entry.  We are the largest owner and operator of family entertainment resorts with indoor waterparks in North America based on the number of resorts in operation. We believe this market presence gives us a significant competitive advantage in attracting guests and efficiently developing additional resorts. In addition, we believe the significant barriers to entry present in our industry segment, including operational complexity, substantial capital requirements, availability of suitable sites in desirable markets and a difficult, multi-year permitting process, discourage other companies in the lodging and entertainment industries from developing similar family entertainment resorts. A new Great Wolf Lodge resort typically takes from one to three years to develop, which includes market selection, site selection and permitting, an additional 15 to 18 months to build and costs in excess of $100,000.
 
  •  Focus on Safety.  We invest heavily in safety measures in the design and operation of our resorts. For example, we specifically design our waterparks with attention to sightlines and safety precautions and use one of the most respected training methods in the water safety industry to train each of our lifeguards. We design and construct our indoor waterparks with state-of-the-art air quality and water treatment systems. We also maintain and periodically upgrade our facilities to ensure that we provide our guests with best-in-class safety measures and systems.
 
  •  Experienced Management Team and Committed and Motivated Staff.  Our senior management team has significant experience in the hospitality, family resort and real estate development industries and


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  has significant expertise in operating complex, themed, family entertainment resorts featuring indoor waterparks. In addition, we have a team of skilled, loyal and committed employees at each of our resorts. We offer our resort employees a number of benefits, including a pleasant and rewarding work environment, career-oriented training, the ability to obtain consistent year-round work, which is uncommon in the resort industry, and career growth opportunities. As a result, we believe our employees are committed to delivering a superb customer experience and personally assuring that our guests fully enjoy their family vacation.
 
Industry Overview
 
We operate in the family entertainment resort segment of the travel and leisure industry. The concept of a family entertainment resort with an indoor waterpark was first introduced to the United States in Wisconsin Dells, Wisconsin, and has evolved there over the past 17 years. In an effort to boost occupancy and daily rates, as well as capture off-season demand, hotel operators in the Wisconsin Dells market began expanding indoor pools and adding waterslides and other water-based attractions to existing hotels and resorts. The success of these efforts prompted several local operators to build new, larger destination resorts based primarily on this concept, including the Wilderness Hotel & Golf Resort, Treasure Island, Raintree Resort, Kalahari and the Great Wolf Lodge (formerly known as the Black Wolf Lodge), which Great Lakes purchased in 1999.
 
We believe that these properties, which typically are themed and include other resort features such as arcades, retail shops and full food and beverage service in addition to the indoor waterpark, have historically outperformed standard hotels in the market. We believe that the rate premiums and increased market share in the Wisconsin Dells for hotels and resorts with some form of an indoor waterpark can be attributed to several factors, including the ability to provide a year-round vacation destination without weather-related risks, the wide appeal of water-based recreation and the favorable trends in leisure travel discussed below. Although the rate premiums and increased market share in Wisconsin Dells have been significant, no operator or developer other than Great Wolf Resorts has established a regional portfolio of family entertainment resorts featuring indoor waterparks.
 
No standard industry definition for a family entertainment resort featuring an indoor waterpark has developed. A recent Hotel & Leisure Advisors, LLC (H&LA) survey indicates that the number of indoor waterpark destination resorts has grown from 29 available properties as of year-end 2005 to 41 available properties as of year-end 2006. Most of our resorts are located in well-established, traditional drive-to family vacation destinations, which allow us to leverage the popularity of these destinations by offering a complementary entertainment option to existing venues and a high-quality family resort alternative. In addition, many of these destinations offer beaches, theme parks, waterparks, amusement parks and many other forms of outdoor activities that are only available on a seasonal basis. Within our enclosed resort environment, our guests can enjoy a total resort experience year round, regardless of weather conditions.
 
Resort Operations
 
Each resort employs a general manager who is responsible for the operations of the particular resort and who typically has many years of experience in the hospitality or family entertainment industry. Our general managers oversee a staff of 300 or more resort employees and are assisted by an extensive management team, including directors for each of human resources, food and beverage, housekeeping, aquatics, maintenance, sales and marketing and front office. A corporate-level liaison for each department ensures consistency throughout our resorts while allowing a particular resort to tailor its operations to best meet the needs of its guests.
 
Prior to assuming responsibility for a resort, general managers and assistant general managers undergo a proprietary management training program designed to familiarize each trainee with various facets of our management, operations and development programs. The program also emphasizes our guest service policies and provides hands-on operating experience at the resort level. Our management training program is intended to train assistant managers to become future general managers.


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We strive to provide our guests with a fun and convenient experience in a warm and family-friendly environment from the first day a new resort opens. To achieve this, a team of experienced management members from our existing resorts, along with corporate liaisons, begins training personnel at our new resorts approximately one month prior to a resort’s opening and is on site at the new resort for a month after opening. We believe that this process ensures that the opening of a new resort is efficient and that our culture of high quality and friendly customer service is carried over to our new resorts, including our guests’ interactions with our front desk, housekeeping, waterpark, restaurant and other staff members. In addition, we train our maintenance personnel to minimize any operational problems that occur during the opening of a new resort, including the operation of our waterparks. We believe that these efforts help to minimize any problems associated with opening a new resort and give our first guests a favorable, memorable experience that will build brand loyalty.
 
Training and Development
 
We believe that our ability to provide a warm family atmosphere where families can relax, play and reconnect begins with our people and their ability to deliver quality customer service. We seek to recruit, train and retain employees who will make sure that our guests enjoy their stay, and we seek to promote from within our company. Each new resort employee undergoes a week-long orientation program and is paired with a more veteran employee for a month so that the new employee can learn more about our resorts, our culture and how we strive to provide the best possible customer service. Our employees are committed to our success and focused on ensuring a memorable experience for each of our guests. We believe that our high level of customer service sets us apart and promotes valuable referrals and repeat visits.
 
Sales and Marketing
 
We place a significant emphasis on the sales and marketing of our family-focused resorts. We work together with a third-party consulting firm to analyze the demographics of our markets and to identify potential guests for targeted marketing, both within our primary market areas and beyond those areas to attract occasional or seasonal travelers. We market to these potential customers through a combination of television, radio, newspaper and direct mail advertising, including advertising through local chambers of commerce and convention and visitors bureaus. We also rely upon repeat guests and guest referrals, as well as brand recognition and the visibility of the resorts themselves, which are located along major highways in high traffic areas. In addition, our engaging website offers detailed information about our resorts, including virtual tours and room layouts.
 
For new resorts, our marketing efforts begin before construction commences and we establish sales offices to generate advance bookings. Reservations may be made at our resorts, through our web site or through our central reservations call center. Our call center and highly trained staff allow us to offer consistent specials throughout our resorts, better track room occupancy levels and room rates and handle the high volume of calls that are usually associated with the opening of a resort.
 
We maintain an in-house sales force and graphic arts department. Our experienced staff develops products and promotions for use in merchandising and marketing promotions. We also engage in cross-marketing, promotions and co-marketing arrangements with major vendors. We have received numerous awards for our general advertising, website, print media, radio commercials and sales presentations.
 
We have developed Cub Club, a frequent guest program for children. Membership is available to all children who have stayed at one of our resorts. The benefits of the program include coupons and other incentives, a periodic newsletter, access to the Cub Club activity rooms at each of our resorts and special offers to children who visit during their birthday month. Our Blue Harbor Resort features a Crew Club program for children, similar to the Great Wolf Lodge resorts’ Cub Club.
 
Maintenance and Inspections
 
Each of our resorts has an aquatics manager who is trained in all aspects of water quality and safety. On-site maintenance personnel frequently inspect our waterparks. These inspections include safety checks of


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the equipment in the waterpark, as well as analyses of water and air quality. Our water quality levels are constantly monitored and tested by computers and by a full-time aquatics maintenance engineer, who works with an additional assistant during our busiest months. Our air quality system is designed to minimize humidity and moisture build-up, which materially reduces maintenance costs. Furthermore, we use Ellis & Associates as water safety consultants at our resorts in order to train lifeguards and audit safety procedures.
 
Our senior management and the individual resort personnel evaluate the risk aspects of each resort’s operation, including potential risks to the public and employees and staff. Each resort has full-time maintenance employees on staff that ensure building quality and fulltime aquatics maintenance employees that ensure the ride safety and air and water quality inside the resort’s indoor waterpark. We use a state of the art filtration system and ozonators to balance the water and air quality within the waterpark in order to accommodate fluctuating quantities of visitors.
 
Development Criteria
 
We choose sites for the development of new resorts based upon a number of factors, including:
 
  •  Large target customer base.  We select development sites that generally have a minimum of five million target customers within a convenient driving distance. Because we offer an affordable vacation experience, we appeal to families in a variety of income ranges.
 
  •  Recognized tourist destination.  We focus on drive-to destinations that attract a large number of tourists, including both emerging and traditional family vacation markets. We believe we can charge premium rates in these markets due to the high quality of our resorts and our family-oriented amenities and activities. In addition, the indoor nature of many of our amenities and activities allows us to reduce the impact of seasonality that negatively affects other attractions in these areas. These areas also often have active and effective local visitors and convention bureaus that complement our marketing and advertising efforts at little or no cost to us.
 
  •  Highly visible and large sites.  We generally develop resorts in highly visible locations along major roadways. Visibility from highways enhances easy drive-to access, provides marketing benefits due to high volumes of traffic and often produces synergies from adjacent land uses or complementary developments. We generally choose sites that have enough acreage to allow for potential expansions and future sales of out-lots.
 
Based upon these criteria, we have identified over 50 markets as potential locations for our resorts.
 
Once we have identified a market that meets our development criteria, we search for potential sites. Acceptable sites which may be difficult to find in some areas. We then perform initial analyses of the permitting process and access to utilities, before acquiring a sufficient amount of land from one or more landowners. Based upon the target customer base of the market, we develop initial specifications for the resort, such as the number of guest suites and size of the indoor waterpark and other amenities. We also formally begin the potentially lengthy and difficult process of obtaining the necessary approvals and permits from the appropriate local governmental bodies, including the necessary water rights and environmental permits. Once the permitting process is complete, we secure financing for the project and begin construction on the resort. This overall development process generally takes from two to four years.
 
Competition
 
Our resorts compete with other forms of family vacation travel, including theme parks, waterparks, amusement parks and other recreational activities, including other resorts located near these types of attractions. Our business is also subject to factors that affect the recreation and leisure and resort industries generally, such as general economic conditions and changes in consumer spending habits. We believe that the principal competitive factors of a family entertainment resort include location, room rates, name recognition, reputation, the uniqueness and perceived quality of the attractions and amenities, the atmosphere and cleanliness of the attractions and amenities, the quality of the lodging accommodations, the quality of the food and beverage service, convenience, service levels and reservation systems.


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A recent Hotel & Leisure Advisors, LLC (H&LA) survey indicates that the number of indoor waterpark destination resorts has grown from 29 available properties as of year-end 2005 to 41 available properties as of year-end 2006.
 
As a result of our market presence and our management team’s substantial experience, we believe we have an opportunity to capitalize on our first-mover advantage in this industry segment and to achieve significant brand recognition. While we believe that our first-mover advantage is very beneficial to us, it does provide our competitors with an opportunity to monitor our success in our chosen markets. As a result, a competitor may choose not to enter one of our markets based on our performance, or may subsequently develop a resort in our markets that is newer, has additional amenities, or offers more, larger or more exciting waterpark attractions than our resorts.
 
In most of our markets, there are few, if any, other family entertainment resorts featuring indoor waterparks. However, in Wisconsin Dells, Wisconsin, where indoor waterparks were first introduced, there are approximately 16 other resorts and hotels with some type of indoor water-related activity or amenity. As a result, we face significant competition from both lower priced unthemed waterparks and larger, more expensive waterparks with thrill rides and other attractions in the Wisconsin Dells’ market. While the Wisconsin Dells’ market has a significant number of resorts with indoor waterparks, we believe the competitive landscape in that small, regional market is not representative of the competition we may face as we further expand our portfolio of resorts. The vast majority of indoor waterpark resorts in Wisconsin Dells are family-owned or privately operated businesses that have yet to develop additional resorts outside of Wisconsin Dells. In addition, we believe our ability to compete effectively in this highly competitive market will enable us to more effectively compete in other markets where we may not be the only family entertainment resort. In addition to Wisconsin Dells, we face direct competition from other indoor waterpark destination resorts in the Sandusky and Traverse City areas.
 
We anticipate that competition within some of our markets will increase in the foreseeable future. We believe that a number of other resort operators are developing or considering the development of family entertainment resorts with indoor waterparks, which will compete with our resorts.
 
Governmental Regulation
 
The ownership and management of our resorts, as well as our development and construction of new resorts, subjects us to federal, state and local laws regulating zoning, land development, land use, building design and construction, and other real estate-related laws and regulations. In addition, a number of states regulate the permitting and licensing of resorts by requiring registration, disclosure statements and compliance with specific standards of conduct. Our failure to maintain or acquire the requisite licenses, permits and authorizations required by such laws and regulations, as well as any failure on our part to comply with registration, disclosure and standards of conduct required by such laws and regulations could impact the operation, profitability and success of our current resorts or the development, completion and success of any resorts we may develop in the future. We believe that each of our resorts has the necessary permits and approvals to operate its business and is in material compliance with all applicable registration, disclosure and conduct requirements. We intend to continue to obtain such permits and approvals for any resorts we may develop in the future or additions or renovations to current resorts and to ensure that such resorts and additions or renovations comply with applicable registration, disclosure and conduct requirements.
 
We are also subject to laws and regulations governing our relationship with employees, including minimum wage requirements, overtime, working conditions and work permit requirements. An increase in the minimum wage rate, employee benefit costs or other costs associated with employees could increase our overall labor costs.
 
The operation of our waterparks subjects us to state and local regulations governing the quality of the water we use in our waterparks, including bacteriological, chemical, physical and radiological standards. In addition to inspections we conduct on our own, state and local authorities may also conduct inspections of our waterparks to determine our compliance with applicable standards. If we are found to be in violation of such regulations we could be subject to various penalties, including, but not limited to, monetary fines and the


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temporary closure of our waterparks. Changes in state or local regulations could impose more stringent standards with which we would have to comply.
 
We are subject to both federal and state environmental laws and regulations, including laws and regulations governing the discharge of water from our waterparks. Specifically, under the requirements of the Federal Clean Water Act, we must obtain National Pollutant Discharge Elimination System permits from the Environmental Protection Agency or from the state environmental agency to which the permit program has been delegated for discharges into waterways and comply with the permit terms regarding wastewater quality and discharge limits. Such permits must be renewed from time-to-time, as required by regulation and additional capital expenditures for wastewater treatment systems associated with the renewal of our water discharge permits may be required. Importantly, changes in federal or state legislation or regulations could impose more stringent release standards with which we would have to comply. Currently, our resort in the Pocono Mountains is our only property subject to such laws and regulations governing the discharge of water and we intend to comply with these laws and regulations as we operate that property.
 
As a place of public accommodation, our resorts are subject to the requirements of the Americans with Disabilities Act of 1990, which we refer to as the ADA. As such, our resorts are required to meet certain federal requirements related to access and use by disabled persons. While we believe that our resorts are substantially in compliance with these requirements, we have not conducted an audit or investigation of all of our resorts to determine our compliance. Further, federal legislation or regulations may amend the ADA to impose more stringent requirements with which we would have to comply.
 
Environmental Matters
 
Our operations and properties are subject to federal, state and local laws and regulations relating to the protection of the environment, natural resources and worker health and safety, including laws and regulations governing and creating liability relating to the management, storage and disposal of hazardous substances and other regulated materials. Our properties are also subject to various environmental laws and regulations that govern certain aspects of our on-going operations. These laws and regulations control such things as the nature and volume of our wastewater discharges, quality of our water supply and our waste management practices. The costs of complying with these requirements, as they now exist or may be altered in the future, could adversely affect our financial condition and results of operations.
 
Because we own and operate real property, various federal, state and local laws may impose liability on us for the costs of removing or remediating various hazardous substances, including substances that may be currently unknown to us, that may have been released on or in our property or disposed by us at third-party locations. The principal federal laws relating to environmental contamination and associated liabilities that could affect us are the Resource Conservation and Recovery Act and the Comprehensive Environmental Response, Compensation and Liability Act; state and local governments have also adopted separate but similar environmental laws and regulations that vary from state to state and locality to locality. These laws may impose liability jointly and severally, without regard to fault and whether or not we knew of or caused the release. The presence of hazardous substances on a property or the failure to meet environmental regulatory requirements may materially adversely affect our ability to use or sell the property, or to use the property as collateral for borrowing, and may cause us to incur substantial remediation or compliance costs. In addition, if hazardous substances are located on or released from one of our properties, we could incur substantial liabilities through a private party personal injury claim, a claim by an adjacent property owner for property damage or a claim by a governmental entity for other damages, such as natural resource damages. This liability may be imposed on us under environmental laws or common-law principles.
 
We obtain environmental assessment reports on the properties we own or operate as we deem appropriate. These reports have not revealed any environmental liability or compliance concerns that we believe would materially adversely affect our financial condition or results of operations. However, the environmental assessments that we have undertaken might not have revealed all potential environmental liabilities or claims for such liabilities. It is also possible that future laws, ordinances or regulations or changed interpretations of existing laws and regulations will impose material environmental liability or compliance costs on us, that the


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current environmental conditions of properties we own or operate will be affected by other properties in the vicinity or by the actions of third parties unrelated to us or that our guests could introduce hazardous or toxic substances into the resorts we own or manage without our knowledge and expose us to liability under federal or state environmental laws. The costs of defending these claims, complying with as yet unidentified requirements, conducting this environmental remediation or responding to such changed conditions could adversely affect our financial condition and results of operations.
 
Some of our resort properties may have contained, or are adjacent to or near other properties that have contained or currently contain underground storage tanks for the storage of petroleum products or other hazardous or toxic substances. If hazardous or toxic substances were released from these tanks, we could incur significant costs or, with respect to tanks on our property, be liable to third parties with respect to the releases.
 
On occasion, we may elect to develop properties that have had a history of industrial activities and/or historical environmental contamination. Where such opportunities arise, we engage third-party experts to evaluate the extent of contamination, the scope of any needed environmental clean-up work, and available measures (such as creation of barriers over residual contamination and deed restrictions prohibiting groundwater use or disturbance of the soil) for ensuring that planned development and future property uses will not present unacceptable human health or environmental risks or exposure to liabilities. If those environmental assessments indicate that the development opportunities are acceptable, we also work with appropriate governmental agencies and obtain their approvals of planned site clean-up, development activities, and the proposed future property uses. We have followed that process in connection with the development of our Blue Harbor Resort in Sheboygan, Wisconsin where the City of Sheboygan has arranged for environmental clean-up work and ongoing groundwater monitoring and we have agreed to the use of a barrier preventing contact with residual contamination and implementation of a deed restriction limiting site activities. To our knowledge, our work at our Sheboygan resort has been conducted in accordance with requirements imposed by the Wisconsin Department of Natural Resources. Based on these efforts, we are not aware of any environmental liability or compliance concerns at our Sheboygan resort that we believe would materially adversely affect our financial conditions or results of operations. It is possible, however, that our efforts have not identified all environmental conditions at the property or that environmental conditions and liabilities associated with the property could change in the future.
 
Future acquisitions of properties subject to environmental requirements or affected by environmental contamination could require us to incur substantial costs relating to such matters. In addition, environmental laws, regulations, wetlands, endangered species and other land use and natural resource issues affecting either currently owned properties or sites identified as possible future acquisitions may increase costs associated with future site development and construction activities or business or expansion opportunities, prevent, delay, alter or interfere with such plans or otherwise adversely affect such plans.
 
Insurance
 
We believe that our properties are covered by adequate fire, flood and property insurance, as well as commercial liability insurance with what we believe are commercially reasonable deductibles and limits for our industry. Changes in the insurance market since September 11, 2001 have generally caused increases in insurance costs and deductibles, and have increased the risk that affordable insurance may not be available to us in the future.
 
While our management believes that our insurance coverage is adequate, if we were held liable for amounts and claims exceeding the limits of our insurance coverage or outside the scope of our insurance coverage, our business, results of operations and financial condition could be materially and adversely affected.
 
Intellectual Property
 
We have registered, applied for the registration of or claim ownership of a variety of trade names, service marks, copyrights and trademarks for use in our business, including Biko the Bear, Blue Harbor Resort, Boathouse Suite, Breaker Bay, Crew Club, Cub Club, Great Wolf Lodge, Great Wolf Resorts, KidAquarium


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Suite, KidCabin and Wiley the Wolf in the United States and, where appropriate, in foreign countries. There can be no assurance that we can obtain the registration for the marks where registration has been sought. We are not aware of any facts that would negatively impact our continuing use of any of the above trade names, service marks or trademarks. We consider our intellectual property rights to be important to our business and actively defend and enforce them.
 
Employees
 
As of December 31, 2006, we had approximately 200 corporate employees, including our central reservations center employees, and approximately 3,400 resort-level employees, approximately 1,300 of whom were part-time employees. Unlike more seasonal resorts and attractions, we are open year-round and are able to attract and retain high quality employees throughout the year. However, we do have fewer part-time employees during the winter months. None of our employees is covered by a collective bargaining agreement. We believe that our relationship with our employees is good.
 
Offices
 
We lease approximately 13,800 square feet of office space for our corporate headquarters office and approximately 5,600 square feet of office space for our central reservations call center operations in Madison, Wisconsin. We also lease approximately 3,800 square feet of office space in Falls Church, Virginia, and approximately 1,500 square feet of office space in North Ridgeville, Ohio. We believe these facilities are adequate for our current needs.
 
Domestic and Foreign Operations
 
We derive a portion of our revenues from licensing fees, management fees, construction management fees and central reservations fees paid by the Great Wolf Lodge resort located in Niagara Falls, Ontario, Canada. During 2006, the total revenue we received from U.S. operations was $146,984 and the total revenue we received from Canadian operations was $1,664. During the year ended 2005 and the period from December 21, 2004 through December 31, 2004, the corresponding amounts were $139,041 and $4,629, respectively for U.S. operations and $374 and $0, respectively, for Canadian operations. We receive no revenue from any foreign country other than Canada. We have no long-lived assets located outside of the United States.
 
Code of Business Conduct and Ethics
 
We have adopted a Code of Business Conduct and Ethics that applies to our principal executive officer and senior financial officers. It is available in the investor relations section of our website, which is located at www.greatwolf.com. In the event that we make changes to or provide waivers from the provisions of our Code of Business Conduct and Ethics that the SEC requires us to disclose, we intend to disclose these events in the investor relations section of our website.
 
ITEM 1A.  RISK FACTORS
 
The risk factors set forth below are applicable to Great Wolf Resorts. You should carefully consider the following factors in evaluating our company, our properties and our business. The occurrence of any of the following risks could materially adversely affect, among other things, our business, financial condition and results of operations.
 
We may not be able to develop new resorts or further develop existing resorts on a timely or cost efficient basis, which would adversely affect our growth strategy.
 
As part of our growth strategy, we intend to develop additional resorts and to further expand our existing resorts. Development involves substantial risks, including the following risks:
 
  •  development costs may exceed budgeted or contracted amounts;
 
  •  increases in the costs of materials or supplies used in construction of our resorts;


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  •  changes in construction materials or methodologies may increase development costs;
 
  •  delays in architectural or other design-related services, or in the commencement or completion of construction;
 
  •  failure to obtain all necessary zoning, land use, occupancy, construction, operating and other required governmental permits and authorizations;
 
  •  changes in real estate, zoning, land use, environmental and tax laws;
 
  •  unavailability of financing on favorable terms;
 
  •  failure of developed properties to achieve desired revenue or profitability levels once opened;
 
  •  scarcity of suitable development sites, due to existing development, physical limitation or competition for sites from competitors that may have greater financial resources or risk tolerance than we do; and
 
  •  the incurrence of substantial costs in the event a development project must be abandoned prior to completion.
 
In particular, resort construction projects entail significant risks, including shortages of design and construction expertise, materials or skilled labor, unforeseen engineering, environmental or geological problems, work stoppages, weather interference, floods and unanticipated cost increases. There are also a limited number of suppliers and manufacturers of the equipment we use in our indoor waterparks. We may not be able to successfully manage our development to minimize these risks, and there can be no assurance that present or future developments will perform in accordance with our previous developments or our expectations.
 
We compete with other family vacation travel destinations and resorts.
 
Our resorts compete with other forms of family vacation travel, including theme, water and amusement parks and other recreational activities. Our business is also subject to factors that affect the recreation and leisure and resort industries generally, such as general economic conditions and changes in consumer spending habits. We believe the principal competitive factors of a family entertainment resort include location, room rates, name recognition, reputation, the uniqueness and perceived quality of the attractions and amenities, the atmosphere and cleanliness of the attractions and amenities, the quality and perceived value, of the lodging accommodations, the quality and perceived value of the food and beverage service, convenience, service levels and reservation systems.
 
Many of our markets have become more competitive, including in particular our Sandusky and Traverse City markets. We anticipate that competition within some of our markets will increase further in the foreseeable future. A number of other resort operators are developing family entertainment resorts with indoor waterparks that will compete with some or all of our resorts. We compete for guests and for new development sites with certain of these entities that may have greater financial resources than we do and better relationships with lenders and sellers of real estate. These entities may be able to accept more risk than we can prudently manage and may have greater marketing and financial resources. Further, there can be no assurance that new or existing competitors will not significantly reduce their rates, as they have in the past, or offer greater convenience, services or amenities, significantly expand or improve resorts, including the addition of “thrill rides,” in markets in which we operate. Such events could materially adversely affect our business and results of operations.
 
We may not be able to manage our expected growth, which could adversely affect our operating results.
 
Since 1999, we have experienced substantial growth as we have grown from operating one resort to our current portfolio of resorts. We intend to continue to develop additional resorts and manage additional licensed resorts owned by joint ventures in which we have an equity interest and by third parties. Our anticipated growth could place a strain on our management, employees and operations. Our growth has increased our operating complexity and the level of responsibility for new and existing management. Our ability to compete


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effectively and to manage our recent and future growth effectively will depend on our ability to implement and improve financial and management information systems on a timely basis and to effect changes in our business, such as implementing internal controls to handle the increased size of our operations and hiring, training, developing and managing an increasing number of experienced management-level and other employees. Unexpected difficulties during expansion, the loss of or failure to attract and retain qualified employees or our inability to respond effectively to recent growth or plan for future expansion, could adversely affect our results of operations.
 
Accidents or injuries in our resorts, particularly in our waterparks, may subject us to liability, and accidents or injuries at our resorts or at competing resorts with waterparks could adversely affect our safety reputation and attendance, which would harm our business, financial condition and results of operations.
 
There are inherent risks of accidents or injuries at family entertainment resorts, including accidents or injuries at waterparks, particularly for young children if their parents do not provide appropriate supervision. The lifeguards in our indoor waterparks and our other resort staff cannot prevent every accident or injury. Potential waterpark accidents and injuries include falls, cuts or other abrasions, concussions and other head injuries, sickness from contaminated water, Chlorine-related irritation, injuries resulting from equipment malfunctions and drownings. One or more accidents or injuries at any of our waterparks or at other waterparks could reduce attendance at our resorts, adversely affect our safety reputation among our potential customers, decrease our overall occupancy rates and increase our costs by requiring us to take additional measures to make our safety precautions even more visible and effective.
 
If accidents or injuries occur at any of our resorts, we may be held liable for costs related to the injuries. We maintain insurance of the type and in the amounts that we believe are commercially reasonable and that are available to businesses in our industry, but there can be no assurance that our liability insurance will be adequate or available at all times and in all circumstances to cover any liability for these costs. There can also be no assurance that the liability insurance carried by Great Lakes prior to the IPO was adequate or available to cover any liability related to incidents occurring prior to the IPO. Our business, financial condition and results of operations would be adversely affected to the extent claims and associated expenses resulting from accidents or injuries exceed our insurance recoveries.
 
We and our predecessor entities have a history of losses and we may not be able to achieve or sustain profitability.
 
We incurred a net loss in the year ended December 31, 2006 and 2005, and the period December 21, 2004 through December 31, 2004, and our predecessor entities incurred net losses in the period January 1, 2004 through December 20, 2004. We cannot guarantee that we will become profitable. Given the increasing competition in our industry and capital intensive nature of our business, we may not be able to sustain or increase profitability on a quarterly or annual basis, and our failure to do so could adversely affect our business and financial condition.
 
Our business is dependent upon family vacation patterns, which may cause fluctuations in our revenues.
 
Since most families with young children choose to take vacations during school breaks and on weekends, our occupancy is highest on the weekends and during months with prolonged school breaks, such as the summer months and spring break weeks in March and April. Our occupancy is lowest during May and September as children return to school following these prolonged breaks. As a result of these family vacation patterns, our revenues may fluctuate. We may be required to enter into short-term borrowings in slower periods in order to offset such fluctuations in revenues and to fund our anticipated obligations. In addition, adverse events occurring during our peak occupancy periods would have an increased impact on our results of operations.


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We may not be able to attract a significant number of customers from our key target markets, which would adversely affect our business, financial condition and results of operations.
 
Our strategy emphasizes attracting and retaining customers from the local, or drive-to, markets within a convenient driving distance from each of our resorts. Any resorts we develop in the future are similarly likely to be dependent primarily on the markets in the immediate vicinity of such resorts. Regional economic difficulties, for example the issues affecting domestic automotive manufacturers and the related impact in Michigan and surrounding areas, may have a disproportionate negative impact on our resorts in the affected markets. There can be no assurance that we will be able to continue to attract a sufficient number of customers in our local markets to make our resort operations profitable. If we fail to do so, our business, financial condition and results of operations would be adversely affected.
 
Because we concentrate in a single industry segment, we may be adversely affected by a downturn in that industry segment.
 
Our assets and operations are concentrated in a single industry segment — family entertainment resorts. Our current strategy is to expand the number of our resorts and improve our existing resorts. Therefore, a downturn in the entertainment, travel or vacation industries, in general, and the family entertainment resort segment, in particular, could have an adverse effect on our business and financial condition.
 
Changes in consumer spending habits may affect our growth, financial condition and results of operations.
 
The success of our operations depends to a significant extent upon a number of factors relating to discretionary consumer spending, including economic conditions affecting disposable consumer income such as employment, business conditions, interest rates and taxation. There can be no assurance that consumer spending will not be adversely affected by economic conditions, thereby impacting our growth, financial condition and results of operations.
 
Increases in operating costs and other expense items could reduce our operating margins and adversely affect our growth, financial condition and results of operations.
 
Increases in operating costs due to inflation and other factors may not be directly offset by increased room and other revenue. Our most significant operating costs are our labor, energy, insurance and property taxes. Many, and in some cases all, of the factors affecting these costs are beyond our control.
 
Labor is our primary resort-level operating expense. As of December 31, 2006, we employed nearly 3,400 hourly-wage and salaried employees in our resorts. If we face labor shortages or increased labor costs because of increased competition for employees, higher employee turnover rates or increases in the federal minimum wage or other employee benefits costs (including costs associated with health insurance coverage), our operating expenses could increase and our growth could be adversely affected. Our success depends in part upon our ability to attract, motivate and retain a sufficient number of qualified employees, including resort managers, lifeguards, waterpark maintenance professionals and resort staff, necessary to keep pace with our expansion schedule. The number of qualified individuals needed to fill these positions is in short supply in some areas. Any future inability to recruit and retain sufficient individuals may delay the planned openings of new resorts. Competition for qualified employees could also require us to pay higher wages to attract a sufficient number of employees.
 
Energy costs also account for a significant portion of our total resort-level operating expenses. The price of energy is volatile, and shortages sometimes occur. Significant increases in the cost of energy, or shortages of energy, could interrupt or curtail our operations and lower our operating margins.
 
The costs for maintaining adequate insurance coverage fluctuate and are generally beyond our control. If insurance rates increase and we are not able to pass along those increased costs to our customers through higher room rates and amenity costs, our operating margins could suffer.
 
Each of our resorts is subject to real and personal property taxes. The real and personal property taxes on our resorts may increase or decrease as tax rates change and as our resorts are assessed or reassessed by taxing


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authorities. If property taxes increase and we are unable to pass these increased costs along to our customers through higher room rates and amenity costs, our financial condition and results of operations may be adversely affected.
 
We may not be able to obtain additional financing on favorable terms, if at all.
 
We expect that we will require additional financing over time, the amount of which will depend on a number of factors, including the number of resorts we construct, additions to our current resorts and the cash flow generated by our resorts. The terms of any additional financing we may be able to procure are unknown at this time. Our access to third-party sources of capital depends, in part, on:
 
  •  general market conditions;
 
  •  the market’s perception of our growth potential;
 
  •  our then-current debt levels;
 
  •  our then-current and expected future earnings;
 
  •  our cash flow; and
 
  •  the market price per share of our common stock.
 
Any future debt financing or issuances of preferred stock that we may make will be senior to the rights of holders of our common stock, and any future issuances of common stock will result in the dilution of the then-existing stockholders’ proportionate equity interest.
 
Uninsured losses or losses in excess of our insurance coverage could adversely affect our financial condition and our cash flow, and there are a limited number of insurers that will underwrite coverage for resorts with indoor waterparks.
 
We maintain comprehensive liability, fire, flood (where appropriate) and extended coverage insurance with respect to our resorts with policy specifications, limits and deductibles that we believe are commercially reasonable for our operations and are available to businesses in our industry. Certain types of losses, however, may be either uninsurable or not economically insurable, such as losses due to earthquakes, riots, acts of war or terrorism, or losses related to the award of punitive damages in a legal action. Should an uninsured loss occur, we could lose both our investment in, and anticipated profits and cash flow from, a resort. If any such loss is insured, we may be required to pay a significant deductible on any claim for recovery of such a loss prior to our insurer being obligated to reimburse us for the loss or the amount of the loss may exceed our coverage for the loss. In addition, we may not be able to obtain insurance in the future at acceptable rates, or at all, and insurance may not be available to us on favorable terms or at all, including insurance for the construction and development of our resorts, especially since there are a limited number of insurance companies that underwrite insurance for indoor waterparks.
 
We will be required to make certain capital expenditures to maintain the quality of our resorts, which could adversely affect our financial condition and results of operations.
 
Our resorts have an ongoing need for renovations and other capital improvements, including periodic replacement of furniture, fixtures and equipment. The cost of such capital improvements could have an adverse effect on our financial condition and results of operations. Such renovations involve certain risks, including the possibility of environmental problems, construction cost overruns and delays, the possibility that we will not have available cash to fund renovations or that financing for renovations will not be available on favorable terms, if at all, uncertainties as to market demand or deterioration in market demand after commencement of renovation and the emergence of unanticipated competition from other entities. If we are unable to meet our capital expenditure needs, we may not be able to maintain the quality of our resorts.


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We may not be able to adequately protect our intellectual property, which could harm the value of our brands and adversely affect our business.
 
The success of our resorts depends in part on our brands, logos and branded merchandise. We rely on a combination of trademarks, copyrights, service marks, trade secrets and similar intellectual property rights to protect our brands, logos, branded merchandise and other intellectual property. The success of our growth strategy depends on our continued ability to use our existing trademarks and service marks in order to increase brand awareness and further develop our brand in both domestic and international markets. We also use our trademarks and other intellectual property on the Internet. If our efforts to protect our intellectual property are not adequate, or if any third party misappropriates or infringes on our intellectual property, either in print or on the Internet, the value of our brands may be harmed, which could have a material adverse effect on our business, including the failure of our brands, logos and branded merchandise to achieve and maintain market acceptance.
 
We have licensed our Great Wolf Lodge brand and intend to further license the brand in domestic and international markets. While we try to ensure that the quality of our brand is maintained by our current licensees, and will be maintained by any future licensees, we cannot assure you that these licensees will not take actions that adversely affect the value of our intellectual property or reputation.
 
We have registered certain trademarks and have other trademark registrations pending in the United States and foreign jurisdictions. There is no guarantee that our trademark registration applications will be granted. In addition, the trademarks that we currently use have not been registered in all of the countries in which we do, or intend to do, business and may never be registered in all of these countries. We cannot assure you that we will be able to adequately protect our trademarks or that our use of these trademarks will not result in liability for trademark infringement, trademark dilution or unfair competition.
 
We may not have taken all the steps necessary to protect our intellectual property in the United States and foreign countries. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States.
 
Our operations may be adversely affected by extreme weather conditions and the impact of disasters.
 
We currently operate, and in the future intend to operate, our resorts in a number of different markets, each of which is subject to local weather patterns and their effects on our resorts, especially our guests’ ability to travel to our resorts. Extreme weather conditions can from time to time have an adverse impact upon individual resorts or particular regions. Our resorts are also vulnerable to the effects of destructive forces, such as fire, storms, high winds and flooding and any other occurrence that could affect the supply of water, gas, telephone or electricity to our resorts. Although our resorts are insured against property damage, damages resulting from acts of God or otherwise may exceed the limits of our insurance coverage or be outside the scope of that coverage.
 
Compliance with the Americans with Disabilities Act and other governmental regulations and changes in governmental rules and regulations may adversely affect our financial condition and results of operations.
 
Under the Americans with Disabilities Act of 1990, or the ADA, all public accommodations are required to meet certain federal requirements related to access and use by disabled persons. While we believe that our resorts are substantially in compliance with these requirements, we have not conducted an audit or investigation of all of our resorts to determine our compliance. A determination that we are not in compliance with the ADA could result in the imposition of fines or an award of damages to private litigants. We cannot predict the ultimate cost of compliance with the ADA.
 
The resort industry is also subject to numerous federal, state and local governmental regulations including those related to building and zoning requirements, and we are subject to laws governing our relationship with our employees, including minimum wage requirements, overtime, working conditions and work permit requirements. In addition, changes in governmental rules and regulations or enforcement policies affecting the


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use and operation of our resorts, including changes to building codes and fire and life safety codes, may occur. If we were required to make substantial modifications at our resorts to comply with the ADA, other governmental regulations or changes in governmental rules and regulations, our financial condition and results of operations could be adversely affected.
 
We face possible liability for environmental cleanup costs and damages for contamination related to our properties, which could adversely affect our business, financial condition and results of operations.
 
Our operations and properties are subject to federal, state and local laws and regulations relating to the protection of the environment, natural resources and worker health and safety, including laws and regulations governing and creating liability relating to the management, storage and disposal of hazardous substances and other regulated materials. Our properties are also subject to various environmental laws and regulations that govern certain aspects of our ongoing operations. These laws and regulations control such things as the nature and volume of our wastewater discharges, quality of our water supply and our waste management practices. The costs of complying with these requirements, and of paying penalties, fines, assessments and the like related to non-compliance, as they now exist or may be altered in the future, could adversely affect our financial condition and results of operations. Specifically, the wastewater treatment plant at our Poconos Mountains resort is subject to numerous state, federal and other regulations. The cost of compliance with such regulations for penalties, remediation and other costs arising out of non compliance, as occurred in 2006 when we agreed to pay a penalty of $833 and incurred other costs in excess of $1,000 to remediate wastewater discharges that were out of compliance with applicable permits and to prevent further out-of-compliance discharges.
 
Because we own and operate real property, various federal, state and local laws may impose liability on us for the costs of removing or remediating various hazardous substances, including substances that may be currently unknown to us, that may have been released on or in our property or disposed by us at third-party locations. The principal federal laws relating to environmental contamination and associated liabilities that could affect us are the Resource Conservation and Recovery Act and the Comprehensive Environmental Response, Compensation and Liability Act; state and local governments have also adopted separate but similar environmental laws and regulations that vary from state to state and locality to locality. These laws may impose liability jointly and severally, without regard to fault and whether or not we knew of or caused the release. The presence of hazardous substances on a property or the failure to meet environmental regulatory requirements may materially adversely affect our ability to use or sell the property, or to use the property as collateral for borrowing, and may cause us to incur substantial remediation or compliance costs. In addition, if hazardous substances are located on or released from one of our properties, we could incur substantial liabilities through a private party personal injury claim, a claim by an adjacent property owner for property damage or a claim by a governmental entity for other damages, such as natural resource damages. This liability may be imposed on us under environmental laws or common-law principles.
 
We obtain environmental assessment reports on the properties we own or operate as we deem appropriate. These reports have not revealed any environmental liability or compliance concerns that we believe would materially adversely affect our financial condition or results of operations. However, the environmental assessments that we have undertaken might not have revealed all potential environmental liabilities or claims for such liabilities. It is also possible that future laws, ordinances or regulations or changed interpretations of existing laws and regulations will impose material environmental liability or compliance costs on us, that the current environmental conditions of properties we own or operate will be affected by other properties in the vicinity or by the actions of third parties unrelated to us or that our guests could introduce hazardous or toxic substances into the resorts we own or manage without our knowledge and expose us to liability under federal or state environmental laws. The costs of defending these claims, complying with as yet unidentified requirements, conducting this environmental remediation or responding to such changed conditions could adversely affect our financial condition and results of operations.
 
Some of our resort properties may have contained, or are adjacent to or near other properties that have contained or currently contain underground storage tanks for the storage of petroleum products or other


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hazardous or toxic substances. If hazardous or toxic substances were released from these tanks, we could incur significant costs or, with respect to tanks on our property, be liable to third parties with respect to the releases.
 
On occasion, we may elect to develop properties that have had a history of industrial activities and/or historical environmental contamination. Where such opportunities arise, we engage third-party experts to evaluate the extent of contamination, the scope of any needed environmental clean-up work, and available measures (such as creation of barriers over residual contamination and deed restrictions prohibiting groundwater use or disturbance of the soil) for ensuring that planned development and future property uses will not present unacceptable human health or environmental risks or exposure to liabilities. If those environmental assessments indicate that the development opportunities are acceptable, we also work with appropriate governmental agencies and obtain their approvals of planned site clean-up, development activities and the proposed future property uses. We have followed that process in connection with the development of our Blue Harbor Resort in Sheboygan, Wisconsin where the City of Sheboygan has arranged for environmental clean-up work and ongoing groundwater monitoring and we have agreed to the use of a barrier preventing contact with residual contamination and implementation of a deed restriction limiting site activities. To our knowledge, our work at our Sheboygan resort has been conducted in accordance with requirements imposed by the Wisconsin Department of Natural Resources. Based on these efforts, we are not aware of any environmental liability or compliance concerns at our Sheboygan resort that we believe would materially adversely affect our financial conditions or results of operations. It is possible, however, that our efforts have not identified all environmental conditions at the property or that environmental conditions and liabilities associated with the property could change in the future.
 
Future acquisitions of properties subject to environmental requirements or affected by environmental contamination could require us to incur substantial costs relating to such matters. In addition, environmental laws, regulations, wetlands, endangered species and other land use and natural resource issues affecting either currently owned properties or sites identified as possible future acquisitions may increase costs associated with future site development and construction activities or business or expansion opportunities, prevent, delay, alter or interfere with such plans or otherwise adversely affect such plans.
 
Regulation of the marketing and sale of condominiums, including a prior offer of condominiums at our Blue Harbor Resort, could adversely affect our business.
 
Our marketing and sales of condominium units are subject to extensive regulation by the federal government and the states in which our condominiums are marketed and sold. On a federal level, the Federal Trade Commission Act prohibits unfair or deceptive acts or competition in interstate commerce. Other federal legislation to which we are or may be subject includes the Interstate Land Sales Full Disclosure Act, the Real Estate Settlement Practices Act and the Fair Housing Act. In addition, many states have adopted specific laws and regulations regarding the sale of condominiums. For example, certain state laws grant the purchaser the right to cancel a contract of purchase within a specified period following the earlier of the date the contract was signed or the date the purchaser has received the last of the documents required to be provided by the seller. No assurance can be given that the cost of qualifying under condominium regulations in all jurisdictions in which we desire to conduct sales will not be significant. The failure to comply with such laws or regulations could adversely affect our business, financial condition and results of operations.
 
There can be no assurance that prior or future sales of our condominium units will not be considered offers or sales of “securities” under federal law or the state law in the states where we desire to, or do, conduct sales or in which our properties are located. If such interests were considered to be securities, we would be required to comply with applicable state and federal securities laws, including laws pertaining to registration or qualification of securities, licensing of salespeople and other matters. There can be no assurance that we will be able to comply with the applicable state and federal securities requirements, and if the offers or sales of our condominium units are deemed to be offers or sales of securities, such a determination may create liabilities or contingencies that could have an adverse effect on our operations, including possible rescission rights relating to the units that have been sold, which, if exercised, could result in losses and would adversely affect our business, financial condition and results of operations.


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In particular, it is possible that the prior offer of condominiums at our Sheboygan resort by Blue Harbor Resort Condominium, LLC, a former subsidiary of Great Lakes that we refer to as Condo LLC, may not have been in compliance with federal and state securities laws. Prior to the initial public offering and the completion of the formation transactions, interests in Condo LLC held by Great Lakes were distributed to Great Lakes’ shareholders. We did not acquire Condo LLC as a part of the formation transactions. Although Condo LLC has taken steps to correct any potential securities laws issues in connection with these offers, we cannot assure you that we would not be held liable to some extent for the offers made by Condo LLC.
 
The illiquidity of real estate may make it difficult for us to dispose of one or more of our resorts.
 
We may from time to time decide to dispose of one or more of our real estate assets. Because real estate holdings generally, and family entertainment resorts like ours in particular, are relatively illiquid, we may not be able to dispose of one or more real estate assets on a timely basis or at a favorable price. The illiquidity of our real estate assets could mean that we continue to operate a facility that management has identified for disposition. Failure to dispose of a real estate asset in a timely fashion, or at all, could adversely affect our business, financial condition and results of operations.
 
The covenants in our mortgage loan agreements impose significant restrictions on us.
 
The terms of our mortgage loan agreements impose significant operating and financial restrictions on us and our subsidiaries and require us to meet certain financial tests. These restrictions could also have a negative impact on our business, financial condition and results of operations by significantly limiting or prohibiting us from engaging in certain transactions, including:
 
  •  incurring or guaranteeing additional indebtedness;
 
  •  transferring or selling assets currently held by us;
 
  •  transferring ownership interests in certain of our subsidiaries; and
 
  •  reducing our tangible net worth below specified levels.
 
The failure to comply with any of these covenants could cause a default under our other debt agreements. Any of these defaults, if not waived, could result in the acceleration of all of our debt, in which case the debt would become immediately due and payable. If this occurs, we may not be able to repay our debt or borrow sufficient funds to refinance it.
 
Certain of our insiders exercise considerable influence over the company.
 
As of the date of this Annual Report on Form 10-K, our executive officers and directors, as a group, beneficially own approximately 5.4% of the outstanding shares of our common stock. By reason of such holdings, these stockholders acting as a group will be able to exercise significant influence over our affairs and policies, including the election of our board of directors and matters submitted to a vote of our stockholders such as mergers and significant asset sales, and their interests might not be consistent with the interests of other stockholders.
 
We may have assumed unknown liabilities in connection with the formation transactions.
 
As part of the formation transactions, we acquired our predecessor companies subject to existing liabilities, some of which may have been unknown at the time of the closing thereof. Unknown liabilities might include liabilities for cleanup or remediation of undisclosed environmental conditions, claims of vendors or other persons dealing with the entities prior to the closing of the formation transactions (that had not been asserted or threatened prior thereto), tax liabilities and accrued but unpaid liabilities incurred in the ordinary course of business. The founding shareholders of our predecessor companies agreed to indemnify us with respect to claims for breaches of representations and warranties brought by us within one year following the completion of the IPO and the formation transactions, subject to certain limitations. Many liabilities may not


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have been identified by December 20, 2005, the expiration of the one-year period, and we may have no recourse against the founding shareholders or these entities for such liabilities.
 
We may issue partnership interests in the future that may be dilutive to, and may have preferential rights over, our common stockholders.
 
We have formed a wholly owned operating partnership to serve as the parent entity of each of the resort-owning entities that we acquired in the formation transactions. We are the limited partner of the partnership and the sole general partner of the partnership is a wholly owned subsidiary that we have formed for that purpose. We formed the operating partnership to provide flexibility for future transactions as we execute our growth strategy. We believe that the ability to issue partnership units will enable us to acquire assets from sellers seeking certain tax treatment. While we do not anticipate issuing any interests in the operating partnership in the foreseeable future, we may issue such interests in the future. These additional interests may include preferred limited partnership units. Any partnership interests that we issue may be entitled to distributions of available cash that might otherwise be allocated to the execution of our business plan or generally available for future dividends, if any. In addition, any partnership interests may be convertible into our common stock, thus having a dilutive impact to our common stockholders, and may have voting or other preferential rights relative to those of our common stockholders.
 
Our stock price has been volatile in the past and may be volatile in the future.
 
On December 20, 2004, we completed the initial public offering. Trading markets after an initial public offering have often been extremely volatile. Since our initial public offering through March 2, 2007, our common stock has traded at a high of $25.88 and a low of $8.00. The following factors could cause the price of our common stock in the public market to fluctuate significantly:
 
  •  variations in our quarterly operating results;
 
  •  changes in market valuations of companies in the resort or entertainment industries, generally, and the family entertainment resort segment, specifically;
 
  •  fluctuations in stock market prices and volumes;
 
  •  issuances of common stock or other securities in the future;
 
  •  the addition or departure of key personnel; and
 
  •  announcements by us or our competitors of new properties, acquisitions or joint ventures, or our failure to announce new properties of a type or in a quantity deemed desirable by participants in the public market.
 
Volatility in the market price of our common stock may prevent investors from being able to sell their common stock at or above the price an investor pays for our common stock. In the past, class action litigation has often been brought against companies following periods of volatility in the market price of those companies’ common stock. Litigation is often expensive and diverts management’s attention and company resources and could have a material adverse effect on our business, financial condition and operating results.
 
The sale of a substantial number of shares of our common stock may cause the market price of our common stock to decline.
 
If our stockholders sell substantial amounts of shares of common stock in the public market, including the shares issued in connection with our formation transactions, or upon the exercise of outstanding options, or if the market perceives that these sales could occur, the market price of our common stock could decline. These sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate, or to use equity as consideration for future acquisitions.


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Provisions in our certificate of incorporation, bylaws, employment agreements and Delaware law have anti-takeover effects that could prevent a change in control that could be beneficial to our stockholders, which could depress the market price of our common stock.
 
Our certificate of incorporation, bylaws, employment agreements and Delaware corporate law contain provisions that could delay, defer, increase the costs of or prevent a change in control of us or our management that could be beneficial to our stockholders. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors and take other corporate actions. As a result, these provisions could limit the price that investors are willing to pay in the future for shares of our common stock. These provisions might also discourage a potential acquisition proposal or tender offer, even if the acquisition proposal or tender offer is at a price above the then current market price for our common stock. These provisions:
 
  •  authorize our board of directors to issue “blank check” preferred stock and determine the powers, preferences and privileges of those shares without prior stockholder approval;
 
  •  prohibit the right of our stockholders to act by written consent;
 
  •  limit the calling of special meetings of stockholders;
 
  •  impose a requirement that holders of 50% of the outstanding shares of common stock are required to amend the provisions relating to actions by written consent of stockholders and the limitations of calling special meetings; and
 
  •  provide for payments to certain of our executive officers upon termination of employment within certain time periods before or after a change of control.
 
Forward-Looking Statements
 
Certain information included in this Annual Report on Form 10-K contains, and other materials filed or to be filed by us with the Securities and Exchange Commission, or the SEC, contain or will contain, forward-looking statements. All statements, other than statements of historical facts, including, among others, statements regarding our future financial results or position, business strategy, projected levels of growth, projected costs and projected financing needs, are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of Great Wolf Resorts, Inc. and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as “may,” “will,” “seeks,” “anticipates,” “believes,” “estimates,” “expects,” “plans,” “intends,” “should” or similar expressions. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties that actual results may differ materially from those contemplated by such forward-looking statements. Important factors currently known to our management that could cause actual results to differ materially from those in forward-looking statements include those set forth above under the section entitled “Risk Factors.”
 
We believe these forward-looking statements are reasonable; however, undue reliance should not be placed on any forward-looking statements, which are based on current expectations. All written and oral forward-looking statements attributable to us or persons acting on our behalf are qualified in their entirety by these cautionary statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time unless required by law.
 
Available Information
 
We maintain an Internet site at http://www.greatwolf.com. Our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the Exchange Act), as well as our Annual Report to shareowners and Section 16 reports on Forms 3, 4, and 5, are available free of charge via EDGAR through the SEC’s website http://www.sec.gov. We have provided a link on our Internet site to the SEC’s website.


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ITEM 1B.   UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 2.   PROPERTIES
 
We have eight family entertainment resorts that are currently operating and two additional resorts that are under development. Unless otherwise indicated, we own a 100% fee interest in these properties. Information on our properties is as follows:
 
  •  Great Wolf Lodge of Wisconsin Dells is located on 16 acres in Wisconsin Dells, Wisconsin, all of which have been developed. This property is owned by a joint venture of which Great Wolf Resorts has a 30% minority interest and CNL Income Properties, Inc. has a 70% majority interest.
 
  •  Great Wolf Lodge of Sandusky is located on 15 acres in Sandusky, Ohio, all of which have been developed. This property is owned by a joint venture of which Great Wolf Resorts has a 30% minority interest and CNL Income Properties, Inc. has a 70% majority interest.
 
  •  Great Wolf Lodge of Traverse City is located on 48 acres in Traverse City, Michigan, of which 22 acres have been developed and 26 acres remain undeveloped.
 
  •  Great Wolf Lodge of Kansas City is located on 17 acres in Kansas City, Kansas, all of which have been developed.
 
  •  Blue Harbor Resort of Sheboygan is located on 12 leased acres in Sheboygan, Wisconsin, all of which have been developed.
 
  •  Great Wolf Lodge of Williamsburg is located on 83 acres in Williamsburg, Virginia, of which 36 acres have been developed or are under development and 47 acres remain undeveloped.
 
  •  Great Wolf Lodge of the Pocono Mountains is located on 95 acres in Pocono Township, near Stroudsburg, Pennsylvania, of which 45 acres are developed and 50 acres remain undeveloped.
 
  •  Great Wolf Lodge of Mason is located on 39 acres in Mason, Ohio. We have an 84% ownership in the joint venture that owns this resort. All 39 acres of this property are developed.
 
  •  Great Wolf Lodge of Grapevine which is currently under construction, will be located on 51 acres in Grapevine, Texas, of which 30 acres are being developed and 21 acres will remain undeveloped.
 
  •  Great Wolf Lodge of Grand Mound, which is under construction, will be located on 39 leased acres in Grand Mound, Washington. This property is owned by a joint venture of which Great Wolf Resorts has a 49% minority interest and The Confederated Tribes of the Chehalis Reservation has a 51% majority interest.
 
For additional information regarding our resort properties see “Item 1. Business — Operating Properties” and “Item 1. Business — Properties Under Construction” above.
 
We lease approximately 13,800 square feet of office space for our corporate headquarters office and approximately 5,600 square feet of office space for our central reservations call center operations in Madison, Wisconsin. We also lease approximately 3,800 square feet of office space in Falls Church, Virginia, and approximately 1,500 square feet of office space in North Ridgeville, Ohio. We believe these facilities are adequate for our current needs.
 
ITEM 3.   LEGAL PROCEEDINGS
 
On February 1, 2007 we entered into a consent settlement with the Pennsylvania Department of Environmental Protection, settling proposed civil penalties arising out of alleged violations by our Pocono Mountains resort of certain provisions of its wastewater discharge permit between October 2005 and August 2006. The agreed upon penalty amount was $833. We expect to incur some additional costs to further improve


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the wastewater treatment plant and to avoid future permit violations, which we expect will cost in excess of $200.
 
In addition, we are involved in other 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 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
We did not submit any matters to a vote of security holder during the fourth quarter of 2006.
 
PART II
 
ITEM 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
In conjunction with the completion of our IPO, our common shares began trading on NASDAQ National Market under the symbol “WOLF.” The following table sets forth the high and low closing prices for our common stock.
 
                 
    Stock Price  
    High     Low  
 
Fiscal 2005:
               
First Quarter
  $ 25.88     $ 20.07  
Second Quarter
  $ 25.25     $ 17.80  
Third Quarter
  $ 22.82     $ 9.20  
Fourth Quarter
  $ 10.82     $ 8.00  
Fiscal 2006:
               
First Quarter
  $ 11.68     $ 9.80  
Second Quarter
  $ 12.72     $ 10.70  
Third Quarter
  $ 12.71     $ 10.16  
Fourth Quarter
  $ 14.22     $ 11.54  
Fiscal 2007:
               
First Quarter through March 2, 2007
  $ 14.73     $ 12.91  
 
As of December 31, 2006, there were 215 record holders of our common stock. As of March 2, 2007, there were 217 record holders of our common stock. The closing price of our common stock on the NASDAQ National Market on March 2, 2007, was $13.37.
 
In connection with our formation transactions, we issued common stock to certain holders of securities, who, among other things, have certified to us as to their status as “accredited investors,” in each of GLC and its resort related subsidiaries. In total, we issued an aggregate of 13,901,947 shares of our common stock to such investors. In exchange, we received all or a portion of each such investor’s interest in either GLC or the applicable resort related GLC subsidiary and such entities became wholly owned subsidiaries of our company. Also in connection with our formation transactions, we issued (1) 64,038 shares of our common stock to the holder of a tenant in common interest in our Poconos resort and (2) 67,516 shares of our common stock to the holder of a tenant in common interest in our Williamsburg resort. In addition, we issued 100 shares of common stock, par value $0.01 per share, to GLC upon our formation on May 10, 2004. We received an aggregate of $1,000 in cash in exchange for these shares. We redeemed these shares in connection with the formation transactions.


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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 Trust’s 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.
 
The issuances described above were exempt from registration under the Securities Act, pursuant to Section 4(2) of the Securities Act and Regulation D promulgated thereunder as transactions by an issuer not involving a public offering.
 
Dividend Policy
 
We have never declared or paid any cash dividends on our capital stock, and we do not anticipate paying cash dividends in the foreseeable future. We currently intend to retain our earnings, if any, for future growth. Future dividends on our common stock, if any, will be at the discretion of our board of directors and will depend on, among other things, our operations, capital requirements and surplus, general financial condition, contractual restrictions and such other factors as our board of directors may deem relevant.
 
Performance Graph
 
The following graph depicts the Company’s total monthly return to shareholders from January 1, 2006 through December 31, 2006, relative to the performance of (i) the Standard & Poor’s 500 Index, (ii) the NASDAQ 100 Index, and (iii) the Russell 2000 Index. All indices shown in the graph assume an investment of $100 on January 1, 2006 and the reinvestment of dividends paid since that date. The Company has never paid cash dividends on its common stock. The stock price performance shown in the graph is not necessarily indicative of future price performance.
 
 


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ITEM 6.   SELECTED FINANCIAL DATA
 
The following table sets forth selected consolidated financial and operating data on a historical basis for Great Wolf Resorts, and on a combined historical basis for Great Lakes Predecessor (the Predecessor). The Predecessor was the predecessor accounting entity to Great Wolf Resorts. We have not presented historical information for Great Wolf Resorts prior to December 20, 2004, the date on which we closed the IPO, because we did not have any material corporate operating activity during the period from our formation until the closing of the IPO.
 
Great Wolf Resorts Financial Information
 
Great Wolf Resorts’ consolidated financial information includes:
 
  •  our corporate entity that provides resort development and management services;
 
  •  our Traverse City, Kansas City, Sheboygan, Williamsburg, Pocono Mountains and Mason operating resorts;
 
  •  for all periods prior to October 2005, the Wisconsin Dells and Sandusky resorts;
 
  •  equity interests in resorts in which we have ownership interests but which we do not consolidate; and
 
  •  our resorts that are under construction which we will consolidate.
 
Great Lakes Predecessor Financial Information
 
The Predecessor’s combined historical financial information included the following:
 
  •  The Great Lakes Companies, Inc. (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.
 
The Traverse City, Kansas City and Sheboygan resorts opened in March 2003, May 2003 and June 2004, respectively. Therefore, the Predecessor’s historical results of operations only reflected operating results for Traverse City, Kansas City and Sheboygan for those periods after the resort opening dates.
 
The Predecessor’s financial information did not include the entities that own the Wisconsin Dells and Sandusky operating resorts as those entities, while managed by GLC, were controlled by affiliates of AIG SunAmerica.

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The following data should be read in conjunction with our financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K.
 
                                                   
                December 21,
                     
    Year Ended
    Year Ended
    2004-
      January 1,
             
    December 31,
    December 31,
    December 31,
      2004-
    Year Ended
    Year Ended
 
    2006
    2005
    2004
      December 20,
    December 31,
    December 31,
 
    Great Wolf
    Great Wolf
    Great Wolf
      2004
    2003
    2002
 
    Resorts, Inc.     Resorts, Inc.     Resorts, Inc.       Predecessor     Predecessor     Predecessor  
    (Dollars in thousands, except per share amounts)  
Statement of Operations:
                                                 
Revenues:
                                                 
Rooms
  $ 87,775     $ 73,207     $ 3,261       $ 31,438     $ 18,801     $  
Food, beverage and other
    43,137       36,846       1,289         16,110       9,439        
Sales of condominiums
          25,862                            
Management and other fees
    2,087       494       79         3,157       3,109       3,410  
Management and other fees-related parties
    3,729       482                            
Other revenue from managed properties(1)
    11,920       2,524               14,553       14,904       14,808  
                                                   
Total revenues
    148,648       139,415       4,629         65,258       46,253       18,218  
                                                   
Operating expenses by department:
                                                 
Rooms
    11,914       10,944       298         4,917       3,265        
Food, beverage and other
    35,923       31,407       958         13,678       8,580        
Other operating expenses:
                                                 
Selling, general and administrative
    41,421       26,894       7,372         18,613       11,376       4,159  
Property operating costs
    23,217       24,798       295         8,810       5,283       631  
Depreciation and amortization
    25,903       26,248       1,897         12,925       7,744       212  
Costs of sales of condominiums
          16,780                            
Goodwill impairment
    50,975                                  
Loss on sale of property
    1,066       26,161                            
Other expenses from managed properties(1)
    11,920       2,524               14,553       14,904       14,808  
                                                   
Total operating expenses
    202,339       165,756       10,820         73,496       51,152       19,810  
                                                   
Net operating loss
    (53,691 )     (26,341 )     (6,191 )       (8,238 )     (4,899 )     (1,592 )
Interest income
    (3,105 )     (1,623 )     (66 )       (224 )     (55 )     (88 )
Interest expense
    7,169       6,728       280         6,748       4,413       217  
(Gain) loss on sale of investments and securities
                        (1,653 )           13  
Interest on mandatorily redeemable shares
                        1,761       (3,136 )     4,479  
                                                   
Loss before income taxes, minority interest, and equity in unconsolidated affiliates
    (57,755 )     (31,446 )     (6,405 )       (14,870 )     (6,121 )     (6,213 )
Income tax benefit
    (8,764 )     (7,199 )     (2,563 )                    
Minority interests, net of tax
    (502 )     (4 )                          
Equity in unconsolidated affiliates, net of tax
    761       170                            
                                                   
Loss from continuing operations
    (49,250 )     (24,413 )     (3,842 )       (14,870 )     (6,121 )     (6,213 )
Income (loss) from discontinued operations
                        1,928       1,118       (542 )
                                                   
Loss before cumulative effect of change in accounting principle
    (49,250 )     (24,413 )     (3,842 )       (12,942 )     (5,003 )     (6,755 )
Cumulative effect of change in accounting principle
                              460        
                                                   
Net loss
  $ (49,250 )   $ (24,413 )   $ (3,842 )     $ (12,942 )   $ (4,543 )   $ (6,755 )
                                                   
Basic loss per share
  $ (1.63 )   $ (0.81 )   $ (0.13 )                          
Diluted loss per share
  $ (1.63 )   $ (0.81 )   $ (0.13 )                          
Weighted average common shares outstanding — Basic
    30,299,647 (2)     30,134,146 (2)     30,132,896 (2)                          
Diluted
    30,299,647 (2)     30,134,146 (2)     30,132,896 (2)                          


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                December 21,
                     
    Year Ended
    Year Ended
    2004-
      January 1,
             
    December 31,
    December 31,
    December 31,
      2004-
    Year Ended
    Year Ended
 
    2006
    2005
    2004
      December 20,
    December 31,
    December 31,
 
    Great Wolf
    Great Wolf
    Great Wolf
      2004
    2003
    2002
 
    Resorts, Inc.     Resorts, Inc.     Resorts, Inc.       Predecessor     Predecessor     Predecessor  
    (Dollars in thousands, except per share amounts)  
Cash Flows:
                                                 
Cash flows from:
                                                 
Operating activities
  $ 29,723     $ 17,788     $ 762       $ 3,637     $ 8,126     $ 376  
Investing activities
    (107,123 )     (65,496 )     (97,583 )       (64,472 )     (64,280 )     (46,276 )
Financing activities
    119,396       23,081       172,151         61,424       54,854       49,797  
Balance Sheet Data (end of period):
                                                 
Total assets
  $ 683,439     $ 605,526     $ 622,025               $ 173,494     $ 106,751  
Total long-term debt
    289,389       168,328       142,665                 93,733       37,710  
Long-term debt secured by assets of spun-off entities
                                12,108       5,054  
Long-term debt secured by assets held for sale
                                14,220       31,564  
Non-GAAP financial Measures:
                                                 
EBITDA
  $ (28,221 )(3)   $ (369 )(3)   $ (4,294 )(3)     $ 6,507 (3)   $ 7,559     $ 334  
 
                                                 
 
 
(1) Reflects reimbursement of payroll, benefits and costs related to the operations of properties managed by us in 2005-2006 and the Predecessor in 2001-2004.
 
(2) Included in the total shares outstanding of our common stock are 129,412 shares held in a trust that holds the assets to pay obligations under our deferred compensation plan. Under applicable accounting rules, the shares of common stock held in that trust are treated as treasury stock for purposes of our earnings per share computations and are therefore excluded from the basic and diluted earnings per share calculations.
 
(3) See reconciliation to net loss in “Management’s Discussion and Analysis of Financial Condition and Results of Operation — Non-GAAP Financial Measures.”
 
ITEM 7.   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. Where appropriate, the following discussion includes analysis of the effects of our IPO, the Formation Transactions and related refinancing transactions and certain other transactions. 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 1A of this Annual Report on Form 10-K report entitled “Forward-Looking Statements.” Certain risk factors may cause our actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. For a discussion of such risk factors, see the sections in Item 1A of this Annual Report on Form 10-K report entitled “Risk Factors” and “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. and its wholly-owned subsidiaries.
 
Formation.  We were formed to succeed to certain businesses of the Great Lakes Predecessor (the Predecessor), which was not a legal entity but rather a combination of numerous entities, all of which were under common management. These entities were involved in the development, ownership and operation of resorts, hotels and multifamily housing projects.
 
We were incorporated in May 2004 as a Delaware corporation in anticipation of the initial public offering of our common stock (the IPO). The IPO closed on December 20, 2004, concurrently with the completion of various formation transactions (the Formation Transactions). Pursuant to the Formation Transactions:
 
  •  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

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  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.
 
These transactions consolidated the ownership of our resort properties and property interests to Great Wolf Resorts. During the period from our formation until we commenced operations upon closing of the IPO on December 20, 2004, we did not have any material corporate activity.
 
The IPO consisted of the sale of 16,100,000 shares of common stock at a price per share of $17.00, generating gross proceeds of $273,700. The net proceeds to us were approximately $248,700 after deducting an aggregate of $19,200 in underwriting discounts and commissions paid to the underwriters and $5,800 in other expenses directly related to the issuance of common stock (such as professional fees and printing fees) incurred in connection with the IPO.
 
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.


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The following table presents an overview of our portfolio of operating resorts and resorts under construction. As of December 31, 2006, we operate eight Great Wolf Lodge resorts (our signature northwoods-themed resorts), and one Blue Harbor Resort (a nautical-themed property).
 
                                     
                          Indoor
 
    Ownership
                    Entertainment
 
    Percentage     Opening   Guest Suites     Condo Units     Area(1)  
                          (Approx. ft2)  
 
Existing Resorts:
                                   
Wisconsin Dells, WI(2)
    30 %   1997     309       77       102,000  
Sandusky, OH(2)
    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     182       64       54,000  
Williamsburg, VA
    100 %   2005     301 (3)           78,000  
Pocono Mountains, PA
    100 %   2005     401             91,000  
Niagara Falls, ONT(4)
        April 2006     406             94,000  
Mason, OH(5)
    84 %   December 2006     401             93,000  
Resorts Under Construction:
                                   
Grapevine, TX(6)
    100 %   Late 2007     404             98,000  
Grand Mound, WA(7)
    49 %   Early 2008     398             78,000  
 
 
(1) Our indoor entertainment areas generally include our indoor waterpark, game arcade, children’s activity room and fitness room, as well as our Aveda spa in the resorts that have such amenities.
 
(2) In 2005, we formed a joint venture with CNL Income Properties, Inc. (CNL), a real estate investment trust focused on leisure and lifestyle properties. The joint venture acquired our Wisconsin Dells and Sandusky resorts. CNL owns a 70% interest in the joint venture, and we retained a 30% interest. CNL paid us approximately $80 million for its 70% ownership interest. We continue to operate the properties and license the Great Wolf Lodge brand to the joint venture under 25-year agreements, subject to earlier termination in certain situations.
 
(3) Construction for the expansion of 104 additional guest suites, conference center space and waterpark attractions began in May 2006. The additional waterpark attractions were completed in December 2006. We expect to complete the additional guest suites and conference center space in Spring 2007.
 
(4) An affiliate of Ripley Entertainment, Inc. (Ripley), our licensee, owns this resort. We have granted Ripley a license to use the Great Wolf Lodge name for this resort through April 2016. We manage the resort on behalf of Ripley and also provide central reservation services.
 
(5) We have entered into a joint venture agreement with a subsidiary of CBS Corporation (CBS), to build this resort and attached conference center. We 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. This resort opened in December 2006. The conference center is expected to be completed in March 2007.
 
(6) We are developing a Great Wolf Lodge resort in Grapevine, Texas. The northwoods themed, eight-story resort will provide a comprehensive package of first-class destination lodging amenities and activities. Construction on the resort began in June 2006 with expected completion in late 2007.
 
(7) We have entered into a joint venture agreement with The Confederated Tribes of the Chehalis Reservation 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.
 
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


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United States in Wisconsin Dells, Wisconsin, and has evolved there over the past 17 years. In an effort to boost occupancy and daily rates, as well as capture off-season demand, hotel operators in the Wisconsin Dells market began expanding indoor pools and adding waterslides and other water-based attractions to existing hotels and resorts. The success of these efforts prompted several local operators to build new, larger destination resorts based primarily on the concept.
 
We believe that these properties, which typically are themed and include other resort features such as arcades, retail shops and full food and beverage service in addition to the indoor waterpark, have historically outperformed standard hotels in the market. We believe that the rate premiums and increased market share in the Wisconsin Dells for hotels and resorts with some form of an indoor waterpark can be attributed to several factors, including the ability to provide a year-round vacation destination without weather-related risks, the wide appeal of water-based recreation and the favorable trends in leisure travel discussed below.
 
While no standard industry definition for a family entertainment resort featuring an indoor waterpark has developed, we generally consider resorts with at least 200 rooms featuring indoor waterparks larger than 25,000 square feet, as well as a variety of water slides and other water-based attractions, to be competitive with our resorts. A recent Hotel & Leisure Advisors, LLC (H&LA) survey indicates that the number of indoor waterpark destination resorts has grown from 29 available properties as of year-end 2005 to 41 available properties as of year-end 2006.
 
We believe recent vacation trends favor drive-to family entertainment resorts featuring indoor waterparks, as the number of families choosing to take shorter, more frequent vacations that they can drive to have increased in recent years. We believe that these trends will continue. We believe indoor waterpark resorts are generally less affected by changes in economic cycles, as drive-to destinations are less expensive and more convenient than destinations that require air travel.
 
Outlook.  We believe that no other operator or developer other than Great Wolf Resorts has established a regional portfolio of family entertainment resorts featuring indoor waterparks. We intend to continue to expand our portfolio of owned resorts throughout the United States and to selectively seek licensing and management opportunities domestically and internationally. The resorts we are currently constructing and plan to develop in the future require significant industry knowledge and substantial capital resources. Several of our resorts have similar family entertainment resorts that compete directly with them.
 
Our primary business objective is to increase long-term stockholder value. We believe we can increase stockholder value by executing our internal and external growth strategies. Our primary internal growth strategies are to: maximize total resort revenue; minimize costs by leveraging our economies of scale; and build upon our existing brand awareness and loyalty in order to compete more effectively. Our primary external growth strategies are to: capitalize on our first-mover advantage by being the first to develop and operate family entertainment resorts featuring indoor waterparks in our selected target markets; focus on development and strategic growth opportunities by seeking to develop additional resorts and target selected licensing and joint venture opportunities; and continue to innovate by leveraging our in-house expertise, in conjunction with the knowledge and experience of our third-party suppliers and designers.
 
In attempting to execute our internal and external growth strategies, we are subject to a variety of business challenges and risks. These challenges include: development and licensing of properties; increases in costs of constructing, operating and maintaining our resorts; competition from other entertainment companies, both within and outside our industry segment; and external economic risks, including family vacation patterns and trends. We seek to meet these challenges by providing sufficient management oversight to site selection, development and resort operations, concentrating on growing and strengthening awareness of our brand and demand for our resorts, and maintaining our focus on safety.
 
We believe that Traverse City and Sandusky resorts have been and 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


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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 our cash flows and profitability. Rooms revenue accounted for approximately 67% of our total resort revenue for the twelve months ended December 31, 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 rooms available
 
  •  Total Rev POR is calculated by dividing total revenue by occupied rooms


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Occupancy allows us to measure the general overall demand for rooms at our resorts and the effectiveness of our sales and marketing strategies. ADR allows us to measure the effectiveness of our yield management strategies. While ADR and RevPAR only include rooms revenue, Total RevPOR and Total RevPAR include both rooms revenue and other revenue derived from food and beverage and other amenities at our resorts. We consider Total RevPOR and Total RevPAR to be key performance indicators for our business because we derive a significant portion of our revenue from food and beverage and other amenities. For the twelve months ended December 31, 2006, approximately 33% of our total resort revenues consisted of non-rooms revenue.
 
We use RevPAR and Total RevPAR to evaluate the blended effect that changes in occupancy, ADR and Total RevPOR have on our profitability. We focus on increasing ADR and Total RevPOR because those increases can have the greatest positive impact on our profitability. In addition, we seek to maximize occupancy, as increases in occupancy generally lead to greater total revenues at our resorts, and maintaining certain occupancy levels is key to covering our fixed costs. Increases in total revenues as a result of higher occupancy are, however, typically accompanied by additional incremental costs (including housekeeping services, utilities and room amenity costs). In contrast, increases in total revenues from higher ADR and Total RevPOR are typically accompanied by lower incremental costs, and result in a greater increase in profitability.
 
We also use EBITDA as a measure of the operating performance of each of our resorts. EBITDA is a supplemental financial measure, and is not defined by accounting principles generally accepted in the United States of America, or GAAP. See “Non-GAAP Financial Measures” for further discussion of our use of EBITDA and a reconciliation to net income.
 
Critical Accounting Policies and Estimates
 
The preparation of our consolidated financial statements and our financial reporting process involve the use of accounting estimates based on our current judgments. Certain accounting estimates are particularly sensitive because of their significance to our consolidated financial statements and because of the possibility that future events affecting them may differ from our current judgments.
 
Investments in Property and Equipment.  We record investments in property and equipment at cost. Improvements and replacements are capitalized when they extend the useful life, increase capacity or improve the efficiency of the asset. Repairs and maintenance are charged to expense as incurred.
 
Depreciation and amortization are recorded on a straight-line basis over the estimated useful lives of the assets as follows:
 
         
Buildings and improvements
    20-40 years  
Fixtures and equipment, including waterpark equipment
    5-15 years  
 
We are required to make subjective assessments as to these useful lives for purposes of determining the amount of depreciation and amortization to record annually with respect to our investments in property and equipment. These assessments have a direct impact on our net income because if we were to shorten the expected useful lives of our investments in property and equipment we would depreciate and amortize such investments over fewer years, resulting in more depreciation and amortization expense and lower net income on an annual basis. We periodically review the estimated useful lives we have assigned to our depreciable assets to determine whether those useful lives are reasonable and appropriate.
 
When circumstances, such as adverse market conditions, indicate the carrying values of a long-lived asset may be impaired, we perform an analysis to review the recoverability of the asset’s carrying value. We make estimates of the undiscounted cash flows (excluding interest charges) from the expected future operations of the asset. These estimates consider factors such as expected future operating income, operating trends and prospects, as well as the effects of demand, competition and other factors. If the analysis indicates that the carrying value is not recoverable from future cash flows, an impairment loss is recognized to the extent that the carrying value exceeds the estimated fair value. Any impairment losses are recorded as operating expenses, which reduce net income.


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Carrying Values of Goodwill, Intangible Assets and Investment in Affiliates.  As a result of the Formation Transactions, we recorded on our consolidated balance sheet approximately $129,086 of goodwill and $23,829 of intangible assets related to our Great Wolf Lodge brand name. The brand name intangible asset has an indefinite life. In 2005 we removed $62,091 of goodwill in conjunction with the sale of 70% interests in our Wisconsin Dells and Sandusky resorts. The carrying value of our 30% interest in the joint venture that now owns the Wisconsin Dells and Sandusky resorts is $25,028 as of December 31, 2006. In 2006 we removed $50,975 of goodwill on our Traverse City and Blue Harbor resorts as the implied fair value of the goodwill, as discussed below, was deemed less than the carrying value.
 
On an annual basis, we perform analyses to determine any impairment of the carrying values of goodwill, indefinite-lived intangible assets and investment in affiliates.
 
  •  To test goodwill for impairment, we compare the fair value of the individual resort to which the goodwill is assigned to the carrying value of that resort. If the analysis indicates that the fair value is less than the carrying value of the individual resort, we compare the implied fair value of the resort’s goodwill with the carrying amount of that goodwill. The implied fair value of the goodwill is determined by allocating the fair value of the individual resort to all the assets and liabilities of that resort as if it had been acquired in a business combination. The excess of the fair value of the individual resort over the amounts assigned to its assets and liabilities is the implied fair value of the goodwill. If the implied fair value of the goodwill is less than its carrying value, an impairment loss is recognized. Any impairment losses are recorded as operating expenses, which reduce net income. Our assessment of the fair value is dependent on the operating results of the resorts. Future adverse changes in the hospitality and lodging industry, market conditions or poor operating results of the underlying real estate assets could result in future losses or the inability to recover the carrying value of goodwill.
 
  •  To test indefinite-lived intangible assets for impairment, we compare the fair value of the intangible asset with its carrying amount. If the fair value of the intangible asset is less than its carrying value, an impairment loss is recognized. Any impairment losses are recorded as operating expenses, which reduce net income. Future adverse changes in the hospitality and lodging industry, market conditions or poor operating results of the underlying real estate assets could result in future losses or the inability to recover the carrying value of these intangibles.
 
  •  To test investment in affiliates for impairment, we compare the fair value of the investment in affiliates with its carrying amount. If the fair value of the investment in affiliate is less than its carrying value, an impairment loss is recognized. Any impairment losses are recorded as operating expenses, which reduce net income. Future adverse changes in the hospitality and lodging industry, market conditions or poor operating results of the underlying investments could result in future losses or the inability to recover the carrying value of this asset.
 
New 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 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.
 
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159). SFAS 159 permits companies to choose to measure many financial assets


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and liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each reporting date. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The provisions of this statement are required to be applied prospectively. We are currently assessing the impact of SFAS 159 on our consolidated financial statements.
 
Non-GAAP Financial Measures
 
We use EBITDA as a measure of our operating performance. EBITDA is a supplemental non-GAAP financial measure. EBITDA is commonly defined as net income plus (a) net interest expense, (b) income taxes, and (c) depreciation and amortization.
 
EBITDA as calculated by us is not necessarily comparable to similarly titled measures presented by other companies. In addition, EBITDA (a) does not represent net income or cash flows from operations as defined by GAAP; (b) is not necessarily indicative of cash available to fund our cash flow needs; and (c) should not be considered as an alternative to net income, operating income, cash flows from operating activities or our other financial information as determined under GAAP.
 
We believe EBITDA is useful to an investor in evaluating our operating performance because:
 
  •  a significant portion of our assets consists of property and equipment that are depreciated over their remaining useful lives in accordance with GAAP. Because depreciation and amortization are non-cash items, we believe that presentation of EBITDA is a useful measure of our operating performance;
 
  •  it is widely used in the hospitality and entertainment industries to measure operating performance without regard to items such as depreciation and amortization; and
 
  •  we believe it helps investors meaningfully evaluate and compare the results of our operations from period to period by removing the impact of items directly resulting from our asset base, primarily depreciation and amortization, from our operating results.
 
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.


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The following table reconciles net loss to EBITDA for the periods presented:
 
                                 
    Great Wolf Resorts, Inc.     Predecessor  
                Period
    Period
 
                December 21,
    January 1,
 
    Year Ended
    Year Ended
    2004 through
    2004 through
 
    December 31,
    December 31,
    December 31,
    December 20,
 
    2006     2005     2004     2004  
 
Net loss
  $ (49,250 )   $ (24,413 )   $ (3,842 )   $ (12,942 )
Adjustments:
                               
Interest expense, net
    4,064       5,105       214       6,524  
Income tax benefit
    (8,938 )     (7,309 )     (2,563 )      
Depreciation and amortization
    25,903       26,248       1,897       12,925  
                                 
EBITDA
  $ (28,221 )   $ (369 )   $ (4,294 )   $ 6,507  
                                 
 
Results of Operations
 
General
 
Our and the Predecessor’s results of operations for the years ended December 31, 2006, 2005 and 2004 are not directly comparable due primarily to the impact of the IPO and the Formation Transactions, our new debt and the repayment of debt upon the consummation of the IPO. In addition, in March 2005 our Great Wolf Lodge in Williamsburg, Virginia opened, in October 2005 our Great Wolf Lodge in Pocono Mountains, Pennsylvania opened, and in December 2006 our Great Wolf Lodge in Mason, Ohio opened. Also, in October 2005 we sold 70% interest in our Wisconsin Dells and Sandusky resorts.
 
Great Wolf Resorts Financial Information
 
Great Wolf Resorts’ consolidated 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, Mason, 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;
 
  •  sales of condominiums;
 
  •  management fee and other revenue from resorts, which includes fees received under our management, license and development 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.”


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Operating Expenses.  Our departmental operating expenses consist of rooms, food and beverage and other department expenses from our resorts.
 
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;
 
  •  cost of sales of condominiums;
 
  •  depreciation and amortization;
 
  •  impairment losses; and
 
  •  other expenses from managed properties, which are recorded as an expense in accordance with EITF 01-14.
 
Great Lakes Predecessor Financial Information
 
The Predecessor’s combined historical financial information included the following:
 
  •  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.
 
The Traverse City, Kansas City and Sheboygan resorts opened in March 2003, May 2003 and June 2004, respectively. Therefore, the Predecessor’s historical results of operations only reflected operating results for Traverse City, Kansas City and Sheboygan for those periods after the resort opening dates.
 
The Predecessor’s financial information did not include the entities that own the Wisconsin Dells and Sandusky operating resorts as those entities, while managed by GLC, were controlled by affiliates of AIG SunAmerica.
 
Revenues.  The Predecessor’s revenues consisted of the following:
 
  •  lodging revenue, which consists of rooms, food and beverage and other department revenues from its consolidated and combined hotels and resorts;
 
  •  management fee revenue from both resort activity and non-resort activity, which includes fees received under its management agreements;
 
  •  other revenue, which consists of accounting fees, development fees, central reservation fees, construction management fees and other fees; and
 
  •  other revenue from managed properties, which are recorded as revenue in accordance with EITF 01-14.
 
Operating Expenses.  The Predecessor’s departmental operating expenses consisted of rooms, food and beverage and other department expenses from its consolidated and combined hotels and resorts.
 
The Predecessor’s other operating expenses included the following items:
 
  •  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;


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  •  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.
 
Year Ended December 31, 2006 compared with Year Ended December 31, 2005
 
The following table shows key operating statistics for our resorts for the years ended December 31, 2006 and 2005:
 
                                         
    All Properties(a)     Same Store Comparison(b)  
    Year Ended
    Year Ended
    Year Ended
             
    December 31,
    December 31,
    December 31,
    Increase (Decrease)  
    2006     2006     2005     $     %  
 
Occupancy
    63.5 %     63.1 %     60.5 %     N/A       4.3 %
ADR
  $ 240.04     $ 211.27     $ 209.71     $ 1.56       0.7 %
RevPAR
  $ 152.41     $ 133.41     $ 126.93     $ 6.48       5.1 %
Total RevPOR
  $ 361.85     $ 316.84     $ 315.37     $ 1.47       0.5 %
Total RevPAR
  $ 229.76     $ 200.08     $ 190.89     $ 9.19       4.8 %
 
 
(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 majority of the period in 2005 and 2006 (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. Also, on December 14, 2006, we opened our Mason resort. As a result, total revenue, rooms revenue and other revenue for the year ended December 31, 2006 and December 31, 2005 are not directly comparable.
 
Presented below are selected amounts from our consolidated statements of operations for the years ended December 31, 2006 and 2005:
 
                         
                Increase
 
    2006     2005     (Decrease)  
 
Revenues
  $ 148,648     $ 139,415     $ 9,233  
Departmental operating expenses
    47,837       42,351       5,486  
Selling, general and administrative
    41,421       26,894       14,527  
Property operating costs
    23,217       24,798       (1,581 )
Depreciation and amortization
    25,903       26,248       (345 )
Goodwill impairment
    50,975             50,975  
Cost of sales of condominiums
          16,780       (16,780 )
Loss on sale of property
    1,066       26,161       (25,095 )
Net operating loss
    (53,691 )     (26,341 )     (27,350 )
Net interest expense
    4,064       5,105       (1,041 )
Income tax benefit
    (8,764 )     (7,199 )     (1,565 )
Net loss
    (49,250 )     (24,413 )     (24,837 )
 
Revenues.  Total revenues increased primarily due to revenues related to the Williamsburg, Pocono Mountains, and Mason Family resorts, which opened in March 2005, October 2005 and December 2006,


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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 2006, 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, Pocono Mountains and Mason resorts were $79,020 and $26,242 for the years ended December 31, 2006 and 2005, respectively.
 
  •  Total management and other fees related to our joint ventures were $3,729 and $482 for the years ended December 31, 2006 and 2005, respectively.
 
  •  Other revenue from managed properties was $11,920 and $2,524 for the years ended December 31, 2006 and 2005, respectively.
 
  •  Revenue from sales of condominiums at our Wisconsin Dells resort was $25,862 for the year ended December 31, 2005. We had no similar revenue during the year ended December 31, 2006.
 
  •  Total revenues for the Wisconsin Dells and Sandusky resorts were $30,212 for the year ended December 31, 2005.
 
Operating expenses.  Total operating expenses increased primarily due to the increase in operating expenses in Williamsburg, Pocono Mountains and Mason Family resorts, which opened in March 2005, October 2005, and December 2006, 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 year ended December 31, 2006, as there was for the year ended December 31, 2005 and by the reduction in resort expenses due to the sale of 70% of our equity interests in our Wisconsin Dells and Sandusky resorts in October 2005.
 
  •  Total departmental operating expenses for the Williamsburg, Pocono Mountains and Mason resorts were $28,853 and $11,330 for the years ended December 31, 2006 and 2005, respectively. Total departmental expenses for the Wisconsin Dells and Sandusky resorts were $11,169 for the year ended December 31, 2005.
 
  •  Total selling, general and administrative expenses for the Williamsburg, Pocono Mountains, and Mason resorts were $18,247 and $5,097 for the years ended December 31, 2006 and 2005, respectively. Total selling, general and administrative expenses for the Wisconsin Dells and Sandusky resorts were $7,133 for the year ended December 31, 2005. During the year ended December 31, 2006 our corporate selling, general and administrative expenses included increases over that of the year ended December 31, 2005 related to share based compensation of $5,113, compensation-related expenses of $1,499 due to increased staffing at our corporate office and $1,663 related to professional fees.
 
  •  Total property operating costs (exclusive of opening costs) for the Williamsburg, Pocono Mountains, and Mason resorts were $7,509 for the year ended December 31, 2006 as compared to $6,371 for the year ended December 31, 2005. Total property operating costs (exclusive of opening costs) for the resorts in Wisconsin Dells and Sandusky were $3,822 for the year ended December 31, 2005. Opening costs related primarily to our Pocono Mountains, Mason Family, Grapevine and Grand Mound resorts and the resort in Niagara Falls were $7,297 for the year ended December 31, 2006, as compared to $5,309 for the year ended December 31, 2005 related to our resorts in Williamsburg and the Pocono Mountains and the condominiums in Wisconsin Dells.
 
  •  Total depreciation and amortization for the Williamsburg, Pocono Mountains and Mason resorts was $13,707 and $8,059 for the years ended December 31, 2006 and 2005, respectively. Total depreciation and amortization for the Wisconsin Dells and Sandusky resorts was $5,769 for the year ended December 31, 2005.
 
  •  For the year ended December 31, 2006 we recorded a goodwill impairment charge of $50,975 related to our Traverse City and Sheboygan resorts, as the implied fair value of the goodwill was deemed less than the carrying value.


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  •  Cost of sales of condominiums of $16,780 relates to the condominiums sold at our Wisconsin Dells resort during the year ended December 31, 2005. We did not incur a similar charge during the year ended December 31, 2006.
 
  •  Loss on sale of real estate of $1,066 during the year ended December 31, 2006 primarily 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 as compared to the loss on sale of real estate of $26,161 recorded in 2005 related to the 70% interest sold in our Wisconsin Dells and Sandusky resorts.
 
Net operating loss.  Net operating loss for 2006 increased $27,350 to $(53,691) from $(26,341) for 2005.
 
Net loss.  Net loss increased primarily due to the following:
 
  •  A increase in net operating loss from $(26,341) for 2005 to $(53,691) for 2006.
 
  •  A decrease in net interest expense of $1,041 mainly due to higher interest income for 2006 as compared to 2005.
 
  •  A increase of an income tax benefit of $1,565 for 2006 as compared to 2005.
 
Year ended December 31, 2005 for Great Wolf Resorts compared with the year ended December 31, 2004 for the Great Wolf Resorts/Predecessor
 
Presented below are selected amounts from the statements of operations for the years ended December 31, 2005 and 2004. To facilitate a meaningful analysis of the results of operations, amounts for the year ended December 31, 2004 include both the historical operations of the Predecessor in 2004 (for the period January 1, 2004 through December 20, 2004) and our operations from December 21, 2004 through December 31, 2004.
 
                         
          Great Wolf
       
    Great Wolf
    Resorts/
       
    Resorts
    Predecessor
    Increase
 
    2005     2004     (Decrease)  
 
Revenues
  $ 139,415     $ 69,887     $ 69,528  
Departmental operating expenses
    42,351       19,851       22,500  
Selling, general and administrative
    26,894       25,985       909  
Property operating costs
    24,798       9,105       15,693  
Depreciation and amortization
    26,248       14,822       11,426  
Cost of sales of condominiums
    16,780             16,780  
Loss on sale of property
    26,161             26,161  
Net operating loss
    (26,341 )     (14,429 )     (11,912 )
Net interest expense
    5,105       6,738       (1,633 )
Income tax benefit
    (7,199 )     (2,563 )     (4,636 )
Income from discontinued operations
          1,928       (1,928 )
Net loss
    (24,413 )     (16,784 )     (7,629 )
 
Revenues.  Total revenues increased primarily due to revenues related to the resorts in Wisconsin Dells and Sandusky, which were purchased as part of the IPO in December 2004 (and then sold in October 2005); the opening of the Williamsburg and Pocono Mountains resorts in March 2005 and October 2005, respectively; and the sale of condominiums at our Wisconsin Dells resort. Also, our Sheboygan resort, which opened in June 2004, had a full year of operations in 2005.
 
  •  Total revenues for the resorts in Wisconsin Dells, Sandusky, Sheboygan, Williamsburg and Pocono Mountains were $68,504 and $10,285 for the years ended December 31, 2005 and December 31, 2004, respectively.
 
  •  Revenue from sales of condominiums at our Wisconsin Dells resort was $25,862 for the year ended December 31, 2005. We had no similar sales during the year ended December 31, 2004.


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  •  The net increase in resort and condominium revenue for the year ended December 31, 2005, versus the year ended December 31, 2004, was offset by $12,029 decrease in other revenue related to managed properties recorded in the year ended December 31, 2005, as compared to the year ended December 31, 2004.
 
Operating expenses.  Total operating expenses increased primarily due to expenses related to the resorts in Wisconsin Dells and Sandusky, which were purchased as part of the IPO in December 2004 (and then sold in October 2005); the opening of the Williamsburg and Pocono Mountains resorts in March 2005 and October 2005, respectively; and the sale of condominiums at our Wisconsin Dells resort. Also, our Sheboygan resort, which opened in June 2004, had a full year of operations in 2005.
 
  •  Total departmental expenses for the resorts in Wisconsin Dells, Sandusky, Sheboygan, Williamsburg and Pocono Mountains were $28,210 and $4,827 for the years ended December 31, 2005 and December 31, 2004, respectively.
 
  •  Total selling, general and administrative expenses for the resorts in Wisconsin Dells, Sandusky, Sheboygan, Williamsburg and Pocono Mountains were $16,527 and $4,927 for the years ended December 31, 2005 and December 31, 2004, respectively. Selling, general and administrative expenses in the year ended December 31, 2004 included $6,413 of IPO related charges and a $1,147 write off of development related expenses. We did not incur similar charges during the year ended December 31, 2005. Also, selling, general and administrative expenses in the year ending December 31, 2004, included a non-cash employee compensation expense of $691. We recorded non-cash employee compensation income of $1,554 in the year ended December 31, 2005.
 
  •  Total property operating costs for the resorts in Wisconsin Dells, Sandusky, Sheboygan, Williamsburg and Pocono Mountains were $17,447 and $3,260 for the years ended December 31, 2005 and December 31, 2004, respectively. Property operating costs include pre-opening costs related to our Pocono Mountains and Williamsburg resorts of $7,791 for the year ended December 31, 2005, as compared to pre-opening costs related to our Sheboygan resort of $1,729 for the year ended December 31, 2004.
 
  •  Total depreciation and amortization for the resorts in Wisconsin Dells, Sandusky, Sheboygan, Williamsburg and Pocono Mountains was $17,697 and $3,750 for the years ended December 31, 2005 and December 31, 2004, respectively. 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 and Kansas City in the year ended December 31, 2005, as compared to December 31, 2004.
 
  •  Cost of sales of condominiums of $16,780 relates to the condominiums sold at our Wisconsin Dells resort in 2005. A similar type charge was not incurred during 2004.
 
  •  A loss of $26,161 recorded related to the 70% interests sold in our Wisconsin Dells and Sandusky resorts.
 
Net operating loss.  Net operating loss for 2005 increased $11,912 to $(26,341) from $(14,429) for 2004.
 
Net loss.  Net loss increased primarily due to the following:
 
  •  An increase in net operating loss.
 
  •  A gain on sale of investments of $1,653 was recorded for the year ended December 31, 2004. No comparable gain was recorded for the year ended December 31, 2005.
 
  •  Income from discontinued operations of $1,928 was recorded for the year ended December 31, 2004. No comparable amount was recorded for the year ended December 31, 2005.
 
The increase in net loss was partially offset by a $4,636 increase in the tax benefit recorded for the year ended December 31, 2005 as compared to the tax benefit recorded for the period December 21, 2005 through December 31, 2005.


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Segments
 
We 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 from other revenues recorded in accordance with EITF 01-14; 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.
 
                         
    Twelve Months Ended December 31,  
                Increase
 
    2006     2005     (Decrease)  
 
Resort Ownership/Operation
                       
Revenues
  $ 130,912     $ 110,053     $ 20,859  
EBITDA, excluding certain items
    26,729       (9,353 )     36,082  
Resort Third-Party Mgmt
                       
Revenues
    17,736       3,500       14,236  
EBITDA, excluding certain items
    5,817       976       4,841  
Condominium Sales
                       
Revenues
          25,862       (25,862 )
EBITDA, excluding certain items
    (370 )     9,082       (9,452 )
Other
                       
Revenues
                 
EBITDA, excluding certain items
    (8,989 )     (798 )     (8,191 )
 
The Other items in the table above represent corporate-level activities that do not constitute a reportable segment.
 
Liquidity and Capital Resources
 
As of December 31, 2006, we had total indebtedness of $289,389, summarized as follows:
 
         
Long-Term Debt:
       
Traverse City/Kansas City mortgage loan
  $ 72,801  
Mason construction loan
    55,792  
Pocono Mountains mortgage loan
    97,000  
Junior subordinated debentures
    51,550  
Other Debt:
       
City of Sheboygan bonds
    8,383  
City of Sheboygan loan
    3,863  
         
    $ 289,389  
         
 
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) minus 4% of the revenues of 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 December 31, 2006.


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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 minus cash divided by 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 7.98% as of December 31, 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 all covenants under this loan at December 31, 2006.
 
Pocono Mountains Mortgage Loan — In December 2006 we closed on a $97,000 first mortgage loan secured by our Pocono Mountains resort. The loan bears interest at a fixed rate of 6.10% and matures January 1, 2017. The loan is interest only for the initial 18-month period and thereafter is subject to a 30-year principal amortization schedule. The loan has customary covenants associated with an individual mortgaged property. The loan also has customary prohibitions on our ability to prepay the loan prior to maturity. We were in compliance with all covenants under this loan at December 31, 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 Trust’s 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 FASB Interpretation No. 46R, “Consolidation of Variable Interest Entities” and the accounting profession’s 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


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certain minimum guaranteed amounts of room tax payments to be made by the Blue Harbor Resort through 2028.
 
City of Sheboygan Loan — The City of Sheboygan loan amount represents a loan made by the City in 2004 in conjunction with the construction of the Blue Harbor Resort in Sheboygan, Wisconsin. The loan is noninterest bearing and matures in 2018. Our obligation to repay the loan will be satisfied by certain minimum guaranteed amounts of real and personal property tax payments to be made by the Blue Harbor Resort through 2018.
 
Future Maturities — Future principal requirements on long-term debt are as follows:
 
         
    Through
 
    December 31,  
 
2007
  $ 1,432  
2008
    1,952  
2009
    2,764  
2010
    58,749  
2011
    3,165  
Thereafter
    221,327  
         
Total
  $ 289,389  
         
 
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.


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Our largest long-term expenditures are expected to be for investments in unconsolidated joint ventures and capital expenditures for development of future consolidated resorts. Our expenditures for such items were $120,523 for the year ended December 31, 2006. We expect to have approximately $160,300 of such expenditures in 2007 and $14,500 in 2008. As discussed above, we expect to meet these requirements through a combination of cash provided by operations, cash on hand, proceeds from investing activities and new and/or existing mortgage financing on properties being developed.
 
Off Balance Sheet Arrangements
 
We have two unconsolidated joint venture arrangements at December 31, 2006. We account for our unconsolidated joint ventures using the equity method of accounting. Our joint venture with CNL Income Properties, Inc. (CNL) owns two resorts, Great Wolf Lodge-Wisconsin Dells, Wisconsin and Great Wolf Lodge-Sandusky, Ohio. We are a limited partner in the CNL joint venture with a 30% ownership interest. At December 31, 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.
 
We entered into our joint venture with The Confederated Tribes of the Chehalis Reservation to develop a Great Wolf Lodge resort and conference center on a 39-acre land parcel in Grand Mound, Washington. This joint venture is a limited liability company; we are a member of that limited liability company with a 49% ownership interest.
 
As capital may be required to fund the activities of these resorts, we may be required to fund in the future the joint ventures’ shares of the costs not funded by the majority owner of the joint venture, the joint ventures operations or outside financing. Based on the nature of the activities conducted in these joint ventures, management cannot estimate with any degree of accuracy amounts that we may be required to fund in the long-term. Management does not currently believe that any additional future funding of these joint ventures’ other than the initial capital contributions to the joint ventures’, will have an adverse effect on our financial condition, however, as we do not expect to make significant future capital contributions to these joint ventures.
 
Contractual Obligations
 
The following table summarizes our contractual obligations as of December 31, 2006:
 
                                         
    Payment Terms  
          Less Than
                More Than
 
    Total     1 Year     1-3 Years     3-5 Years     5 Years  
 
Debt Obligations(1)
  $ 289,389     $ 1,432     $ 4,716     $ 61,914     $ 221,327  
Operating Lease Obligations
    1,218       464       754              
Construction Contracts
    79,867       79,867                    
                                         
Total
  $ 370,474     $ 81,763     $ 5,470     $ 61,914     $ 221,327  
                                         
 
 
(1) Includes $8,383 of fixed rate debt recognized as a liability related to certain bonds issued by the City of Sheboygan and $3,863 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 $96,778 of available cash and cash equivalents and working capital of $55,365 (current assets less current liabilities) at December 31, 2006, compared to the $54,782 of available cash and cash equivalents and $33,433 of working capital at December 31, 2005.


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Cash Flows
 
Comparison of Year Ended December 31, 2006 to Year Ended December 31, 2005
 
                         
    Year Ended December 31,     Increase
 
    2006     2005     (Decrease)  
 
Net cash provided by operating activities
  $ 29,723     $ 17,788     $ 11,935  
Net cash used in investing activities
    (107,123 )     (65,496 )     (41,627 )
Net cash provided by financing activities
    119,396       23,081       96,315  
 
Operating Activities.  The increase in net cash provided by operating activities resulted primarily from a reduction in the net operating loss excluding our impairment loss for the year ended December 31, 2006 compared to the year ended December 31, 2005.
 
Investing Activities.  Net cash used in investing activities was lower for the year ended December 31, 2005 as compared to the year ended December 31, 2006 primarily because of the cash received due to the sale of 70% interests in 2005 of our Wisconsin Dells and Sandusky resorts.
 
Financing Activities.  The increase in net cash provided by financing activities resulted primarily from proceeds from our Pocono Mountains mortgage loan for $97,000.
 
Comparison of Year Ended December 31, 2005 for the Company to Year Ended December 31, 2004 for the Predecessor/Great Wolf Resorts
 
                         
          Great Wolf
       
    Great Wolf
    Resorts/
       
    Resorts     Predecessor        
    Year Ended December 31,     Increase
 
    2005     2004     (Decrease)  
 
Net cash provided by operating activities
  $ 17,788     $ 4,399     $ 13,389  
Net cash used in investing activities
    (65,496 )     (162,055 )     96,559  
Net cash provided by financing activities
    23,081       233,575       (210,494 )
 
Operating Activities.  The increase in net cash provided by operating activities for the year ended December 31, 2005, as compared to the year ended December 31, 2004, resulted from a decrease in accounts payable, accrued expenses and other liabilities and prepaid expenses and other assets. This decrease was offset by higher depreciation in the 2005 period.
 
Investing Activities.  The decrease in net cash used in investing activities for the year ended December 31, 2005, as compared to the year ended December 31, 2004, resulted primarily from an increase in proceeds from the sale of assets in the 2005 period as compared to the 2004 period. Also, in 2004 we purchased the resorts as part of the IPO.
 
Financing Activities.  Net cash provided by financing activities decreased for the year ended December 31, 2005, as compared to the year ended December 31, 2003 primarily due to the effect of the IPO in 2004.
 
Inflation
 
We are able to change room and amenity rates at our resort properties on a daily basis, so the impact of higher inflation can often be passed along to customers. However, a weak economic environment that decreased overall demand for our products and services could restrict our ability to raise room and amenity rates to offset rising costs.


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ITEM 7A.   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 December 31, 2006, we had total indebtedness of approximately $289,389. This debt consisted of:
 
  •  $72,801 of fixed rate debt secured by two of our resorts. This debt bears interest at 6.96%.
 
  •  $51,550 of subordinated debentures that bear interest at a fixed rate of 7.80% through March 2015 and then at a floating rate of LIBOR plus 310 basis points thereafter. The securities mature in March 2035.
 
  •  $97,000 of fixed rate debt secured by one of our resorts. This debt bears interest at 6.10%
 
  •  $55,792 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 7.98% at December 31, 2006.
 
  •  $8,383 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 $3,863 of noninterest bearing debt recognized as a liability related to a loan from the City of Sheboygan. These liabilities will be satisfied by certain future minimum guaranteed amounts of real and personal property tax payments and room tax payments to be made by the Sheboygan resort; and
 
As of December 31, 2006, we estimate the total fair value of the indebtedness described above to be $8,377 more than their total carrying values, due to the terms of the existing debt being different than those terms we believe would currently be available to us for indebtedness with similar risks and remaining maturities.
 
If the prime rate and/or LIBOR were to increase by 1% or 100 basis points, the increase in interest expense on our variable rate debt would decrease future earnings and cash flows by approximately $558 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 $558 annually.


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ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
The following consolidated and combined financial statements are filed as part of this Annual Report on Form 10-K:
 
         
    Page
    No.
 
Consolidated and Combined Financial Statements of Great Wolf Resorts and Subsidiaries and Great Lakes Predecessor:
   
  57
  58
  59
  60
  61
Notes to Consolidated and Combined Financial Statements
  62


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Board of Directors and Stockholders
Great Wolf Resorts, Inc.
Madison, Wisconsin
 
We have audited the accompanying consolidated balance sheets of Great Wolf Resorts, Inc. and subsidiaries (the “Company”), as of December 31, 2006 and 2005, and the related consolidated statements of operations, equity and cash flows of the Company for the years ended December 31, 2006 and 2005, and the period from December 21, 2004 (commencement of operations) through December 31, 2004, and the related combined statements of operations, equity and cash flows of Great Lakes Predecessor, as defined in Note 1 to the combined financial statements, for the period from January 1, 2004 through December 20, 2004. These consolidated and combined financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated and combined financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, such financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2006 and 2005, the consolidated results of operations and cash flows of the Company for the years ended December 31, 2006 and 2005, and the period from December 21, 2004 (commencement of operations) through December 31, 2004, and the combined results of operations and cash flows of Great Lakes Predecessor for the period from January 1, 2004 through December 20, 2004, in conformity with accounting principles generally accepted in the United States of America.
 
As described in Note 13 to the consolidated financial statements, on January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123R, Share-Based Payment.
 
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 7, 2007 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
 
DELOITTE & TOUCHE, LLP
 
Milwaukee, Wisconsin
March 7, 2007


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GREAT WOLF RESORTS, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
                 
    December 31,  
    2006     2005  
    (Dollars in thousands, except per share amounts)  
 
ASSETS
Current assets:
               
Cash and cash equivalents
  $ 96,778     $ 54,782  
Accounts receivable, net of allowance for doubtful accounts of $205 and $95
    2,680       2,506  
Accounts receivable — affiliates
    2,223       12,825  
Inventory
    2,825       2,254  
Other current assets
    4,638       1,996  
                 
Total current assets
    109,144       74,363  
Property and equipment, net
    489,968       385,391  
Investment in affiliates
    25,028       43,207  
Other assets
    19,450       11,741  
Other intangible assets
    23,829       23,829  
Goodwill
    16,020       66,995  
                 
Total assets
  $ 683,439     $ 605,526  
                 
 
LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS’ EQUITY
Current liabilities:
               
Current portion of long-term debt
  $ 1,432     $ 1,928  
Accounts payable
    25,882       18,183  
Accrued payroll
    2,768       2,053  
Accrued expenses
    12,740       7,258  
Accrued expenses — affiliates
    443       3,576  
Advance deposits
    7,165       5,680  
Gift certificates payable
    3,349       2,126  
Other current liabilities
          126  
                 
Total current liabilities
    53,779       40,930  
Mortgage debt
    275,711       154,092  
Other long-term debt
    12,246       12,308  
Other long-term liabilities
    391       391  
Deferred tax liability
    15,846       25,800  
Deferred compensation liability
    2,200       1,501  
                 
Total liabilities
    360,173       235,022  
Minority interests
    5,757       6,593  
Commitments and contingencies
               
Stockholders’ Equity:
               
Common stock, $0.01 par value, 250,000,000 shares authorized, 30,509,320 and 30,277,308 shares issued and outstanding at December 31, 2006 and 2005, respectively
    305       303  
Additional paid in capital
    396,909       394,212  
Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued or outstanding at December 31, 2006 and 2005
           
Accumulated deficit
    (77,505 )     (28,255 )
Deferred compensation
    (2,200 )     (2,349 )
                 
Total stockholders’ equity
    317,509       363,911  
                 
Total liabilities, minority interests and stockholders’ equity
  $ 683,439     $ 605,526  
                 
 
See accompanying notes to consolidated and combined financial statements.


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GREAT WOLF RESORTS, INC. AND SUBSIDIARIES AND
GREAT LAKES PREDECESSOR

CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
 
                                   
    Great Wolf Resorts, Inc.       Predecessor  
                Period
      Period
 
                December 21,
      January 1,
 
                2004 through
      2004 through
 
    Year Ended December 31,     December 31,
      December 20,
 
    2006     2005     2004       2004  
    (Dollars in thousands, except per share data)  
Revenues:
                                 
Rooms
  $ 87,775     $ 73,207     $ 3,261       $ 31,438  
Food and beverage
    21,930       18,897       776         8,255  
Other hotel operations
    21,207       17,949       513         7,855  
Sales of condominiums
          25,862                
Management and other fees
    2,087       494                
Management and other fees — related parties
    3,729       482       79         3,157  
                                   
      136,728       136,891       4,629         50,705  
Other revenue from managed properties-related parties
    11,920       2,524               14,553  
                                   
Total revenues
    148,648       139,415       4,629         65,258  
                                   
Operating expenses by department:
                                 
Rooms
    11,914       10,944       298         4,917  
Food and beverage
    18,806       16,532       598         7,370  
Other
    17,117       14,875       360         6,308  
Other operating expenses:
                                 
Selling, general and administrative
    41,421       26,894       7,372         18,613  
Property operating costs
    23,217       24,798       295         8,810  
Depreciation and amortization
    25,903       26,248       1,897         12,925  
Cost of sales of condominiums
          16,780                
Goodwill impairment
    50,975                      
Loss on sale of property
    1,066       26,161                
                                   
      190,419       163,232       10,820         58,943  
Other expenses from managed properties-related parties
    11,920       2,524               14,553  
                                   
Total operating expenses
    202,339       165,756       10,820         73,496  
                                   
Net operating loss
    (53,691 )     (26,341 )     (6,191 )       (8,238 )
Interest income
    (3,105 )     (1,623 )     (66 )       (224 )
Interest expense
    7,169       6,728       280         6,748  
Gain on sale of investments
                        (1,653 )
Interest on mandatorily redeemable shares
                        1,761  
                                   
Loss before income taxes, minority interests, and equity in unconsolidated affiliates
    (57,755 )     (31,446 )     (6,405 )       (14,870 )
Income tax benefit
    (8,764 )     (7,199 )     (2,563 )        
Minority interests, net of tax
    (502 )     (4 )              
Equity in unconsolidated affiliates, net of tax
    761       170                
                                   
Loss from continuing operations
    (49,250 )     (24,413 )     (3,842 )       (14,870 )
Income from discontinued operations
                        1,928  
                                   
Net loss
  $ (49,250 )   $ (24,413 )   $ (3,842 )     $ (12,942 )
                                   
Basic loss per share
  $ (1.63 )   $ (0.81 )   $ (0.13 )          
                                   
Diluted loss per share
  $ (1.63 )   $ (0.81 )   $ (0.13 )          
                                   
Weighted average common shares outstanding:
                                 
Basic
    30,299,647       30,134,146       30,132,896            
                                   
Diluted
    30,299,647       30,134,146       30,132,896            
                                   
 
See accompanying notes to consolidated and combined financial statements.


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GREAT WOLF RESORTS, INC. AND SUBSIDIARIES AND
GREAT LAKES PREDECESSOR

CONSOLIDATED AND COMBINED STATEMENTS OF EQUITY
 
                                                                 
                                  Members’
             
                Additional
                Equity of
             
    Common
    Common
    Paid in
    Accumulated
    Deferred
    Combined
    Treasury
    Total
 
    Shares     Stock     Capital     Deficit     Compensation     Entities     Stock     Equity  
    (Dollars in thousands)  
 
Predecessor:
                                                               
Balance, January 1, 2004
          $     $     $ (1,256 )   $     $ 31,263     $ (824 )   $ 29,183  
Contributions
                        643             25,145             25,788  
Distributions
                        (3,170 )           (7,534 )           (10,704 )
Net income (loss)
                        1,582             (14,524 )           (12,942 )
                                                                 
Balance, December 20, 2004
          $     $     $ (2,201 )   $     $ 34,350     $ (824 )   $ 31,325  
                                                                 
Great Wolf Resorts, Inc.:
                                                               
Reclassification, net of effect of spin-off, of Predecessor’s equity, mandatorily redeemable ownership interests and minority interests
        $ 50     $ 45,727     $     $     $     $     $ 45,777  
Net proceeds from sale of common stock
    16,100,000       161       248,506                               248,667  
Issuance of common stock — acquisition of resorts
    14,032,896       91       97,628                               97,719  
                                                               
Issuance of common stock — deferred compensation plan
    129,412       1       2,199             (2,200 )                  
Net loss
                      (3,842 )                       (3,842 )
                                                                 
Balance, December 31, 2004
    30,262,308       303       394,060       (3,842 )     (2,200 )                 388,321  
Issuance of non-vested equity shares
    15,000             152             (152 )                  
Amortization of non-vested equity shares
                            3                   3  
Net loss
                      (24,413 )                       (24,413 )
                                                                 
Balance, December 31, 2005
    30,277,308       303       394,212       (28,255 )     (2,349 )                 363,911  
Issuance of non-vested equity shares
    232,012       2                                     2  
Reclassification of unearned compensation to additional paid-in capital upon the adoption of Financial Accounting Standards No. 123(R) — See Note 13
                (149 )           149                    
Stock-based compensation
                3,052                               3,052  
Share issuance costs
                (206 )                             (206 )
Net loss
                      (49,250 )                       (49,250 )
                                                                 
Balance, December 31, 2006
    30,509,320     $ 305     $ 396,909     $ (77,505 )   $ (2,200 )   $     $     $ 317,509  
                                                                 
 
See accompanying notes to consolidated and combined financial statements.


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GREAT WOLF RESORTS, INC. AND SUBSIDIARIES AND
GREAT LAKES PREDECESSOR

CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(dollars in thousands)
 
                                   
    Great Wolf Resorts, Inc.       Predecessor  
                Period
      Period
 
                December 21,
      January 1,
 
                2004 through
      2004 through
 
    Year Ended December 31,     December 31,
      December 20,
 
    2006     2005     2004       2004  
    (Dollars in thousands)  
Operating activities:
                                 
Net loss
  $ (49,250 )   $ (24,413 )   $ (3,842 )     $ (12,942 )
Adjustments to reconcile net loss to net cash provided by operating activities:
                                 
Depreciation and amortization
    25,903       26,248       1,897         13,107  
Goodwill impairment
    50,975                          
Non-cash employee compensation expenses
    3,559       (1,554 )     2,891          
(Gain) loss on sale of assets
    1,066       26,161               (5,327 )
Gain on sale of investments and other
                        (1,653 )
Equity in unconsolidated affiliates
    1,269       282                
Minority interests
    (836 )     (7 )               2,729  
Deferred tax benefit
    (9,500 )     (7,504 )     (2,563 )        
Changes in operating assets and liabilities:
                                 
Accounts receivable and other assets
    4,107       1,349       1,564         (9,236 )
Accounts payable, accrued expenses and other liabilities
    2,430       (2,774 )     815         16,959  
                                   
Net cash provided by operating activities
    29,723       17,788       762         3,637  
                                   
Investing activities:
                                 
Capital expenditures for property and equipment
    (120,523 )     (124,905 )     (115 )       (108,804 )
Cash distributions from unconsolidated affiliates
    18,902                      
Investment in affiliates
    (523 )     (1,519 )              
Investment in development
    (4,626 )                    
Proceeds from sale of assets
    2,101       59,948               32,174  
Purchases of owners’ interest, net of cash acquired
                (95,460 )        
Increase in restricted cash
    (1,282 )     (1,305 )     (2,008 )        
(Increase) decrease in escrow
    (1,172 )     2,285               (1,564 )
Decrease in equity escrow
                        13,722  
                                   
Net cash used in investing activities
    (107,123 )     (65,496 )     (97,583 )       (64,472 )
                                   
Financing activities:
                                 
Proceeds from equity offering
                273,700          
Payment of offering costs
                (21,979 )       (726 )
Principal payments on long-term debt
    (31,978 )     (50,049 )     (152,417 )       (16,805 )
Proceeds from issuance of long-term debt
    153,039       75,712       75,000         68,330  
Payment of loan costs
    (1,665 )     (2,582 )     (2,153 )       (2,569 )
Member contributions
                        25,788  
Member distributions
                        (11,370 )
Changes in mandatorily redeemable ownership interests
                        1,761  
Net distributions to minority investors
                        (2,985 )
                                   
Net cash provided by financing activities
    119,396       23,081       172,151         61,424  
                                   
Net increase (decrease) in cash and cash equivalents
    41,996       (24,627 )     75,330         589  
Cash and cash equivalents, beginning of period
    54,782       79,409       4,079         3,490  
                                   
Cash and cash equivalents, end of period
  $ 96,778     $ 54,782     $ 79,409       $ 4,079  
                                   
Supplemental Cash Flow Information
                                 
Cash paid for interest, net of capitalized interest
  $ 6,036     $ 3,605     $ 698       $ 6,317  
Cash paid (refunds) for income taxes
  $ (471 )   $ 1,128     $       $  
Non-cash items:
                                 
Land contributed for minority interest
  $     $ 6,600     $       $  
Construction in process accruals
  $ 10,101     $ 8,648     $ 18,578       $  
Escrow funds receivable
  $     $ 12,825     $       $ —   
 
See accompanying notes to consolidated and combined financial statements.


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NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(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. and its wholly-owned subsidiaries.
 
Formation
 
We were formed to succeed to certain businesses of the Great Lakes Predecessor (the Predecessor), which was not a legal entity but rather a combination of numerous entities, all of which were under common management. These entities were involved in the development, ownership and operation of resorts, hotels and multifamily housing projects. The Predecessor financial statements do not include entities that owned Great Wolf Lodges of Wisconsin Dells, Wisconsin and Sandusky, Ohio. These entities were controlled by affiliates of AIG SunAmerica, Inc.
 
We were incorporated in May 2004 as a Delaware corporation in anticipation of the initial public offering of our common stock (the IPO). The IPO closed on December 20, 2004, concurrently with the completion of various formation transactions (the Formation Transactions).
 
Pursuant to the Formation Transactions:
 
  •  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.
 
These transactions consolidated the ownership of our resort properties and property interests to Great Wolf Resorts. During the period from our formation until we commenced operations upon closing of the IPO on December 20, 2004, we did not have any material corporate activity.
 
The IPO consisted of the sale of 16,100,000 shares of common stock at a price per share of $17.00, generating gross proceeds of $273,700. The net proceeds to us were approximately $248,700 after deducting an aggregate of $19,200 in underwriting discounts and commissions paid to the underwriters and $5,800 in other expenses directly related to the issuance of common stock (such as professional fees and printing fees) incurred in connection with the IPO.
 
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


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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 under construction. As of December 31, 2006, we operate eight Great Wolf Lodge resorts (our signature northwoods-themed resorts), and one Blue Harbor Resort (a nautical-themed property).
 
                                     
                          Indoor
 
    Ownership
        Guest
    Condo
    Entertainment
 
    Percentage     Opening   Suites     Units     Area(1)  
                          (Approx. ft2)  
 
Existing Resorts:
                                   
Wisconsin Dells, WI(2)
    30 %   1997     309       77       102,000  
Sandusky, OH(2)
    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     182       64       54,000  
Williamsburg, VA
    100 %   2005     301 (3)           78,000  
Pocono Mountains, PA
    100 %   2005     401             91,000  
Niagara Falls, ONT(4)
        April 2006     406             94,000  
Mason, OH(5)
    84 %   December 2006     401             93,000  
Resorts Under Construction:
                                   
Grapevine, TX(6)
    100 %   Late 2007     404             98,000  
Grand Mound, WA(7)
    49 %   Early 2008     398             78,000  
 
 
(1) Our indoor entertainment areas generally include our indoor waterpark, game arcade, children’s activity room and fitness room, as well as our Aveda spa in the resorts that have such amenities.
 
(2) In 2005, we formed a joint venture with CNL Income Properties, Inc. (CNL), a real estate investment trust focused on leisure and lifestyle properties. The joint venture acquired our Wisconsin Dells and Sandusky resorts. CNL owns a 70% interest in the joint venture, and we retained a 30% interest. CNL paid us approximately $80 million for its 70% ownership interest. We continue to operate the properties and license the Great Wolf Lodge brand to the joint venture under 25-year agreements, subject to earlier termination in certain situations.
 
(3) Construction for the expansion of 104 additional guest suites, conference center space and waterpark attractions began in May 2006. The additional waterpark attractions were completed in December 2006. We expect to complete the additional guest suites and conference center space in Spring 2007.
 
(4) An affiliate of Ripley Entertainment, Inc. (Ripley), our licensee, owns this resort. We have granted Ripley a license to use the Great Wolf Lodge name for this resort through April 2016. We manage the resort on behalf of Ripley and also provide central reservation services.


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(5) We have entered into a joint venture agreement with a subsidiary of CBS Corporation (CBS), to build this resort and attached conference center. We 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. This resort opened in December 2006. The conference center is expected to be completed in March 2007.
 
(6) We are developing a Great Wolf Lodge resort in Grapevine, Texas. The northwoods themed, eight-story resort will provide a comprehensive package of first-class destination lodging amenities and activities. Construction on the resort began in June 2006 with expected completion in late 2007.
 
(7) We have entered into a joint venture agreement with The Confederated Tribes of the Chehalis Reservation 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
 
Principles of Consolidation and Combination — For the period subsequent to the IPO, the accompanying consolidated financial statements include all of the accounts of Great Wolf Resorts and our consolidated subsidiaries. Property interests (other than property contributed by GLC) contributed to us by the Predecessor and other investors have been accounted for as purchases, and the excess of the purchase price over the related historical cost bases has been allocated to the tangible and intangible assets acquired and liabilities assumed. For the period prior to our IPO, the accompanying combined financial statements include all of the accounts of the Predecessor. All significant intercompany balances and transactions have been eliminated in the consolidated and combined financial statements.
 
Cash and Cash Equivalents — Cash and cash equivalents consist of highly liquid investments with an original maturity of three months or less when acquired. Cash is invested with federally insured institutions that are members of the FDIC. Cash balances with institutions may be in excess of federally insured limits or may be invested in time deposits that are not insured by the institution, the FDIC or any other government agency. Cash and cash equivalents does not include cash escrowed under loan agreements or cash restricted in connection with deferred compensation payable.
 
Allowance for Doubtful Accounts — An allowance for doubtful accounts is provided when it is determined that it is more likely than not a specific account will not be collected. Bad debt expense for the years ended December 31, 2006, 2005, and 2004 was $189, $241, and $239, respectively. Writeoffs of accounts receivable for the years ended December 31, 2006, 2005, and 2004, were $79, $329, and $116, respectively.
 
Inventory — Inventories are recorded at the lower of cost or market.
 
Property and Equipment — Investments in property and equipment are recorded at cost. These assets are depreciated using the straight-line method over their estimated useful lives as follows:
 
     
Buildings and improvements
  20-40 years
Fixtures and equipment, including waterpark equipment
  5-15 years
 
We periodically review the estimated useful lives we have assigned to our depreciable assets to determine whether those useful lives are reasonable and appropriate.
 
Improvements and replacements are capitalized when they extend the useful life, increase capacity or improve the efficiency of the asset. Repairs and maintenance are expensed as incurred. Construction in process includes costs such as site work, permitting and construction related to resorts under development. Interest is


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capitalized on construction in process balances during the construction period. Interest capitalized totaled $7,628, $5,495, and $1,918 for the years ended December 31, 2006, 2005, and 2004, respectively.
 
Loan Fees — Loan fees are capitalized and amortized over the term of the loan using a method that approximates the effective interest method. Loan fees, net of accumulated amortization, were $4,823, $3,704 and $5,174 as of December 31, 2006, 2005 and 2004, respectively. Amortization of loan fees was $515, $3,621, and $3,084 for the years ended December 31, 2006, 2005, and 2004, respectively. Included in loan fee amortization for the years ended December 31, 2006, 2005 and 2004, were $178, $2,969 and $1,283, respectively, of loan fees that were written off due to repayment of debt.
 
Partially-Owned Entities — We considered Accounting Principles Based Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock,” Statement of Position 78-9, “Accounting for Investments in Real Estate Ventures,” Emerging Issues Task Force (EITF) 96-16, “Investors Accounting for an Investee When the Investor has the Majority of the Voting Interest but the Minority Partners have Certain Approval or Veto Rights,” FASB Interpretation No. 46 (Revised 2003), “Consolidation of Variable Interest Entities — An Interpretation of ARB No. 51” and EITF 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights” to determine the method of accounting for our partially-owned entities. In determining whether we had controlling interest in a partially-owned entity and the requirement to consolidate the accounts of that entity, we consider factors such as ownership interest, board representation, management representation, authority to make decisions, and contractual and substantive participating rights of the partners/members as well as whether the entity is a variable interest entity in which we will absorb the majority of the entity’s expected losses, if they occur, or receive the majority of the expected residual returns, if they occur, or both.
 
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 partner’s claim on the net assets of the partnership at the end and beginning of the period, after taking into account contributions and distributions. Each partner’s 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.
 
Other Intangible Assets — Our other intangible assets consist of the value of our Great Wolf Lodge brand name. This intangible asset has an indefinite useful life. In accordance with Statement of Financial Accounting Standards (SFAS) No. 142 “Goodwill and Other Intangible Assets,” we do not amortize this intangible, but instead test it for possible impairment at least annually by comparing the fair value of the intangible asset with its carrying amount. Our assessment during the year ended December 31, 2006 determined that no such impairment had occurred. Future adverse changes in the hospitality and lodging industry, market conditions or poor operating results of the underlying real estate assets could result in future losses or the inability to recover the carrying value of these intangibles.
 
Goodwill — The excess of the purchase price of entities that are considered to be purchases of businesses over the estimated fair value of tangible and identifiable intangible assets acquired is recorded as goodwill. We recorded goodwill in connection with the Formation Transactions.
 
In connection with SFAS No. 142, we are required to assess goodwill for impairment annually, or more frequently if circumstances indicate impairment may have occurred. We assess goodwill for such impairment by comparing the carrying value of our reporting units to their fair values. We determine our reporting units’ fair value using a discounted cash flow model. Our assessment during the year ended December 31, 2006 determined that an impairment had occurred at two of our resorts due to economic and market conditions,


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resulting in a charge of $50,975. Future adverse changes in the hospitality and lodging industry, market conditions or poor operating results of the underlying real estate assets could result in future losses or the inability to recover the carrying value of the remaining goodwill.
 
Impairment of Long-Lived Assets — When circumstances, such as adverse market conditions, indicate that the carrying value of a long — lived asset may be impaired, we perform an analysis to review the recoverability of the asset’s carrying value. We make estimates of the undiscounted cash flows (excluding interest charges) from the expected future operations of the asset. These estimates consider factors such as expected future operating income, operating trends and prospects, as well as the effects of demand, competition and other factors. If the analysis indicates that the carrying value is not recoverable from future cash flows, an impairment loss is recognized to the extent that the carrying value exceeds the estimated fair value. Any impairment losses are recorded as operating expenses, which reduce net income. We had no impairment losses in any of the periods presented.
 
Revenue Recognition — We earn revenues from our resort operations, management of resorts and other related services, and sales of condominiums. The Predecessor also earned revenue from its hotel operations and hotel and multifamily management and development services.
 
We recognize revenue from rooms, food and beverage, and other operating departments at the resorts as earned at the time of sale or rendering of service. Cash received in advance of the sale or rendering of services is recorded as advance deposits on the consolidated balance sheets. We recognize management and related fees as they are contractually earned. We recognize development fees as earned under the completed contract method for projects with a short duration, and the percentage of completion method (based on contract-to-date costs incurred compared to total expected costs) for longer-term projects. We recognize revenue from the sale of real estate assets in accordance with SFAS No. 66, “Accounting for Sales of Real Estate.”
 
Sales of Real Estate Assets — SFAS No. 66 requires an entity to recognize gains on sales of real estate only when a sale is consummated, the buyer’s initial and continuing investments are adequate to demonstrate a commitment to pay, and risks and rewards of ownership are transferred to the buyer. We account for gains and losses on sales of real estate in accordance with the provisions of SFAS No. 66. In the period from January 1, 2004 through December 20, 2004, the Predecessor recognized a gain on sale of real estate of $1,072 from the sale of land owned in Ontario, Canada and $581 from the sale of land in Beckley, West Virginia. In 2005, we recorded revenues and cost of sales of $25,862 and $16,780, respectively, related to the sale of condominiums. We also recorded a loss of $26,161 on the sale of two of our resorts to a joint venture. In 2006 we recorded an additional loss of $953 related to our 2005 sale of two of our resorts to a joint venture.
 
Other Revenue and Other Expenses From Managed Properties — We employ the staff at our managed properties. Under our management agreements, the resort owners reimburse us for payroll, benefits and certain other costs related to the operations of the managed properties. EITF 01-14 “Income Statement Characterization of Reimbursements Received for ’Out-of-Pocket’ Expenses Incurred,” establishes standards for accounting for reimbursable expenses in our income statement. 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.”
 
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 Consolidated Statements of Operations.
 
Income Taxes — The Predecessor was comprised of a Subchapter S Corporation and limited liability companies. Under applicable federal and state income tax rules, the net income or loss of each of these entities was reportable in the income tax returns of the stockholders, partners and members of the entities. Accordingly, no income tax provision was included in the accompanying combined financial statements.


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Subsequent to the IPO, we and our subsidiaries file a consolidated federal income tax return and separate state income tax returns. Under the liability method prescribed by SFAS 109, deferred income taxes are established for deferred for all temporary differences between the book and tax bases of assets and liabilities using the tax rates scheduled by law to be in effect when the temporary differences reverse. Future tax benefits are recognized to the extent that realization of such benefits is more likely than not. A valuation allowance is recorded for those benefits that do not meet this criterion.
 
Advertising — Advertising costs are expensed as incurred. Advertising expense for the years ended December 31, 2006, 2005, and 2004 was $10,297, $7,329, and $3,283, respectively.
 
IPO Costs — Underwriting commissions and other costs directly related to sale of our common stock in the IPO are reflected as a reduction of additional paid-in-capital. Included in selling, general and administrative expenses are $863 and $5,550 of other expenses incurred as a result of the IPO transactions, for the period January 1, 2004 through December 20, 2004 and December 21, 2004 through December 31, 2004, respectively. These expenses include a debt prepayment penalty, write-offs of loan fees related to debt repaid or refinanced in conjunction with the IPO and bonuses due to certain executives, pursuant to their employment arrangements, as a result of the IPO.
 
Segments — We 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 from other revenues recorded in accordance with EITF 01-14; 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 impairment loss, 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  
 
Year ended December 31, 2006
                                       
Revenues
  $ 130,912     $ 17,736     $     $     $ 148,648  
                                         
EBITDA, excluding certain items
    26,729       5,817       (370 )     (8,989 )   $ 23,187  
Depreciation and amortization
    (25,366 )                 (537 )     (25,903 )
Impairment loss
    (50,975 )                       (50,975 )
Interest expense, net
                            (4,064 )
                                         
Loss before income taxes, minority interests, and equity in earnings of unconsolidated affiliates
                          $ (57,755 )
                                         
Additions to long-lived assets
    119,686                   837     $ 120,523  
                                         
Total assets
    520,528       2,960             159,951     $ 683,439  
                                         
 


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NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS — (Continued)

                                                 
    Resort
    Resort Third-
                Totals per
       
    Ownership/
    Party
    Condominium
          Financial
       
    Operation     Management     Sales     Other     Statements        
 
Year ended December 31, 2005
                                               
Revenues
  $ 110,053     $ 3,500     $ 25,862     $     $ 139,415          
                                                 
EBITDA, excluding certain items
    (9,353 )     976       9,082       (798 )   $ (93 )        
Depreciation and amortization
    (24,576 )                 (1,672 )     (26,248 )        
Interest expense, net
                            (5,105 )        
                                                 
Loss before income taxes, minority interests, and equity in earnings of unconsolidated affiliates
                          $ (31,446 )        
                                                 
Additions to long-lived assets
    124,487                   418     $ 124,905          
                                                 
Total assets
    479,170                   126,356     $ 605,526          
                                                 
 
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.
 
For the year ended December 31, 2004 we viewed our operations as principally one segment (resort ownership/operation) and the financial information disclosed for 2004 represents all of the financial information related to that segment.
 
Use of Estimates — To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, we must make estimates and assumptions. These estimates and assumptions affect the reported amounts in the financial statements, and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.
 
Reclassifications — Certain 2005 amounts have been reclassified to conform to the 2006 presentation.
 
New 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 adoption of this statement.
 
In September 2006, the FASB issued SFAS No. 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.
 
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159). SFAS 159 permits companies to choose to measure many financial assets

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and liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each reporting date. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The provisions of this statement are required to be applied prospectively. We are currently assessing the impact of SFAS 159 on our consolidated financial statements.
 
3.   INVESTMENT IN AFFILIATES
 
CNL Joint Venture
 
In October 2005, we formed a joint venture with CNL Income Properties, Inc. (CNL), a real estate investment trust focused on leisure and lifestyle properties. The joint venture acquired two of our wholly-owned properties — Great Wolf Lodge — Wisconsin Dells, Wisconsin, and Great Wolf Lodge — Sandusky, Ohio. CNL paid us $80,150 to purchase a 70% interest in the joint venture; we own the remaining 30% of the joint venture. We continue to manage the properties and license the Great Wolf Lodge brand to the joint venture under 25-year agreements.
 
In March 2006, our joint venture with CNL entered into a loan agreement and borrowed $63,000. The loan is secured by the joint venture’s resorts. Pursuant to the joint venture agreement, the joint venture distributed to us 30% of the net loan proceeds, or approximately $18,600.
 
In accordance with the provisions of SFAS 66, upon formation of the joint venture we reclassified 30% of the historical carrying value of the two properties’ net assets to our investment in affiliate balance. We wrote off the remaining 70% of the historical carrying value of the properties’ net assets in determining the loss on sale. The carrying value of our investment in this joint venture was $25,028 and $43,207 as of December 31, 2006 and 2005, respectively.
 
Summary financial data for our investment in affiliate as of and for the years ended December 31, 2006 and 2005 is as follows:
 
                 
    2006     2005  
 
Balance sheet data:
               
Total assets
  $ 116,973     $ 120,884  
Total liabilities
  $ 69,578     $ 9,284  
Operating data:
               
Revenue
  $ 37,428     $ 6,550  
Operating Expenses
  $ (33,630 )   $ (6,600 )
Net loss
  $ (2,655 )   $ (1,029 )
 
Under the joint venture formation agreement, we may receive an earn-out of up to $3,000 for each of the two resorts at the end of 2008, based on the 2007/2008 performance of the resorts. The earn-out is a possible source of future earnings for us, which represents a gain contingency. It is not certain that we will realize this future revenue. Accordingly, in accordance with SFAS 5, “Accounting for Contingencies,” we have not recorded the gain contingency.
 
We agreed to complete construction of a waterpark expansion at our Wisconsin Dells resort and complete some roof repairs at our Sandusky resort. A portion of the proceeds from the joint venture transaction was escrowed to meet these obligations. We have a receivable from the joint venture of $12,825 as of December 31, 2005 related to the escrowed funds; this amount is recorded as accounts receivable-affiliates. We also have a liability of $3,576 for the construction and repairs as of December 31, 2005; this amount is recorded as accrued expenses-affiliates. During 2006, $10,724 of the escrow was used to complete the waterpark expansion and the balance of $2,101 was paid to us.


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GREAT WOLF RESORTS, INC. AND SUBSIDIARIES AND
GREAT LAKES PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS — (Continued)

 
At December 31, 2006, we have a receivable from the joint venture of $1,223 that relates primarily to license fees; this amount is recorded as accounts receivable-affiliates. We also have a liability of $443 for construction and repairs; this amount is recorded as accrued expenses-affiliates.
 
Grand Mount Joint Venture
 
In June 2005, we entered into a joint venture with The Confederated Tribes of the Chehalis Reservation (the Tribe) to develop a Great Wolf Lodge resort and conference center on a 39-acre land parcel in Grand Mound, Washington. We will operate the resort under the Great Wolf Lodge brand, The Confederated Tribes of the Chehalis Reservation will contribute the land needed for the resort, and both parties will maintain equity positions in the joint venture. Construction on the resort began in October 2006. At December 31, 2006, we have a receivable from the Tribe of $1,000 that relates to development fees; this amount is recorded as accounts receivable-affiliates.
 
4.   PURCHASE ACCOUNTING IN CONNECTION WITH THE IPO
 
The IPO closed on December 20, 2004. In conjunction with the Formation Transactions completed on that date, we issued a total of 14,032,896 shares of our common stock and paid cash of approximately $97,600 to buy out certain investors in the resort-owning entities.
 
For the five resort-owning entities with operating resorts at the time of the Formation Transactions, we recorded the Formation Transactions by applying the purchase method of accounting in connection with our acquisition of those five resort-owning entities. In conjunction with purchase accounting we:
 
  •  Recorded property and equipment, other assets, debt 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 estimated fair value of net tangible and intangible assets acquired from the five resort-owning entities.
 
         
Value of Great Wolf Resorts common stock issued
  $ 80,840  
Cash paid
    73,042  
         
Total cost of acquisition
    153,882  
Fair value of debt assumed
    181,415  
Fair value of property and equipment acquired
    (189,427 )
Fair value of intangible assets
    (10,296 )
Deferred tax liability recorded
    11,297  
Fair value of other assets and liabilities
    8,325  
         
Goodwill
  $ 155,196  
         
 
As a result of this process, we had $155,196 of goodwill at December 31, 2004, all of which related to the application of purchase accounting in conjunction with the Formation Transactions. Some of the values and amounts used in the initial application of purchase accounting for our consolidated balance sheet were based on preliminary estimates and assumptions. In 2005, we refined these estimates and assumptions.


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GREAT WOLF RESORTS, INC. AND SUBSIDIARIES AND
GREAT LAKES PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS — (Continued)

 
During the year ended December 31, 2005, we recorded adjustments that reduced goodwill by $62,091 related to the 70% interest we sold in our Wisconsin Dells and Sandusky resorts in October 2005. We also recorded adjustments to the estimated fair market values of property and equipment acquired, resulting in an increase to property and equipment of $28,341, an increase to accrued expenses of $855, an increase in deferred tax liability of $1,376, and a decrease in goodwill of $26,110.
 
For the two resort-owning entities with resorts under construction at the time of the Formation Transactions, we recorded the Formation Transactions as a purchase of assets of those two entities. In conjunction with this accounting we:
 
  •  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%. In the fourth quarter of 2005, we recorded adjustments to finalize the deferred tax liabilities, resulting in a decrease in deferred tax liabilities of $6,086, a decrease in property and equipment acquired of $10,801, and an increase in intangible assets of $4,715.
 
5.   PROPERTY AND EQUIPMENT
 
Property and equipment consist of the following:
 
                 
    December 31,  
    2006     2005  
 
Land and improvements
  $ 38,058     $ 38,735  
Building and improvements
    178,464       151,056  
Furniture, fixtures and equipment
    243,991       167,691  
Construction in process
    71,848       45,024  
                 
      532,361       402,506  
Less accumulated depreciation
    (42,393 )     (17,115 )
                 
Property and equipment, net
  $ 489,968     $ 385,391  
                 
 
Depreciation expense was $25,657, $22,627, and $11,920 for the years ended December 31, 2006, 2005, and 2004, respectively.


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GREAT WOLF RESORTS, INC. AND SUBSIDIARIES AND
GREAT LAKES PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS — (Continued)

 
6.   LONG-TERM DEBT
 
Long-term debt consists of the following:
 
                 
    December 31,  
    2006     2005  
 
Long-Term Debt:
               
Traverse City/Kansas City mortgage loan
  $ 72,801     $ 73,979  
Sheboygan mortgage loan
          28,939  
Mason construction loan
    55,792        
Pocono Mountains mortgage loan
    97,000        
Other mortgage debt
          1,552  
Junior subordinated debentures
    51,550       51,550  
Other Debt:
               
City of Sheboygan bonds
    8,383       8,288  
City of Sheboygan loan
    3,863       4,020  
                 
      289,389       168,328  
Less current portion of long-term debt
    (1,432 )     (1,928 )
                 
Total long-term debt
  $ 287,957     $ 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) minus 4% of the revenues of 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 December 31, 2006.
 
Sheboygan Mortgage Loan — This loan was repaid on December 13, 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 minus cash divided by 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 7.98% as of December 31, 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 custo