in re: gander mountain company securities litigation 05-cv

UNITED STATES DISTRICT COURT DISTRICT OF MINNESOTA

IN RE GANDER MOUNTAIN COMPANY SECURITIES LITIGATION

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Civil Action No.: 05-CV-183 (DWF/JSM) JURY TRIAL DEMANDED

CONSOLIDATED CLASS ACTION COMPLAINT

Lead Plaintiff, the Mueller Group (“Plaintiff”), alleges the following based upon

information and belief, except as to those allegations concerning Plaintiff, which are

based upon personal knowledge. Plaintiff’s information and belief are based upon,

among other things: (a) the investigation conducted by and through its attorneys; (b)

review and analysis of filings made by Gander Mountain Company (“Gander Mountain”

or the “Company”) with the United States Securities and Exchange Commission

(“SEC”); (c) review and analysis of press releases, public statements, news articles,

securities analysts’ reports and other publications disseminated by or concerning Gander

Mountain; (d) interviews with former Gander Mountain employees; and (e) other

publicly available information about Gander Mountain. Most of the facts supporting the

allegations contained herein are known only to defendants Gander Mountain, Mark R.

Baker (“Baker”), Dennis M. Lindahl (“Lindahl”), Gerald A. Erickson (“G. Erickson”),

Donovan A. Erickson (“D. Erickson”), Neal D. Erickson (“N. Erickson”), Richard A.

Erickson (“Richard Erickson”), Marjorie J. Pihl (“Pihl”), and Ronald A. Erickson

(“Ronald Erickson”) (collectively “Defendants”) or are within their control. Plaintiff

believes that substantial additional evidentiary support will exist for the allegations set

forth in this Consolidated Class Action Complaint (“Complaint“) herein after a

reasonable opportunity for discovery.

Case 0:05-cv-00183-DWF-AJB Document 33 Filed 08/09/2005 of 65

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NATURE OF THE ACTION

1. Plaintiff brings this action pursuant to §§ 11, 12(a)(2) and 15 of the

Securities Act of 1933 (the “Securities Act“), 15 U.S.C. §§ 77k, 77l(a)(2) and 77o, on its

own behalf and on behalf of all other persons or entities who purchased or otherwise

acquired Gander common stock pursuant or traceable to the Company’s Registration

Statement filed with the SEC on February 5, 2004, as amended on March 15, 2004,

March 26, 2004, March 30, 2004, April 14, 2004 and April 16, 2004, and declared

effective by the SEC on April 20, 2004, and the Prospectus, which forms part of the

Registration Statement, filed with the SEC on April 21, 2004, as supplemented (the

“Registration Statement/Prospectus”), for its initial public offering of 6,583,750 shares of

common stock (the “IPO”), on April 21, 2004. In addition, Plaintiff brings this action

pursuant to §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange

Act“), 15 U.S.C. §§ 78j(b) and 78t(a), and Rule 10b-5 promulgated thereunder (17 C.F.R.

§ 240.10b-5), on its own behalf and on behalf of all other persons or entities who

purchased or otherwise acquired Gander Mountain common stock between April 21,

2004, and January 14, 2005, inclusive (the “Class Period”).

2. Plaintiff’s Securities Act claims are pled separate and apart from the

Exchange Act claims. The Securities Act claims do not incorporate by reference, or

otherwise rely upon, any allegations pled in support of the Exchange Act claims and,

therefore, Plaintiff’s non-fraud allegations in support of the Securities Act claims are pled

under notice pleading standards of Fed. R. Civ. P. 8(a).

3. Founded in 1960, Gander Mountain is a specialty retailer that caters to

outdoor lifestyle enthusiasts, with a particular focus on hunting, fishing and camping.

Gander Mountain stores offer national, regional and owned-brand outdoor equipment,

accessories, related technical apparel and footwear.


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4. From 1997 until its April 21, 2004 IPO, Gander Mountain was a privately

held company that was owned and controlled by members of the Erickson family,

including certain of the defendants named herein. Although the Erickson family had

invested millions of dollars into expanding Gander Mountain’s base of stores from 26 to

66 during 1997-2004, there was no market for the Company’s securities and, as a

consequence, no way for the Erickson family to cash in on their huge investment. By the

time defendant Baker was hired as the Company’s CEO in 2002, Gander Mountain’s

number one priority was going public. However, Defendants recognized that the

Company needed to drastically improve its lagging comparable store sales figures before

the investing public would have any interest in buying its IPO shares at an economically

beneficial price.

5. In order to artificially boost comparable store sales, Baker masterminded a

strategy to flood the Company’s stores with inventory. These increased inventories were

combined with 10 percent discounts offered to customers during the fiscal year ended

January 31, 2004 (the 2003 fiscal year), through the Company’s one-time co-branded

credit card promotion. These short-term fixes had the desired effect of increasing

comparable store sales by 11.5 percent in the 2003 fiscal year. Without sufficient

explanation as to the primary source of those gains, the investing public was unaware that

they were unsustainable.

6. “CS1” is a former Divisional Merchandise Manager, who worked at the

Company’s headquarters from 1998 until the end of 2002 and reported directly to Allen

Dittrich (“Dittrich”), the Company’s Executive Vice President of Merchandizing and

Marketing. Dittrich reported directly to defendant Baker. Since CS1’s departure, CS1

has remained in close contact with senior executives and middle management, including

making frequent visits to the Company’s headquarters and stores.


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7. According to CS1, Baker’s strategy for increasing comparable store sales

was to increase inventory – a strategy CS1 described as an old trick in retail. “If you

throw a lot of inventory at [stores], you can get exponential sales. The more increased

sales you get, the faster your comps grow.” CS1 states that Baker immediately increased

average store inventories from approximately $1.4-$1.6 million, to approximately $2.1-

$2.2 million. CS1 states that the problem with this strategy is that, although it yields

short-term increases in sales, ultimately purchasing additional inventory becomes too

expensive and cuts into profits. In other words, a 50 percent increase in inventory does

not translate to a 50 percent increase in sales. CS1 states that Baker’s trick worked in the

short-term and boosted sales in fiscal 2003, however, by 2004, costs for adding inventory

accrued and the Company’s profit margin began to take a hit. In addition to the scheme

described by CS1, the Company boosted its comparable store sales through its one-time

co-branded credit card promotion.

8. On April 26, 2005, Gander Mountain completed its IPO of 6,583,750

shares of common stock, at a price of $16.00 per share, for proceeds in excess of $105

million.

9. Unbeknownst to Plaintiff and the investing public, by the time Gander

Mountain went public, growing inventories, decreasing profit margins, and the ultimate

failure of the co-branded credit card promotions had all taken their toll on same store

sales, which were declining by the start of the Class Period.

10. By the fall of 2004, Defendants’ scheme to dress up the Company for its

IPO began to unravel. On November 9, 2004, the Company issued a press release in

which the Company disclosed, among other things, that its comparable store sales would

be negative for fiscal 2004: Gander Mountain Company today lowered its outlook for pretax income for fiscal 2004 to a range of $8 million to $13


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million, compared with the company’s prior guidance of $16 million to $21 million. The company reported pretax income of $1.5 million in fiscal 2003. The company also said that it expects its comparable store sales comparison for the year to be slightly negative, versus prior guidance of a three- to five-percent gain. Last year’s comparable store sales increase was 11.5 percent….

* * * “We are disappointed in the sales performance of our stores.”

(Emphasis added.)

11. This news shocked the investing public and sent Gander Mountain shares

plummeting $4.64 per share, or 25.01 percent, to close at $13.91 per share, on November

9, 2004.

12. On January 14, 2005, the last day of the Class Period, the Company issued

a press release in which it further lowered its guidance for fiscal 2004: Gander Mountain Company today lowered its outlook for pretax income for fiscal 2004 to a range of $2.0 million to $4.0 million, compared with the company’s prior guidance of $8 million to $13 million.

* * * [S]ales have not met the company’s expectations. As a result, the company increased post-holiday promotional activity in an effort to reduce inventories to comparable year-end levels. The results of these promotions will negatively impact the current quarter’s gross margin rate.

13. On this news, shares of Gander Mountain fell $1.86 per share, or 16.47

percent, to close at $9.43 per share, on January 14, 2005.

14. A March 10, 2005 article appearing in the STAR TRIBUNE (Minneapolis,

MN), “Clouds Surround Gander Mountain,” pointed out that: Gander could have done a better job managing investors’ expectation, which includes disclosing the source of the retailer’s impressive revenue gains leading up to its IPO last April…


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The article attributes the Company’s dramatic 11.5 percent increase in same store sales

during fiscal 2003 to the one-time 10 percent discounts offered to customers through the

Company’s co-branded credit card promotion – a fact never disclosed in the Registration

Statement/Prospectus: In 2003 … the company’s same-store sales rose a remarkable 11.5 percent. However, analysts now attribute much of that gain to a credit card promotion that offered customers a one-time 10 percent discount and up to 11 months of deferred billing. People took advantage of the credit card to make large, one-time purchases. “The company never highlighted the credit card, but it had a big impact” on sales in 2003, [Steve] Denault [senior research analyst at Northland Securities] said. “It compelled the guy who had an eye on the $500 shotgun and knew he couldn’t afford it to go ahead and buy it.”

JURISDICTION AND VENUE

15. The claims asserted herein arise under and pursuant to §§ 10(b), and 20(a)

of the Exchange Act, (15 U.S.C. §§ 78j(b) and 78t(a)), and Rule 10b-5 promulgated

thereunder (17 C.F.R. §240.10b-5). Additionally, this action arises under §§ 11, 12(a)(2)

and 15 of the Securities Act (15 U.S.C. §§ 77k, 77l(a)(2), and 77(o)).

16. This Court has jurisdiction over the subject matter of this action pursuant to

§27 of the Exchange Act (15 U.S.C. §78aa), § 22(a) of the Securities Act (15 U.S.C. §

77v(a)), and 28 U.S.C. § 1331.

17. Venue is proper in this Judicial District pursuant to §27 of the Exchange

Act, 15 U.S.C. § 78aa, § 22(a) of the Securities Act, 15 U.S.C. § 77v(a), and 28 U.S.C. §

1391(b). Many of the acts and transactions alleged herein, including the preparation and

dissemination of materially false and misleading information, occurred in substantial part

in this Judicial District. Additionally, the Company maintains its principal executive

offices in this Judicial District.


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18. In connection with the acts, conduct and other wrongs alleged in this

complaint, Defendants, directly or indirectly, used the means and instrumentalities of

interstate commerce, including but not limited to, the United States mails, interstate

telephone communications and the facilities of the national securities exchange.

THE PARTIES

19. Lead Plaintiff, the Mueller Group, purchased the publicly traded common

stock of Gander Mountain at artificially inflated prices during the Class Period, as

demonstrated by Plaintiff’s certification previously filed with the Court, and has suffered

damages as a result of the disclosure of the wrongful acts of Defendants as alleged herein.

By order dated June 8, 2005, the Court appointed Plaintiff as the Lead Plaintiff in this

case pursuant to 15 U.S.C. § 78u-4.

20. Defendant Gander Mountain is incorporated in Minnesota and maintains its

principal executive offices at 180 East Fifth Street, St. Paul, Minnesota.

21. Defendant Baker has been the Company’s Chief Executive Officer since

September 2002 and has served as its President since February 2004. Baker was elected

a director of the Company in April 2004. Baker reviewed, approved and signed certain

of Gander Mountain’s false and misleading SEC filings during the Class Period.

22. Defendant Lindahl has served as the Company’s Executive Vice President

and Chief Financial Officer since July 2003, Assistant Secretary from February 1997

through January 2004 and Acting Chief Executive Officer from February 1997 through

November 1997. In February 2004, he was appointed Secretary and Treasurer. Lindahl

joined Holiday Companies Inc. (“Holiday Companies”) in 1986, serving as Vice

President and Chief Financial Officer from 1997 to 2003. Holiday Companies is a

private company that is owned and controlled by members of the Erickson family,

including certain of the defendants named herein. Prior to the IPO, Holiday Companies,

through its wholly owned subsidiary, Holiday Stationstores, Inc. (“Holiday


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Stationstores”) owned 76.6 percent of the Company’s equity. Following the IPO,

Holiday Stationstores interest was diluted to 46.3 percent. According to the Registration

Statement/Prospectus, Lindahl continues to serve as a consultant to Holiday Companies.

Lindahl reviewed, approved and signed certain of Gander Mountain’s false and

misleading SEC filings during the Class Period.

23. Defendant Ronald Erickson was elected a director of the Company in

February 1997 and has served as Chairman of the Board of Directors since that time.

Ronald Erickson is also the Chief Executive Officer and Chairman of the Board of

Directors of Holiday Companies, positions he has held since its formation in December

1992. Ronald Erickson reviewed, approved and signed certain of Gander Mountain’s

false and misleading SEC filings during the Class Period.

24. Defendant G. Erickson was elected a Director of the Company in February

1997. G. Erickson has been a principal of Holiday Companies since its formation in

December 1992 and has served on the Board of Directors and as Vice President of

Holiday Companies since that time. G. Erickson has also served as Vice Chairman of the

Board of Directors of Holiday Companies since 2003. G. Erickson reviewed, approved

and signed certain of Gander Mountain’s false and misleading SEC filings during the

Class Period.

25. Defendant D. Erickson was a Director during the Class Period. D. Erickson

has been a principal of Holiday Companies since its formation in December 1992 and has

served on the Board of Directors of Holiday Companies since that time. D. Erickson is

the brother of Ronald Erickson and N. Erickson and the cousin of G. Erickson and

Richard Erickson and defendant Pihl. D. Erickson reviewed, approved and signed certain

of Gander Mountain’s false and misleading SEC filings during the Class Period.

26. Defendant N. Erickson was a Director during the Class Period. N. Erickson

has been a principal of Holiday Companies since its formation in December 1992 and has


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served on the Board of Directors of Holiday Companies since that time. N. Erickson is

the brother of Ronald Erickson and D. Erickson and the cousin of G. Erickson, Richard

Erickson and defendant Pihl. N. Erickson reviewed, approved and signed certain of

Gander Mountain’s false and misleading SEC filings during the Class Period.

27. Defendant Richard Erickson was a Director during the Class Period.

Richard Erickson has been a principal of Holiday Companies since its formation in

December 1992 and has served on the Board of Directors of Holiday Companies since

that time. Richard Erickson is the brother of G. Erickson and defendant Pihl and the

cousin of Ronald Erickson, D. Erickson and N. Erickson. Richard Erickson reviewed,

approved and signed certain of Gander Mountain’s false and misleading SEC filings

during the Class Period.

28. Defendant Pihl was a Director during the Class Period. Pihl has been a

principal of Holiday Companies since its formation in December 1992 and has served on

the Board of Directors of Holiday Companies since that time. Pihl is the sister of G.

Erickson and Richard Erickson and the cousin of Ronald Erickson, D. Erickson and N.

Erickson. Pihl reviewed, approved and signed certain of Gander Mountain’s false and

misleading SEC filings during the Class Period.

29. Defendants Baker, Lindahl, G. Erickson, D. Erickson, N. Erickson, Richard

Erickson, Pihl, and Ronald Erickson are collectively referred to hereinafter as the

“Individual Defendants.” During the Class Period, each of the Individual Defendants, as

senior executive officers and/or directors of Gander Mountain, was privy to non-public

information concerning the Company’s business, finances, products, markets and present

and future business prospects via access to internal corporate documents, conversations

with other corporate officers and employees, attendance at management and Board of

Directors meetings and committees thereof and via reports and other information

provided to them in connection therewith. Because of their possession of such


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information, the Individual Defendants knew or recklessly disregarded the fact that

adverse facts specified herein had not been disclosed to, and were being concealed from,

the investing public.

30. It is appropriate to treat the Individual Defendants as a group for pleading

purposes and to presume that the false, misleading and incomplete information conveyed

in the Company’s public filings, press releases and other publications as alleged herein is

the collective product of the narrowly defined group of defendants identified above.

Each of the above officers of Gander Mountain, by virtue of his/her high-level position

with the Company, directly participated in the management of the Company, was directly

involved in the day-to-day operations of the Company at the highest levels and was privy

to confidential proprietary information concerning the Company and its business,

operations, growth, financial statements, and financial condition, as alleged herein. The

Individual Defendants were involved in drafting, producing, reviewing and/or

disseminating the false and misleading statements and information alleged herein, were

aware, or recklessly disregarded, that the false and misleading statements were being

issued regarding the Company, and approved or ratified these statements, in violation of

the federal securities laws.

31. As officers and controlling persons of a publicly-held company whose

securities were and are registered with the SEC pursuant to the Exchange Act, and were

traded on the NASDAQ and governed by the provisions of the federal securities laws, the

Individual Defendants each had a duty to disseminate accurate and truthful information

promptly with respect to the Company’s financial condition and performance, growth,

operations, financial statements, business, markets, management, earnings and present

and future business prospects, and to correct any previously-issued statements that had

become materially misleading or untrue, so that the market price of the Company’s

publicly-traded securities would be based upon truthful and accurate information. The


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Individual Defendants’ misrepresentations and omissions during the Class Period

violated these specific requirements and obligations.

32. The Individual Defendants participated in the drafting, preparation, and/or

approval of the various public and shareholder and investor reports and other

communications complained of herein and were aware of, or recklessly disregarded, the

misstatements contained therein and omissions therefrom, and were aware of their

materially false and misleading nature. Because of their Board membership and/or

executive and managerial positions with Gander Mountain, the Individual Defendants

had access to the adverse undisclosed information about Gander Mountain’s financial

condition and performance as particularized herein and knew (or recklessly disregarded)

that these adverse facts rendered the positive representations made by or about Gander

Mountain and its business issued or adopted by the Company materially false and

misleading.

33. The Individual Defendants, because of their positions of control and

authority as officers and/or directors of the Company, were able to and did control the

content of the various SEC filings, press releases and other public statements pertaining

to the Company during the Class Period. Each Individual Defendant was provided with

copies of the documents alleged herein to be misleading prior to or shortly after their

issuance and/or had the ability and/or opportunity to prevent their issuance or cause them

to be corrected. Accordingly, each of the Individual Defendants is responsible for the

accuracy of the public reports and releases detailed herein and are therefore primarily

liable for the representations contained therein.

34. Each of the Defendants is liable as a participant in a fraudulent scheme and

course of business that operated as a fraud or deceit on purchasers of Gander Mountain’s

common stock by disseminating materially false and misleading statements and/or

concealing material adverse facts. The scheme (i) deceived the investing public


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regarding Gander Mountain business, operations, management and the intrinsic value of

Gander Mountain’s common stock; and (ii) caused Plaintiff and other members of the

Class to purchase Gander Mountain’s common stock at artificially inflated prices.

PLAINTIFF’S CLASS ACTION ALLEGATIONS

35. Plaintiff brings this action as a class action pursuant to Federal Rule of

Civil Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all persons who

purchased Gander Mountain’s securities in the IPO and/or traceable to Gander

Mountain’s Registration Statement/Prospectus for its IPO, and those persons who

purchased shares in the open market between April 21, 2004, and January 13, 2005,

inclusive (the “Class”), and who were damaged thereby. Excluded from the Class are

Defendants, the officers and directors of the Company, at all relevant times, members of

their immediate families and their legal representatives, heirs, successors or assigns and

any entity in which Defendants have or had a controlling interest.

36. The members of the Class are so numerous that joinder of all members is

impracticable. Throughout the Class Period, Gander Mountain’s common stock was

actively traded on the NASDAQ. While the exact number of Class members is unknown

to Plaintiff at this time and can only be ascertained through appropriate discovery,

Plaintiff believes that there are thousands of members in the proposed Class. Record

owners and other members of the Class may be identified from records maintained by

Gander Mountain or its transfer agent and may be notified of the pendency of this action

by mail, using the form of notice similar to that customarily used in securities class

actions.

37. Plaintiff’s claims are typical of the claims of the members of the Class, as

all members of the Class are similarly affected by Defendants’ wrongful conduct in

violation of federal law that is complained of herein.


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38. Plaintiff will fairly and adequately protect the interests of the members of

the Class and has retained counsel competent and experienced in class and securities

litigation.

39. Common questions of law and fact exist as to all members of the Class and

predominate over any questions solely affecting individual members of the Class.

Among the questions of law and fact common to the Class are:

(a) Whether the federal securities laws were violated by Defendants’

acts as alleged herein;

(b) Whether statements made by Defendants to the investing public

during the Class Period misrepresented material facts about the business, operations and

management of Gander Mountain; and

(c) To what extent the members of the Class have sustained damages

and the proper measure of damages.

40. A class action is superior to all other available methods for the fair and

efficient adjudication of this controversy since joinder of all members is impracticable.

Furthermore, as the damages suffered by individual Class members may be relatively

small, the expense and burden of individual litigation make it impossible for members of

the Class to individually redress the wrongs done to them. There will be no difficulty in

the management of this action as a class action.

SUBSTANTIVE ALLEGATIONS

41. In the mid-1990’s, Gander Mountain had fallen on hard times. On August

9, 1996, the Company filed for relief under Chapter 11 of the Bankruptcy Code. Pursuant

to a court-approved plan of reorganization, in early 1997, Gander Mountain sold most of

its assets to Holiday Stationstores (a wholly owned subsidiary of Holiday Companies,

which is owned, operated and controlled by the Erickson family, including defendants G.

Erickson, D. Erickson, N. Erickson, Richard Erickson, Ronald Erickson, and Pihl (the


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“Erickson Defendants”)). The consideration for this asset sale consisted of all secured

debt, administrative expenses of the bankruptcy, priority claims, reasonable post-

confirmation expenses, plus $19,500,000. Proceeds of the sale were deposited into a

Trust and distributed to the Company’s creditors and shareholders.

42. From its reorganization in 1997 through the IPO, Gander Mountain was a

privately held company controlled by the Erickson Defendants through their individual

ownership of the Company and their holdings in the Company’s majority shareholders,

Holiday Stationstores and Lyndale Terminal Company.

43. By 2003, Gander Mountain had transformed itself from a traditional

specialty store with a regional focus to a large format category-focused national chain

store. This transformation included building new large format stores that ranged in size

from 50,000 to 100,000 square feet (as compared to its existing 30,000 square foot

stores), with a warehouse-style environment and increased depth and breadth of product

offerings. Gander Mountain’s first large format store opened in March 2003. Also, the

Company had expanded its store base from 26 stores, in 1997, to 66 stores, in 2004,

located in nine states.

44. Prior to the IPO, Gander Mountain relied heavily upon the Erickson

Defendants, Holiday Companies, and Holiday Stationstores to fund its aggressive

expansion plan. For instance, in December 2001, the Company borrowed $55 million

from Holiday Companies, which the Company repaid in February 2003 by converting

notes payable into $54.6 million of its preferred stock. From March 2003 through May

2003, Holiday Companies advanced an additional $10.0 million to Gander Mountain, of

which $0.2 million had been repaid as of January 31, 2004. Also, Holiday Companies

and/or Holiday Stationstores guaranteed the Company’s leases with third parties for 36 of

the Company’s stores and its distribution center, guaranteed $11.7 million of borrowings


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under the Company’s credit facility, and guaranteed debts owed to certain third party

vendors.

45. As a result of these related party transactions, immediately prior to the IPO,

Gander Mountain was deeply indebted to Holiday Companies, Holiday Stationstores, and

the Erickson Defendants. In addition to the relationships outlined above, on February 6,

2004, the ST. PAUL PIONEER PRESS reported that as of November 1, 2003 the Company

owed a $9.8 million debt to Holiday Stationstores.

46. Without a ready market for Gander Mountain’s securities, the Erickson

Defendants had been unable to cash in on their substantial investment in the Company.

The Erickson Defendants recognized that they had to take Gander Mountain public in

order to receive immediate payment of the $9.8 million Gander Mountain owed to

Holiday Stationstores, and to create a market for their vast holdings of the Company’s

stock. According to a March 30, 2004, article in the ST. PAUL PIONEER PRESS, “Gander

Mountain’s aggressive expansion plan leaves it few options but to go public. It needs

capital to keep growing and its owners, the Ericksons and Holiday [Companies] need

a way to cash in on a hefty investment.” (Emphasis added.)

47. The Registration Statement/Prospectus disclosed that the Erickson

Defendants structured the IPO so that they would immediately and directly benefit from

the offering. Specifically, the Registration Statement/Prospectus stated: “We intend to

use $9.8 million of the net proceeds from this offering to repay all of our outstanding debt

to Holiday Companies [i.e., the Erickson Defendants]…”

48. The Company’s IPO was a phenomenal success. According to an April 21,

2004 article appearing in THESTREET.COM, “[I]nvestors gobbled up the outdoor

equipment retailer’s stock on its first day of trading. Its shares traded up $6.02, or 37.6%,

to $22.02.” On April 23, 2004, THE WALL STREET JOURNAL reported that shares of


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Gander Mountain common stock “rose 38% in its Nasdaq debut – and 5% more

yesterday.”

49. On April 26, 2004, Gander Mountain issued a press release announcing the

closing of the Company’s IPO of 6,583,750 shares of its common stock, including

858,750 shares sold upon exercise of an underwriters’ over-allotment option, at a price of

$16.00 per share, for proceeds in excess of $105 million.

50. Following the IPO, the Erickson Defendants, together with Holiday

Stationstores, collectively owned more than 51 percent of the Company’s outstanding

common stock. As a result, the Erickson Defendants and Holiday Stationstores continue

to be capable of controlling matters requiring shareholder approval, including election of

directors and the approval of mergers and other extraordinary transactions.

The False And Misleading IPO Registration Statement/Prospectus

51. On or about April 21, 2004, the first day of the Class Period, Gander

Mountain commenced its IPO of 5,750,000 shares of its common stock at a price of

$16.00 per share, for aggregate consideration of $92,000,000. In connection with the

IPO, Gander Mountain filed the Registration Statement/Prospectus. Also, pursuant to a

Form S-1MEF filed on April 21, 2004, the Company registered an additional 833,750

shares of its common stock for sale in the IPO, at a price of $16.00 per share, for an

additional $13,340,000, boosting the total offing to 6,583,750 shares, with total proceeds

of $105,340,000. Each of the Individual Defendants signed the Company’s Registration

Statement.

52. The Registration Statement/Prospectus included the following Statement of

Operations Data for the fiscal years ended February 1, 2003 (“fiscal year 2002” and

January 31, 2004 (“fiscal year 2003”):


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Statement of Operations Data Feb. 1, 2003 Jan. 31, 2004 Sales $ 357,441 $ 489,430 Cost of goods sold 272,033 370,770 Gross profit 85,408 118,660 Store operating expenses 66,517 85,361 General and administrative expenses 20,864 22,327 Preopening expenses 644 4,696 Income (loss) from operations (2,617) 6,276 Interest expense 7,314 4,760 Income (loss) before income taxes (9,931) 1,516 Net income (loss) (12,205) 1,516 Loss applicable to common shareholders (22,262) (15,007) Basic and diluted loss applicable to

common shareholders per share (22.87) (15.42)

53. With respect to the Company’s fiscal 2003 statement of operations data, the

Management Discussion and Analysis (“MD&A”) section of the Registration

Statement/Prospectus stated: Sales increased by $132.0 million, or 36.9%, to $489.4 million in fiscal 2003 from $357.4 million in fiscal 2002. The increase in sales resulted from a comparable store sales increase of $39.9 million, or 11.5%, and sales of $91.7 million from ten additional stores, including eight new stores and two relocated stores, opened during fiscal 2003. In addition to the operating initiatives discussed above, the increase in comparable store sales was attributable to sales increases in our hunting category led by consistently strong performance in our firearms department. Firearms sales performance was enhanced by the launch of our co-branded credit card in September 2003, which provided customers with a 5% to 10% discount and a new financing option for these higher priced items. These increases were partially offset by lower sales in the apparel and footwear categories due to unseasonably cool and wet weather in the first quarter of fiscal 2002 and flat sales of fishing rods and reels that were consistent with recent industry trends.

54. Defendants represented in the Registration Statement/Prospectus that the

Company’s financial statements were prepared in accordance with generally accepted


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accounting principles (“GAAP”) and reflected all adjustments necessary to present fairly

the Company’s results of operations: Our financial statements are prepared in accordance with generally accepted accounting principles. In connection with the preparation of the financial statements, we are required to make assumptions, make estimates and apply judgment that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that we believe to be relevant at the time the consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with generally accepted accounting principles.

55. With respect to pre-opening expenses, the MD&A section of the

Registration Statement/Prospectus stated: Pre-opening expenses increased by $4.1 million to $4.7 million in fiscal 2003 from $0.6 million in fiscal 2002. The increase in pre-opening expenses was due to the opening of eight new stores and two relocated stores, including eight larger format stores, during fiscal 2003 compared to the opening of two new smaller format stores during fiscal 2002.

56. The Registration Statement/Prospectus represented that for the 2003 fiscal

year, comparable store sales increased 11.5%. Additionally, the Registration

Statement/Prospectus stated the following with respect to the Company’s comparable

store sales during the 2002 and 2003 fiscal years:


Fiscal 2002

1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Comparable 1.9% (1.9)% (4.3)% 12.0% stores sales increase(decrease)

Fiscal 2003

1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Comparable 3.8% 15.5% 12.5% 12.2% stores sales increase (decrease)

57. With respect to known trends or uncertainties that had or that

Defendants reasonably expected to have a material impact on net sales, revenues

or income from continuing operation, the Registration Statement/Prospectus failed

to disclose that the Company’s co-branded credit card promotion (in combination

with the Companies substantially increased inventories) was one of the primary

drivers of its highly touted comparable store sales growth in fiscal 2003; that the

gains associated with this one-time promotion would not (and indeed could not) be

repeated during the 2004 fiscal year; and that there was a material risk that, in the

absence of this promotion, the Company’s comparable store sales growth was

unsustainable. The Registration Statement/Prospectus disclosed only that the

increase in comparable store sales was attributable to increased firearms sales,

which, in turn, was “enhanced” by the launch of its co-branded credit card in

September 2003: In addition to the operating initiatives discussed above, the increase in comparable store sales was attributable to sales increases in our hunting category led by consistently strong performance in our firearms department. Firearms sales performance was enhanced by the launch of our co-branded credit card in September 2003, which provided customers with a 5% to 10% discount and a new financing option for these higher priced items. These increases were partially offset by lower sales in the apparel and footwear

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categories due to unseasonably cool and wet weather in the first quarter of fiscal 2002 and flat sales of fishing rods and reels that were consistent with recent industry trends.

58. Not only did the Registration Statement/Prospectus fail to

adequately apprise prospective investors that there was a material risk that the

positive short-term trend in comparable store sales growth attributable to the one-

time 10 percent discounts from the co-branded credit card promotion would end

when the promotion ended, in early 2004, but the Registration

Statement/Prospectus also misrepresented the co-branded credit card as an

intrinsic part of the Company’s long-term marketing and advertising strategy: In addition to our print advertising program, we incorporate the following into our marketing and advertising strategy:

* * * • a loyalty program offered through our co-branded MasterCard credit card….

59. Under the heading, “Risk Factors,” the Registration

Statement/Prospectus purported to warn potential investors of the risk that

miscalculations in demand fluctuations could lead to excess inventories: We incur significant additional expenses in the third and fourth fiscal quarters due to higher purchase volumes and increased staffing in our stores. If, for any reason, we miscalculate the demand for our products or our product mix during the third or fourth fiscal quarters, our sales in these quarters could decline resulting in significantly lower margins and excess inventory, which could cause our annual operating results to suffer and our stock price to decline significantly.

This statement was materially false and misleading because it failed to disclose

that Defendants had already engaged in a deliberate and calculated scheme to

boost comparable store sales by flooding the Company’s stores with inventory,

20


which – as planned – boosted comparable store sales figures in anticipation of the

IPO, but, in the long-term, burdened the Company with excess inventories and

debt.

60. With respect to the Company’s description of its expected growth,

the Registration Statement/Prospectus stated: “We expect to grow at a rapid pace.”

61. In addition to the reasons stated above, the statements referenced

above in ¶¶ 52-60 were each materially false and misleading because Defendants

failed to disclose and misrepresented the following adverse facts, among others:

(1) the reported increases in comparable store sales were primarily the result of

inherently unsustainable short-term strategies that would eventually lead to

declines in comparable store sales figures and lower profit margins in fiscal 2004,

including: (i) increasing store inventories; and (ii) the Company’s co-branded

credit card promotion, which provided customers with a one-time 5% to 10%

discount and special financing options; (2) by failing to disclose the truth

regarding the Company’s increased comparable store sales during the 2003 fiscal

year and the reasons why such increases had become unsustainable by the time of

the IPO, Defendants violated SEC Regulation S-K (“Reg. S-K”), which requires

that the Registration Statement/Prospectus disclose “any known trends or

uncertainties that have had or that the registrant reasonably expects will have a

material favorable or unfavorable impact on net sales or revenues or income from

continuing operations;” (3) the Registration Statement/Prospectus failed to

adequately disclose material events and uncertainties known to Defendants that

would cause the Company’s reported financial performance for the 2003 fiscal

year not to be indicative of future operating results of future condition, in violation

of Reg. S-K, including: (i) providing descriptions and amounts of matters that

would have an impact on future operations that have not had an impact in the past

(including the ending of the one-time co-branded credit card promotion); and (ii)

21


matters that have had an impact on reported operations in the past that are not

expected to have an impact on reported operations in the future (including the 10

percent discounts offered during the 2003 fiscal year in connection with the co-

branded credit promotion, which was combined with substantial increases in

inventories); and (4) that as a consequence of the foregoing, Defendants lacked a

reasonable basis for their positive statements about the Company’s growth and

prospects.

DEFENDANTS VIOLATED SEC REGULATION S-K

62. As referenced above, Defendants caused Gander Mountain to file

with the SEC and, disseminate to Plaintiff and the investing public, the materially

false and misleading Registration Statement/Prospectus, in violation of Reg. S-K,

§229.303(a)(3)(ii) and the instructions accompanying this Regulation. Under Reg.

S-K, §229.303(a)(3)(ii), Defendants had an affirmative obligation to disclose in

the Registration Statement/Prospectus any known trends or uncertainties that have

or is reasonably expected to have a material impact on future sales, revenues or

income, as follows: Describe any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations. If the registrant knows of events that will cause a material change in the relationship between costs and revenues (such as known future increases in costs of labor or materials or price increases or inventory adjustments), the change in the relationship shall be disclosed.

63. In addition, the instructions accompanying §229.303(a)(3)(ii)

provide further clarification of the nature and extent of the disclosures required by

Reg. S-K:

22


The discussion and analysis shall focus on material events and uncertainties known to management that would cause reported financial information not to be necessarily indicative of future operating results or of future financial condition. This would include descriptions and amounts of (A) matters that would have an impact on future operations and have had an impact in the past, and (B) matters that have had an impact on reported operations and are not expected to have an impact upon future operatons.

64. As stated above, the Registration Statement/Prospectus failed to

disclose the scheme described by CS1, whereby Defendants intentionally flooded

the Company’s stores with inventory in order to increase in comparable store sales

figures in anticipation of the IPO. CS1 describes this as an old trick in retail that

has the desired effect of boosting revenues and comparable store sales figures, but

is inherently unsustainable because the cost of acquiring the inventory will

eventually erode profit margins and increase debt to unacceptable levels. The

Registration Statement/Prospectus also failed to disclose that Defendants

combined these increased inventories with a one-time 10 percent discount offered

to customers in connection with the Company’s co-branded credit card promotion,

which began in September 2003.

65. Moreover, the Registration Statement/Prospectus failed to disclose

that: (i) the dramatic 11.5 percent increase in comparable store sales was a short-

term trend that could only be achieved through the scheme described herein; (ii) as

a result of the Defendants’ scheme to boost comparable store sales figures, the

Company’s financial results for the 2003 fiscal year were not “indicative of future

operating results or [the Company’s] future financial condition;” and (iii) that

there was a material risk that this trend would not continue following the IPO.

None of these material facts were disclosed in the Registration

Statement/Prospectus, in violation of Reg. S-K.

23


SECURITIES ACT COUNTS

FIRST CLAIM Against Gander Mountain And The Individual Defendants

For Violations Of § 11 Of The Securities Act In Connection With The IPO

66. Plaintiff incorporates each and every allegation of ¶¶ 1-65 by

reference as if set forth fully herein.

67. This Count is brought pursuant to § 11 of the Securities Act, 15

U.S.C. § 77k, on behalf of all persons or entities who purchased or otherwise

acquired Gander Mountain common stock pursuant or traceable to the Registration

Statement/Prospectus for the IPO. In this Count, Plaintiff does not assert that the

Defendants are liable for fraudulent or intentional conduct.

68. The Registration Statement/Prospectus, as set forth in ¶¶ 52-60,

above, was inaccurate and misleading, contained untrue statements of material

facts, and omitted to state other facts necessary to make the statements contained

therein not misleading. Specifically, the Defendants’ statements in the

Registration Statement/Prospectus concerning increases in same store sales in the

2003 fiscal year were materially false and misleading because the Registration

Statement/Prospectus failed to disclose that these increases were primarily the

result of inherently unsustainable short-term strategies that would eventually lead

to declines in comparable store sales figures and lower profit margins in fiscal

2004, including: (i) increasing store inventories, and (ii) promoting and relying

upon the Company’s co-branded credit card promotion, which provided customers

with a one-time 5% to 10% discount and special financing options, as described

herein. Defendants’ statements in the Registration Statement/Prospectus

concerning same store comparable sales increases violated Reg. S-K by failing to

disclose that the Company’s 11.5 percent increase comparable store sales, during

the 2003 fiscal year: (i) was a short-term trend that could only be achieved through

24


the scheme to boost comparable store sales, described herein; (ii) as a result of the

Defendants’ scheme to boost comparable store sales figures, the Company’s

financial results for the 2003 fiscal year were not “indicative of future operating

results or [the Company’s] future financial condition;” and (iii) that there was a

material risk that this trend would not continue following the IPO, as described

herein. These misstatements rendered the statements made in the Registration

Statement/Prospectus materially false and misleading.

69. Gander Mountain, as the issuer of the Registration

Statement/Prospectus, is strictly liable for the false and misleading statements

therein.

70. Each of the Individual Defendants signed the Registration

Statement/Prospectus for the IPO. Therefore, each of the Individual Defendants

named in this Count is liable to Plaintiff and the other members of the Class who

purchased or otherwise acquired Gander Mountain common stock pursuant to or

traceable to the Registration Statement/Prospectus for the IPO for the various

misstatements and omissions contained therein under § 11 of the Securities Act.

71. Plaintiff and the other members of the Class purchased or otherwise

acquired Gander Mountain common stock pursuant to or traceable to the

Registration Statement/Prospectus for the IPO. At the time they purchased or

acquired Gander Mountain common stock, Plaintiff and other members of the

Class were without knowledge of the facts concerning the inaccurate and

misleading statements and omissions alleged herein.

72. Less than one year has elapsed from discovery of the violations and

facts upon which this Complaint is based to the time of filing of this action. Less

than three years has elapsed from the time that Gander Mountain’s common stock

was offered bona fide to the public to the time of filing of the action.

25


73. By reason of the conduct alleged herein, each Defendant named in

this Count violated § 11 of the Securities Act. As a direct and proximate result of

Defendants’ conduct, Plaintiff and the other members of the Class have sustained

substantial damage in connection with their purchase and/or acquiring of the

common stock pursuant to or traceable to the Registration Statement/Prospectus

for the IPO. SECOND CLAIM

Against The Individual Defendants For Violations Of § 15 Of The Securities Act

In Connection With The IPO



75. This Count is brought pursuant to § 15 of the Securities Act, on

behalf of all persons or entities who purchased or otherwise acquired Gander

Mountain common stock pursuant to or traceable to the Registration

Statement/Prospectus for the IPO. In this Count, Plaintiff does not assert that the

Individual Defendants are liable for fraudulent or intentional conduct.

76. Each of the Individual Defendants named in this Count was a control

person of Gander Mountain by virtue of his/her executive and/or directorial

positions at the Company. The Individual Defendants named in this Count had the

power, and exercised the same, to cause Gander Mountain to engage in the

violations of law complained of herein and were able to and did control the

contents of the Registration Statement/Prospectus for the IPO.

77. By reason of their senior executive positions at Gander Mountain

and their actual control over the Company’s day-to-day operations, financial

statements, public filings and their intimate involvement and control over the

Registration Statement/Prospectus for the IPO, the Individual Defendants named

26


in this Count are jointly and severally liable to Plaintiff and the other members of

the Class as a result of the wrongful conduct alleged herein.

ADDITIONAL ALLEGATIONS IN SUPPORT OF EXCHANGE ACT COUNTS ONLY

78. Plaintiff repeats and realleges each of the allegations set forth in ¶¶

1-77 as if fully set forth herein.

Former Gander Mountain Employees Describe Defendants’ Scheme

79. In order to get the maximum value out of the IPO, Defendants

engaged in a number of short-term strategies to artificially inflate the Company’s

comparable store sales growth figures. Former Gander Mountain employees have

described some of the short-term strategies used by Defendants to artificially

inflate the Company’s comparable store sales growth figures in anticipation of the

IPO.

80. CS1 is a former Divisional Merchandise Manager, who worked at

the Company’s headquarters from 1998 until the end of 2002. During CS1’s

tenure at Gander Mountain, CS1’s direct supervisor was Dittrich, the Company’s

Executive Vice President of Merchandizing and Marketing, who reported directly

to defendant Baker. Since CS1’s departure, CS1 has remained in close contact

with senior executives and middle management, including making frequent visits

to the Company’s headquarters and stores.

81. According to CS1, the Defendants began implementing a strategy to

take the Company public back in 1999 or 2000. Indeed, based upon conversations

with the Company’s senior management, CS1 states that this was the Company’s

number one priority. CS1 states that prior to defendant Baker’s tenure,

comparable store sales were “steady,” growing at a rate of approximately 1 to 3

percent per year. By 2001 or 2002, however, it became evident that Company

sales had not grown sufficiently for an economically viable IPO. Thus, when

27


defendant Baker became the Company’s CEO in August 2002, he was given a

clear mandate to increase the Company’s comparable store sales figures.

82. CS1 explained that Gander Mountain defined “comp stores” as

stores that had been in existence for more than thirteen months. Gander Mountain

used the thirteen-month mark rather than twelve months because the Company

held one-year anniversary sales at its stores a year after the store’s “grand

opening.” As a result, it would be harder for the Company to build on sales

numbers if they included the one-year anniversary sales, so the Company would

wait until the sale concluded before qualifying the store as a comparable store.

83. According to CS1, Baker’s strategy for increasing comparable store

sales was to increase inventory – a strategy CS1 described as an old trick in retail.

“If you throw a lot of inventory at [stores], you can get exponential sales. The

more increased sales you get, the faster your comps grow.” CS1 states that Baker

immediately increased average store inventories from approximately $1.4-$1.6

million, to approximately $2.1-$2.2 million. CS1 states that the problem with this

strategy is that, although it yields short-term increases in sales, ultimately

purchasing additional inventory becomes too expensive and cuts into profits. In

other words, a 50 percent increase in inventory does not translate to a 50 percent

increase in sales. CS1 states that Baker’s trick (which was combined with the one-

time 10 percent discounts offered in connection with the co-branded credit card

promotion) worked in the short-term and boosted sales in 2003, but by 2004, costs

for adding inventory accrued and the Company’s profit margin – predictably –

began to take a hit. Indeed, based upon conversations with the Company’s senior

management, CS1 states that immediately after the IPO, in April 2004, Gander

Mountain’s new Board of Directors looked at the numbers and determined that

inventory spending needed to be curbed.

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84. Based upon information provided by CS1, it is clear that Baker and

Lindahl would have been keenly aware of the drop in comparable store sales and

rising inventories at the time of the IPO. Specifically, based upon conversations

with the Company’s senior management, CS1 states that all of the Company’s

senior executives attended weekly and monthly sales and planning meetings

during which sales strategies were plotted out and middle managers were assigned

the task of implementing those strategies. During these meetings, there was

intense focus on priming the Company for its IPO by increasing comparable store

sales figures. It was during these meetings that Baker announced his plan to

increase inventories and the Company’s co-branded credit card promotion was

hatched. Dittrich communicated to CS1 what transpired in the senior executive

meetings, including the strategies to prepare the Company to go public.

85. Another former Gander Mountain employee who worked at the

Company’s headquarters from 1997 until the end of 2002 and has remained in

close contact with management (“CS2”), had the responsibility for compiling

weekly reports that provided updates on the Company’s nationwide sales,

inventory levels, gross margins, new store sales numbers and comparable store

sales numbers. According to CS2, all senior management at the Company had

access to these reports. Based upon CS2’s personal communications with the

Company’s senior management, including defendant Baker, CS2 states that

nobody in the Company was more interested in reading these reports than Baker.

86. Sales information was also streamed to the Defendants through the

Company’s point-of-sale computer system, which, according to a former Gander

Mountain director of information technology from 1998 to 2002 (“CS3”), the

Company is still using. Specifically, the Company uses a suite of packages from

Retek, which was installed in November 2000. The package includes a

merchandizing system, a distribution system, and a data warehouse system.

29


According to CS3, the Retek system accurately tracks sales and inventory at the

point-of-sale, i.e., at the cash register. Every night, as part of the stores’ closing

procedures, they run a program that reports the day’s sales data to Gander

Mountain’s headquarters, where the data is then pooled by the headquarters’ sales

audit system. Thus, every item sold and every item in inventory was tracked with

the Retek system. The information from the Retek system was available and

updated on a daily basis. According to CS3, the data compilations from the Retek

system were provided to all of the Company’s executives, including Defendants.

87. As a result of the weekly and monthly sales meetings, the weekly

reports compiled by CS2, and the point-of-sale data from the Retek system,

Defendants knew about the Company’s declining comparable store sales figures,

the failure of the co-branded credit card promotion, rising inventories and

declining profits at the time of the IPO.

88. Defendants successfully concealed the truth from investors

concerning the Company’s artificially inflated same store sales figures and, as a

result, Gander Mountain’s IPO was a phenomenal success. Although Defendants’

scheme succeeded in artificially increasing revenues and comparable store sales

figures, after the IPO, rising inventories and increasing debt forced Defendants’ to

abandon their deceptive strategies. Prior to the 2003 fiscal year, the Company’s

inventory levels had grown at a relatively modest rate: $67.0 million, $81.8

million, $95.3 million and $109.9 million, for the fiscal years ended January 29,

2000, January 27, 2001, February 2, 2002, and February 1, 2003, respectively. By

January 31, 2004, however, inventories had climbed to $180.3 million. As shown

by Plaintiffs’ confidential witnesses, Defendants intentionally increased Gander

Mountain’s inventories for the purpose of driving up revenues and same store

sales figures. In order to acquire this inventory, however, Defendants caused the

Company to take on massive debt, including increasing borrowings under its credit

30


facility from $45.1 million as of February 1, 2003, to more than $102 million as of

January 31, 2004, and $9.8 million borrowed from Holiday Stationstores.

89. Although the figures in the preceding paragraph were disclosed in

the Registration Statement/Prospectus, the Company failed to disclose that, at the

time of the IPO, it had acquired far more inventory than the Company could

possibly sell during the 2004 fiscal year. Moreover, the Defendants failed to

disclose that the burden of carrying this increased inventory was compounded by

the conclusion of its one-time 10 percent discount offered through its co-branded

credit card promotion, which had helped fuel the Company’s dramatic comparable

store sales growth during the fiscal year ended January 31, 2004 – the period

immediately before the IPO. In addition, Defendants failed to disclose the known

material risk that the short-term trend of increased comparable store sales during

the 2003 fiscal year was not sustainable.

90. At the end of the first quarter of 2004 (the period ended May 1,

2004); Gander Mountain had accumulated inventories of $226.0 million. As the

Class Period progressed, inventories continued to rise, with inventories hitting

$253.7 million for the quarter ended July 31, 2004, and hitting $329.4 million for

the quarter ended October 30, 2004. After the end of the third quarter of 2004 (the

period ended October 30, 2004), Defendants’ scheme had begun to unravel, as

described below.

Post-IPO False And Misleading Statements

91. Notwithstanding the adverse undisclosed information known or

recklessly disregarded by Defendants, throughout the Class Period, Defendants

made materially false and misleading statements about Gander Mountain and its

business condition.

31


The First Quarter 2004 Earnings Release

92. On May 19, 2004, the Company issued a press release announcing

its financial results for the quarter ended May 1, 2004 (the “First Quarter 2004

Earnings Release”). Specifically, the First Quarter 2004 Earnings Release stated: Total sales for the first quarter of fiscal 2004 increased 42% or $29.3 million, to $98.7 million. Comparable stores sales increased 8.7%. The net loss for the quarter was $13.6 million compared with a net loss of $11.2 million in the first quarter of fiscal 2003.

Commenting on these results, Baker stated:

We were satisfied with Gander Mountain’s progress in the quarter. Strong sales growth reflects our emphasis on both comparable store performance and new store development…. Gander Mountain is a highly seasonal business both because of our hunting, fishing and camping emphasis and because of the concentration of our current stores in northern states. First quarter results were consistent with our expectations and keep us on track to meet our overall financial plan for 2004.

In addition, the First Quarter 2004 Earnings Release made the following

projections for the full fiscal year 2004: Sales are expected to reach $650-$700 million, an increase of 33% to 43% over fiscal 2003. Comparable store sales are expected to increase by approximately 3% to 5%. Income before income taxes is expected to be $16-$21 million, compared with $1.5 million in fiscal 2003.

The First Quarter 2004 10-Q

93. On June 14, 2004, Gander Mountain filed with the SEC its quarterly

report for the period ended May 1, 2004 (the “First Quarter 2004 10-Q”). The

First Quarter 2004 10-Q reiterated the financial results reported in the Company’s

32


First Quarter 2004 Earnings Release. Defendants Baker and Lindahl signed the

First Quarter 2004 10-Q. In addition, both Baker and Lindahl certified the First

Quarter 2004 10-Q pursuant to the Sarbanes-Oxley Act of 2002. Specifically,

their certifications represented that, among other things, the First Quarter 2004 10-

Q did not contain any false or misleading statements of material fact or fail to

disclose any material facts and fairly presented the Company’s financial results

and condition, as follows: 1. I have reviewed this quarterly report on Form 10-Q of Gander Mountain Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report; 4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

33


b) evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. 5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

94. The First Quarter 2004 10-Q represented that Gander Mountain’s

comparable store sales had increased by 8.7 percent during the first quarter of

2004: Sales increased by $29.3 million, or 42.2%, to $98.7 million for the 13 weeks ended May 1, 2004, from

34


$69.4 million for the 13 weeks ended May 3, 2003. This increase resulted from a comparable store sales increase of $5.5 million, or 8.7%, and sales of $24.8 million from ten additional stores opened subsequent to the first quarter of fiscal 2003, offset by closed and non-comparable store sales. The increase in comparable store sales was attributable to sales increases in our hunting category, particularly firearms, both new and used. Our apparel and footwear categories also contributed significantly to comparable stores sales.

95. The First Quarter 2004 10-Q represented that during the first quarter

of 2004, Gander Mountain’s co-branded credit card was responsible for increasing

the Company’s sales of firearms: Firearms sales were enhanced by our co-branded credit card launched in September 2003, which provides customers with a 5% discount and a new financing option on firearms.

96. Under the heading, “Critical Accounting Policies and Use of

Estimates,” the First Quarter 2004 10-Q represented that the Company’s financial

statements were prepared in accordance with GAAP: Our financial statements are prepared in accordance with generally accepted accounting principles. In connection with the preparation of the financial statements, we are required to make assumptions, make estimates and apply judgment that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that we believe to be relevant at the time the consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with generally accepted accounting principles.

35


The Second Quarter 2004 Earnings Release

97. On August 18, 2004, Gander Mountain issued a press release

announcing the Company’s financial results for the quarter ended July 31, 2004

(the “Second Quarter 2004 Earnings Release”). In the Second Quarter 2004

Earnings Release, Defendants continued to tout the Company’s purported

increases in comparable store sales: Total sales for the second quarter of fiscal 2004 increased 35%, or $33.3 million, to $128.1 million. Comparable store sales increased 1.8% on top of a 15.5% increase in the second quarter of fiscal 2003. The net loss for the quarter was $3.7 million compared with a net loss of $4.4 million in the second quarter of fiscal 2003.

For the 26 weeks ended July 31, 2004, sales increased $62.6 million, or 38%, to $226.8 million. Comparable store sales increased 4.8%. The net loss for the 26 weeks ended July 31, 2004 was $17.3 million, compared with a net loss of $15.6 million for the 26 weeks ended August 2, 2003.

On April 26, 2004, Gander Mountain closed its initial public offering of 6,583,750 shares of its common stock and converted existing preferred stock to common stock. On a GAAP basis, the per share net loss for the second quarter of 2004 was $0.26 per common share compared with a net loss of $8.75 per common share for the second quarter of fiscal 2003. For the 26 weeks ended July 31, 2004 on a GAAP basis, the Company’s net loss was $2.71 per common share compared with a net loss of $24.56 per common share for the 26 weeks ended August 2, 2003. Giving effect to the conversion of preferred shares and the application of the net proceeds of the offering as of the beginning of each period presented, pro forma net loss for the second quarter of fiscal 2004 was unchanged from the GAAP net loss of $3.7 million, or $0.26 per share, compared to a pro forma net loss of $3.5

36


million, or $0.25 per share, for the second quarter of last year. Pro forma net loss for the 26 weeks ended July 31, 2004 was $16.3 million, or $1.15 per share, compared to a pro forma net loss of $14.2 million, or $1.09 per share, for the 26 weeks ended August 2, 2003.

Commenting on these results, Defendant Baker stated:

Our industry leading 35% sales growth this quarter reflects our focus on both comparable store performance and new store development…. We are on track to meet our overall financial plan for 2004 as we move into the higher volume third and fourth quarters.

The Second Quarter 2004 Earnings Conference Call

98. On August 18, 2004, Defendants hosted a conference call with

securities analysts and the investing public to discuss the Company’s financial

results for the quarter ended July 31, 2004 (the “Second Quarter 2004 Earnings

Conference Call”). During the Second Quarter 2004 Earnings Conference Call,

defendants Lindahl and Baker reaffirmed the financial results reported in the

Second Quarter 2004 Earnings Release. In addition, Defendants again touted the

Company’s purported same store sales growth. Specifically, Lindahl stated: Gander Mountain delivered 35 percent sales growth, including a 1.8 percent comparable store sales increase. This comparable store sales increase comes on top of a 15.5 percent comp-store increase in the second quarter of 2003.

* * * For the six months [ended July 31, 2004], sales increased 38 percent on new store openings and comparable store sales growth of 4.8 percent.

Baker also commented on comparable store sales: Our comp performance of 1.8 was over the 15.5 of a year ago. Comps now have been improved for seven straight quarters.

37


In response to a question from analyst Sean McGowan of Harris Nesbitt Gerard,

Defendant Baker elaborated on same store growth for the first six months of fiscal

2004: First half comparison? I think if you look at our growth year-on-year … a year ago the first quarter, we were at (indiscernible) and we did a 4.8 year-to-date. So, we are comparable for the first half of this year to a 10 percent comp-store. We’ve laid on top of that a 4.8 (indiscernible) for this year.

In response to a follow up question by Sean McGowan, defendant Lindahl

reaffirmed the Company’s previously reported comparable store sales figures: Last year was 3.8 for the first quarter, 15.5 for the second quarter, 12.5 for the third quarter, 12.2 for the fourth quarter, for an 11.5 for fiscal ’03 comparable stores.

99. Defendants’ statements in the Second Quarter 2004 Earnings

Release and the Second Quarter 2004 Earnings Conference Call had the desired

effect of increasing the price of Gander Mountain’s common stock. Following the

Second Quarter 2004 Earnings Release and the Second Quarter 2004 Earnings

Conference Call, on August 19, 2004, the ST. PAUL PIONEER PRESS reported that

Gander Mountain’s accelerated store-opening schedule along with better than

expected inventory levels and same store sales fueled a 10 percent rise or $1.88

increase in the Company’s stock price to close August 18, 2004 at $20.66 per

share.

The Second Quarter 2004 10-Q

100. On September 30, 2004, Gander Mountain filed with the SEC its

quarterly report for the period ended July 31, 2004 (the “Second Quarter 2004 10-

Q”). Defendants Baker and Lindahl signed the Second Quarter 2004 10-Q. In

addition, Baker and Lindahl certified the Second Quarter 2004 10-Q pursuant to

the Sarbanes-Oxley Act of 2002. The Second Quarter 2004 10-Q reiterated the

38


financial results reported in the Company’s Second Quarter 2004 Earnings

Release.

101. The Second Quarter 2004 10-Q represented that Gander Mountain’s

comparable store sales had increased by 1.8 percent during the second quarter of

2004: Sales increased by $33.3 million, or 35.1%, to $128.1 million in the second quarter of fiscal 2004, from $94.8 million in the second quarter of fiscal 2003. This increase primarily resulted from a comparable store sales increase of $1.4 million, or 1.8%, and sales of $32.8 million from stores not yet included in the comparable store sales base, offset by closed stores. The increase in comparable store sales was primarily attributable to sales increases in our hunting category, particularly new and used firearms, firearms security and paintball. Our apparel and footwear categories also contributed to comparable stores sales, with most departments reporting gains.

(Emphasis added.)

102. The Second Quarter 2004 10-Q represented that during the second

quarter of 2004, Gander Mountain’s co-branded credit card was partially

responsible for increasing the Company’s sales and gross profits: Gross profit increased by $9.3 million, or 41.7%, to $31.5 million in the second quarter of fiscal 2004 from $22.2 million in the second quarter of fiscal 2003. As a percentage of sales, gross profit increased 1.1% to 24.6% in the second quarter of fiscal 2004 from 23.5% in the second quarter of fiscal 2003. Gross product margins increased approximately 0.7% for the quarter but were offset by additional markdowns in the apparel, fishing and camping categories. The remaining net increase was primarily due to:

* * *

39


• an increase in net revenues from our co-branded credit card program….

(Emphasis added.)

103. Under the heading, “Critical Accounting Policies and Use of

Estimates,” the Second Quarter 2004 10-Q represented that the Company’s

financial statements were prepared in accordance with GAAP: Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. In connection with the preparation of the financial statements, we are required to make assumptions, make estimates and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that we believe to be relevant at the time the consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with accounting principles generally accepted in the United States of America.

104. The statements referenced above in ¶¶ 92-103 were each materially

false and misleading because Defendants failed to disclose and misrepresented the

following adverse facts, among others: (1) increases in comparable store sales

were primarily the result of inherently unsustainable short-term strategies that

would eventually lead to declines in comparable store sales figures and lower

profit margins in fiscal 2004, including: (i) increasing store inventories; and (ii)

relying upon the Company’s co-branded credit card promotion, which provided

customers with a one-time 5% to 10% discount and special financing options; (2)

that the Company’s new “big box” warehouse style stores were cannibalizing sales

of the Company’s smaller stores and causing further erosion of comparable store

sales figures; (3) that as a consequence of the foregoing, Defendants lacked a

40


reasonable basis for their positive statements about the Company’s growth and

prospects; and (4) as a result of the foregoing material misrepresentations and

omissions, Gander Mountain’s financial statements violated GAAP and SEC

Regulations.

The Truth Begins to Emerge

The November 9, 2004 Press Release

105. On November 9, 2004, the Company issued a press release entitled

“Gander Mountain Company Revises Outlook for Fiscal 2004,” therein the

Company stated: Gander Mountain Company today lowered its outlook for pretax income for fiscal 2004 to a range of $8 million to $13 million, compared with the company’s prior guidance of $16 million to $21 million. The company reported pretax income of $1.5 million in fiscal 2003. The company also said that it expects its comparable store sales comparison for the year to be slightly negative, versus prior guidance of a three- to five-percent gain. Last year’s comparable store sales increase was 11.5 percent. Total revenue for the 2004 fiscal year is now expected to be in the range of $640 million to $670 million, compared with $490 million in the prior year.

The company expects to report that total revenue in the third quarter increased 24 percent to approximately $178 million, reflecting the addition of new stores, while comparable store sales declined 7.5 percent compared with an increase of 12.5 percent in the third quarter of the previous year. The company expects to report that year-to-date comparable store sales declined 0.7 percent. In revising its outlook, the company cited weaker-than-anticipated sales, resulting in part from the impact of unseasonably warm weather on sales of outerwear and footwear. In addition, co-branded credit card

41


promotions in 2004 were not as effective in driving sales of high-ticket items as the 2003 promotions, when the credit card program was introduced. “We are disappointed in the sales performance of our stores. However, we expect to report modestly positive income for the third quarter as a result of reacting to the sales environment and effectively managing our operating costs and inventory levels,” said Mark Baker, president and CEO. “In addition, by the end of the third quarter we had opened 19 new stores during the year, up from our original plan of 15, and each opened on time and on budget.”

106. The news shocked the market. Shares of Gander Mountain fell

$4.64 per share, or 25.01 percent, to close at $13.91 per share, on November 9,

2004.

The Third Quarter 2004 Earnings Release

107. On November 17, 2004, Gander Mountain issued a press release

announcing the Company’s financial results for the quarter ended October 30,

2004 (the “Third Quarter 2004 Earnings Release”). The “Third Quarter 2004

Earnings Release stated: Gander Mountain Company today reported sales and earnings results for the third quarter ended October 30, 2004. Total sales for the third quarter of fiscal 2004 increased 24.4%, or $34.9 million, to $178.1 million. Comparable store sales decreased 7.5% after a 12.5% increase in the third quarter of fiscal 2003. The company reported net income for the quarter of $2.1 million, compared with net income of $4.4 million in the third quarter of fiscal 2003. The company opened 14 stores in the quarter versus four in the third quarter of 2003, incurring pre-opening expenses of $4.6 million compared to $1.4 million in the 2003 period.

For the first nine months of fiscal 2004, sales increased $97.5 million, or 31.7%, to $405.0 million. Comparable store sales declined 0.7% after an increase

42


of 11.1% in the first nine months of 2003. The net loss for the first nine months of fiscal 2004 was $15.2 million, compared with a net loss of $11.2 million for same period of fiscal 2003.

“With almost 6,000 dedicated associates providing outstanding service to every customer, we have increased sales 32% for the year to date. Building scale is crucial to gaining operating efficiencies in retailing, and we believe that the investment in opening new stores this year will be rewarded in improved profitability,” said Mark Baker, President and CEO. “While we are disappointed in the slower-than-expected growth in sales for the recent quarter, we proactively managed our business to minimize the impact on profits.

“We will continue to drive our growth by building new stores, as well as by offering an enhanced assortment of products and services,” Baker continued. “We were gratified by the strong brand recognition and overwhelming customer response as we entered new markets like Texas.”

* * * Full Fiscal Year 2004

* Sales are expected to reach $640 to $670 million, an increase of 31% to 37% over fiscal 2003.

* Comparable store sales are expected to be negative 1% to 3%.

* Income before income taxes is expected to be $8 to $13 million, compared with $1.5 million in fiscal 2003.

The Third Quarter 2004 Earnings Conference Call

108. On November 17, 2004, Defendants hosted a conference call with

securities analysts and the investing public to discuss the Company’s financial

results for the quarter ended October 30, 2004 (the “Third Quarter 2004 Earnings

Conference Call”). During the Third Quarter 2004 Earnings Conference Call,

43


defendants Lindahl and Baker reaffirmed the financial results reported in the Third

Quarter 2004 Earnings Release. In addition, Defendants belatedly disclosed that

the Company’s co-branded credit card promotions had failed to increase

comparable store sales: Another factor that affected our sales results, particularly our comp store sales, was firearms. There are three incidents that caused the negative comp. First we introduced our co-branded credit card in the third quarter of 2003 with a promotion that offered customers a one-time 10 percent discount and up to 11 months of deferred billing for any purchase using the card. The greatest impact was on higher ticket items, and particularly firearms. The promotions we offered this year were not as successful in driving firearms sales.

(Emphasis added.) Also during the Third Quarter 2004 Earnings Conference Call,

an unidentified Gander Mountain representative further revealed that the

Company’s co-branded credit card promotions were ineffective: No, the big issues that we have had – and obviously we don’t want to telegraph to our competitors all of these issues – but we have had this MBNA thing this year, which obviously you saw huge comps in the third quarter, which we disclosed last year. And we obviously thought we could, through double the points and offering some specials, drive at least that kind of volume. But for whatever reasons, we were not able to do that. That was that biggest promotion that we had by far throughout the course of the year; that was extraordinary.

The January 14, 2005 Press Release

109. On January 14, 2005, the last day of the Class Period, the Company

issued a press release before the markets opened, entitled “Gander Mountain

Company Revises Outlook for Fiscal 2004,” wherein the Company stated:

44


Gander Mountain Company today lowered its outlook for pretax income for fiscal 2004 to a range of $2.0 million to $4.0 million, compared with the company’s prior guidance of $8 million to $13 million. The company reported pretax income of $1.5 million in fiscal 2003. The company also said that it expects comparable store sales for the current fiscal year to be down 2 percent to 3 percent. Last year’s comparable store sales increased 11.5 percent. Total revenue for the 2004 fiscal year is expected to be in the range of $640 million to $645 million, an increase of approximately 31 percent over revenue of $489 million in the prior year. The company expects total revenue in the fourth quarter to increase approximately 31 percent to $236 million to $241 million, reflecting the addition of new stores and a comparable store sales decrease of approximately 6 percent. Comparable store sales increased 12.2 percent in the fourth quarter of fiscal 2003. The company expects to report pretax income of $17.2 million to $19.2 million in the current quarter, compared to $12.8 million in the fourth quarter of last year, a 34 percent to 50 percent increase. In revising its outlook, the company cited the continuing impact of unseasonably warm weather into mid-December. Despite improvements in sales after the weather normalized, sales have not met the company’s expectations. As a result, the company increased post-holiday promotional activity in an effort to reduce inventories to comparable year-end levels. The results of these promotions will negatively impact the current quarter’s gross margin rate.

(Emphasis added.)

110. On this news, shares of Gander Mountain fell $1.86 per share, or

16.47 percent, to close at $9.43 per share, on January 14, 2005.

45


The Aftermath

111. An article appearing in the STAR TRIBUNE (Minneapolis, MN),

“Clouds Surround Gander Mountain,” on March 10, 2005, stated: Gander’s management team has been too quick to blame the weather [for its declining comparable store sales]. More ominous … is the recent explosion in the number of big-box hunting and fishing retailers.

In addition to increased competition, the article states:

Gander could have done a better job managing investors’ expectation, which includes disclosing the source of the retailer’s impressive revenue gains leading up to its IPO last April…

The article attributes the Company’s dramatic 11.5 percent increase in same store

sales during 2003 to the one-time credit card promotion – a fact concealed by

Defendants: In 2003 … the company’s same-store sales rose a remarkable 11.5 percent. However, analysts now attribute much of that gain to a credit card promotion that offered customers a one-time 10 percent discount and up to 11 months of deferred billing. People took advantage of the credit card to make large, one-time purchases. “The company never highlighted the credit card, but it had a big impact” on sales in 2003, [Steve] Denault [senior research analyst at Northland Securities] said. “It compelled the guy who had an eye on the $500 shotgun and knew he couldn’t afford it to go ahead and buy it.”

112. On March 11, 2005, Gander Mountain held a conference call for

securities analysts and the investing public during which Defendants disclosed that

the Company’s new “big box” warehouse style stores had been cannibalizing sales

46


of the Company’s smaller stores and causing further erosion of comparable store

sales figures: We found the cannibalization and competition had impacted more than we anticipated. As an example, in the Twin Cities where we have 2 big box stores we have seen more continued cannibalization of our smaller stores than we anticipated.

113. On March 9, 2005, Gander Mountain issued a press release

disclosing that the Company would be restating its previously released financial

statements, including those contained in the IPO Registration

Statement/Prospectus: Gander Mountain Company (Nasdaq: GMTN) today stated that … it will restate previously issued financial statements to adjust its method of accounting for leases. The company expects the cumulative effect of the prior period restatements will be approximately $8 million on a pre-tax basis, including approximately $1.7 million related to fiscal 2004. Substantially all of the fiscal 2004 impact relates to pre-opening construction and initial set-up activities and accordingly, will be charged to pre-opening expense.

* * * As a result of the restatements, the company’s historical financial statements should no longer be relied upon.

(Emphasis added.)

114. On March 11, 2005, the Company issued a press release that

included the following restated financials for the Company’s 2003 fiscal year

ended January 31, 2004:

47


Condensed Statements of Operations - Unaudited

(In thousands, except per share data)

52 Weeks Ended 52 Weeks Ended January 31, 2004 January 31, 2004 (Originally Reported (Restated)

In The Registration Statement/Prospectus)

Sales $489,430 $489,430 Cost of goods sold 370,535 370,535 Gross profit 118,660 118,895 Operating expenses:

Store operating expenses 85,361 86,084 General and administrative expenses 22,327 21,618 Pre-opening expenses - rent -- 1,024 Pre-opening expenses

- other 4,696 4,696 Income from operations 6,276 5,473 Interest expense, net 4,760 4,760 Income before income taxes 1,516 713 Income tax provision (benefit) -- -- Net income 1,516 713 Less preferred stock dividends 16,523 16,523 Income (loss) applicable to

common shareholders $(15,007) $(15,810) Income (loss) per common share: Basic $(15.42) $(16.24) Diluted $(15.42) $(16.24)

It should be noted that some of the figures in the Company’s final restatement, as

reported in its annual report on Form 10-K for the 2004 fiscal year, differ from the

figures reported in this press release.

115. On March 11, 2005, Gander Mountain held a conference call for

securities analysts and the investing public. During the March 11, 2005

48


conference call, Lindahl explained the impact of the restatement on the

Company’s income statement and balance sheet: As discussed in our press release dated March 9, 2005, we were required to restate our previously issued financial statements to adjust for our method of accounting for leases…. [T]he cumulative pretax adjustment for all years prior to fiscal 2003 was $5.3 million. The adjustment for fiscal 2003 was $803,000 and the adjustment for the first 3 quarters of fiscal 2004 was $1.6 million. The change in accounting had no material impact on the fourth quarter of fiscal 2004. As shown on the income statement a substantial portion of the adjustment related to preopening rent expense. $1.024 million in fiscal 2003 and $1.780 million in the first 3 quarters of fiscal 2004. This results from the Company now beginning the lease term on the earlier of the commencement date of the lease, the date when the Company takes possession of the building for construction of leasehold improvements, or the date we initiate the initial set up of fixtures and merchandise. This compares to our previous practice of beginning the lease for accounting purposes on the commencement date of the lease. Obviously it’s a high growth Company that opens a significant number of new stores and that utilizes recycled real estate that reduce lease rates and does some of our own tenant improvements, we are significantly more impacted by this change than many other retailers. To the extent that be continue to utilize recycled real estate and manage the tenant improvement work ourselves we will continue to have significant preopening rent expense. These restatements … impact our balance sheet as construction allowances will now be classified as deferred rent credits and no longer recorded as reductions of leasehold improvement costs.

* * *

49


Overall the change in lease accounting impacted property and equipment, long-term liabilities, and shareholders equity on the 2003 balance sheet. Property and equipment decreased by $1.4 million from the previously reported amount, primarily due to the shorter amortization lives for tenant improvements. Long-term liabilities increased $4.7 million as a result of recording additional straight-line rent for the periods of time prior to lease commencement date. Shareholders equity decreased $6.1 million related to the cumulative effect of the change in accounting for leases.

(Emphasis added.) Thus, Gander Mountain admitted that, during the Class Period,

it had improperly accounted for the Company’s leases and pre-opening expenses,

which caused the Company’s reported net income to be overstated.

LOSS CAUSATION/ECONOMIC LOSS

116. During the Class Period, as detailed herein, Defendants engaged in a

scheme to deceive the market and a course of conduct that artificially inflated

Gander Mountain’s stock price and operated as a fraud or deceit on Class Period

purchasers of Gander Mountain stock by misrepresenting the Company’s financial

condition.

117. Defendants presented a misleading picture of Gander Mountain’s

business condition and prospects. Based upon these false and misleading financial

statements, the Registration Statement/Prospectus stated: “We expect to grow at a

rapid pace.” During the Class Period, Defendants repeatedly emphasized that

Gander Mountain had an “increase in sales result[ing] from a comparable store

sales increase” and that the Company’s “performance was enhanced by the launch

of our co-branded credit card in September 2003.”

118. Defendants’ claims of solid growth in addition to the claims that the

financial results in the Company’s SEC filings presented a true picture of Gander

Mountain’s financial condition caused and maintained the artificial inflation in

50


Gander Mountain’s stock price throughout the Class Period until the truth began to

be revealed to the market.

119. Defendants’ false and misleading statements had the intended effect

and caused Gander Mountain stock to trade at artificially inflated levels, reaching

as high as $26.25 per share on April 28, 2004. After the close of trading on

November 9, 2004, Defendants issued a press release disclosing the Company’s

disappointing comparable store sales for the third quarter of fiscal 2004.

Specifically, the November 9, 2004 Press Release stated: “The company …

expects its comparable store sales comparison for the year to be slightly negative,

versus prior guidance of a three-to five-percent gain.” This disclosure shocked the

market in light of the statements made in the Company’s Registration

Statement/Prospectus and other Class Period public statements.

120. As a direct result of Defendants’ admissions and the public

revelations regarding its failure to meet expectations concerning its advertising

revenues and its diminished business prospects going forward, Gander Mountain’s

stock price plummeted $4.64 per share, or 25.01 percent, to close at $13.91 per

share, on November 9, 2004. This drop partially removed the inflation from

Gander Mountain’s stock price, causing real economic loss to investors who had

purchased the stock prior to the November 9, 2004 disclosure during the Class

Period.

121. On January 14, 2005, Defendants issued a press release in which the

Company disclosed to the investing public that its financial results for the fourth

quarter and the full fiscal year 2004 would be lower than previously announced, in

part, as a result of a 2 percent to 3 percent drop in comparable store sales; the

failure of the Company’s co-branded credit card promotion to positively impact

sales; and that the Company was forced to increase its post-holiday promotional

activities in an effort to reduce bloated inventories.

51


122. As investors and the market became aware that Gander Mountain’s

prior financial results had been falsified and that Gander Mountain’s actual

business prospects were, in fact, poor, the prior artificial inflation came out of

Gander Mountain’s stock price, damaging Lead Plaintiff and other Class members.

123. As a direct result of Defendants’ admissions and the public

revelations regarding the truth about Gander Mountain’s financial results and its

actual business prospects going forward, Gander Mountain’s stock price again fell

$1.86 per share, or 16.47 percent, on January 14, 2005, to close at $9.43 per share,

on unusually heavy trading volume. This drop partially removed the inflation

from Gander Mountain’s stock price, causing real economic loss to investors who

had purchased the stock during the Class Period. In sum, as Defendants’ fraud and

Gander Mountain’s adverse business performance was belatedly revealed, the

Company’s stock price plummeted, the artificial inflation came out of the stock

and Plaintiff and other members of the Class were damaged, suffering economic

losses.

124. The approximately 16 percent decline in Gander Mountain’s stock

price at the end of the Class Period was a direct result of the nature and extent of

Defendants’ fraud being partially revealed to investors and the market. The timing

and magnitude of Gander Mountain’s stock price declines negate any inference

that the loss suffered by Plaintiff and other Class members was caused by changed

market conditions, macroeconomic or industry factors or Company-specific facts

unrelated to the Defendants’ fraudulent conduct.

125. While the price of Gander Mountain stock fell from $11.29 per share

on January 13, 2005, to $9.43 per share at the close of trading on January 14,

2005, representing a 16.47 percent drop, the NASDAQ index went up 0.82

percent. During the Class Period, while Gander Mountain’s stock price fell $4.64

per share, or 25.01 percent, on November 9, 2004, to close at $13.91 per share

52


upon the disclosure of lower than expected comparable store sales being revealed,

the NASDAQ index went up 0.2 percent. Thus, the economic loss, i.e., damages,

suffered by Plaintiff and other members of the Class was a direct result of

Defendants’ fraudulent scheme to artificially inflate Gander Mountain’s stock

price and the subsequent significant decline in the value of Gander Mountain’s

stock when Defendants’ prior misrepresentations and other fraudulent conduct was

revealed.

ADDITIONAL SCIENTER ALLEGATIONS

126. As alleged herein, Defendants acted with scienter in that Defendants

knew that the public documents and statements issued or disseminated in the name

of the Company were materially false and misleading; knew that such statements

or documents would be issued or disseminated to the investing public; and

knowingly and substantially participated or acquiesced in the issuance or

dissemination of such statements or documents as primary violations of the federal

securities laws. As set forth elsewhere herein in detail, Defendants, by virtue of

their receipt of information reflecting the true facts regarding Gander Mountain,

their control over, and/or receipt and/or modification of Gander Mountain

materially misleading misstatements and/or their associations with the Company

which made them privy to confidential proprietary information concerning Gander

Mountain, participated in the fraudulent scheme alleged herein.

127. Defendants knew and/or recklessly disregarded the falsity and

misleading nature of the information, which they caused to be disseminated to the

investing public. The ongoing fraudulent scheme described in this complaint

could not have been perpetrated over a substantial period of time, as has occurred,

without the knowledge and complicity of the personnel at the highest level of the

Company, including the Individual Defendants.

53


128. As referenced above, Defendants caused Gander Mountain to falsely

state the Company’s net income or loss, loss applicable to common shareholders,

basic and diluted loss applicable to common shareholders per share, property and

equipment, shareholder’s equity, accumulated deficit, and long term liabilities, in

violation of GAAP and SEC rules. In addition, contrary to representations and

certifications, Gander Mountain lacked adequate internal controls over its financial

reporting. Gander Mountain’s lack of internal accounting controls allowed for the

Company’s improper lease accounting recognition in its financial statements,

including the Registration Statement/Prospectus.

129. The fact that Gander Mountain revised and restated downward its

net income and shareholder’s equity and revised and restated upwards its long

term liabilities and accumulated deficit is an admission that the financial

statements originally issued were false and that the misstatements were material.

130. Pursuant to GAAP, as set forth in APB No. 20, the type of

restatements and revisions announced by Gander Mountain were to correct for

material errors in previously issued financial statements. APB No. 20, ¶¶ 7-13.

The restatement of past financial statements is a disfavored method of recognizing

an accounting change as it dilutes confidence by investors in the financial

statements, it makes it difficult to compare financial statements, and it is often

difficult, if not impossible, to generate the numbers when restatement occurs.

APB No. 20, ¶ 14. Thus, GAAP provides that financial statements should only be

restated in limited circumstances, i.e., when there is a change in the reporting

entity, there is a change in accounting principles used or to correct an error in

previously issued financial statements. Gander Mountain’s restatements and

revisions were not due to a change in reporting entity or a change in accounting

principle, but rather to correct errors in previously issued financial statements.

Thus, the restatements and revisions were an admission by Gander Mountain that

54


its previously issued financial results and its public statements regarding those

results were false and misleading.

131. Section 13(b)(2) of the Exchange Act states, in pertinent part, that

every reporting company must: “(A) make and keep books, records, and accounts,

which, in reasonable detail, accurately and fairly reflect the transactions and

dispositions of the assets of the issuer; [and] (B) devise and maintain a system of

internal accounting controls sufficient to provide reasonable assurances that ...

transactions are recorded as necessary [] to permit preparation of financial

statements in conformity with [GAAP].” These provisions require an issuer to

employ and supervise reliable personnel, to maintain reasonable assurances that

transactions are executed as authorized, to record transactions on an issuer’s books

and, at reasonable intervals, to compare accounting records with physical assets.

132. Gander Mountain has now admitted that its disclosure controls and

procedures in place during the 2004 fiscal year were inadequate. The Company’s

Form 10-K filed on April 29, 2005 stated in part: During our fourth quarter of fiscal 2004, we reviewed our lease, leasehold improvements and construction allowances accounting practices and concluded that our controls over the selection and monitoring of appropriate assumptions and factors affecting accounting for leases were insufficient. As a result, we changed our controls and accounting policies surrounding the review, analysis and recording of new and current leases, including the selection and monitoring of appropriate assumptions and guidelines to be applied during the review and analysis of all lease transactions. Furthermore, we restated our previously issued financial statements to reflect adjustments we made to our lease accounting practices.

133. The fact that the Company has now restated its financial results for

the 2002 and 2003 fiscal years and admitted that it reported falsified financial

55


statements throughout the Class Period constitutes strong circumstantial evidence

of Defendants’ scienter. The significance of this evidence is that it demonstrates a

pattern of conduct in which Defendants knew or recklessly disregarded the

overwhelming prevalence of improper accounting practices and falsification of the

Company’s financial results throughout the Class Period, including with respect to

the scheme alleged herein.

134. As seen above, in the years leading up to the Class Period,

Defendants’ number one priority was taking the Company public. After being

appointed CEO in 2002, Baker engineered a short-term strategy for increasing

comparable store sales by increasing store inventories. However, as Defendants

knew, the problem with this strategy is that although it yields short-term increases

in sales, ultimately purchasing additional inventory becomes too expensive and

cuts into profits. Baker’s scheme of increased inventories was combined with a

one-time 10 percent discount offered to customers during fiscal 2003, through the

Company’s one-time co-branded credit card promotion. Baker’s trick worked in

the short-term and boosted comparable store sales in 2003, but by 2004 the

Company’s profit margin – predictably – began to decline. According to CS1,

immediately after the IPO Gander Mountain’s new Board of Directors looked at

the numbers and determined that inventory spending needed to be slashed. During

this period, CS1 states that Baker and Lindahl would have been keenly aware of

the precipitous drop in comparable store sales and rising inventories.

135. As a result of the weekly and monthly sales meetings described by

CS1, the weekly reports complied by CS2, and the point-of-sale data from the

Retek system described by CS3, Defendants knew about the Company’s declining

comparable store sales figures, the failure of the co-branded credit card promotion,

rising inventories and declining profits at the time of the IPO and throughout the

Class Period. Nevertheless, Defendants chose to conceal this information from the

56


investing public in an effort to reap the maximum proceeds from the IPO and to

keep Gander Mountain securities artificially inflated in the months following the

IPO.

136. The Erickson Defendants were highly motivated to engage in fraud

by making the false and misleading statements in the Registration

Statement/Prospectus so that they could “cash in on a hefty investment” in the

Company. Indeed, the Erickson Defendants were instrumental in structuring the

IPO so that they directly received $9.8 million out of the proceeds from this

offering (representing a full repayment of the debt the Company owed to the

Erickson Defendants) and immediately benefited from the IPO in a concrete and

personal manner. Moreover, the IPO created a ready and liquid market for the

Erickson Defendants so that they could finally cash in on their hefty investment in

Gander Mountain.

137. Defendant Baker was motivated to engage in fraud and, in particular,

to orchestrate the scheme to artificially inflate comparable store sales figures by

increasing store inventories and boosting sales through the Company’s co-branded

credit card promotion, which provided customers with a one-time 5% to 10%

discount and special financing options, so that he could receive certain incentives

for taking the Company public, including an award of 100,000 stock options with

an exercise price of $16.00, on or about April 20, 2004, and a more lucrative

employment contract. At all times relevant to this action, Baker knew that the IPO

was not economically feasible unless he could engineer and implement a strategy

for increasing the Company’s comparable store sales figures. As shown above,

Baker succeeded in boosting same store sales by 11.5 percent during the 2003

fiscal year – an increase that would not have been possible but for Baker’s primary

role in the fraudulent scheme described herein. As a result, Baker made Gander

Mountain’s IPO reality. In anticipation of the IPO, Baker received a new

57


employment agreement that increased his annual salary from $373,943 to

$516,000 and increased his bonus potential from the $375,000 he received in 2003

fiscal year, to 100 percent of his new salary or $516,000.

138. Defendant Lindahl was similarly motivated to engage in fraud. Like

Baker, Lindahl was granted 93,728 stock options, with an exercise price of $16.00,

in anticipation of the Company’s successful IPO.

Applicability Of Presumption Of Reliance: Fraud-On-The-Market Doctrine

139. At all relevant times, the market for Gander Mountain securities was

an efficient market for the following reasons, among others:

(a) Gander Mountain stock met the requirements for listing, and

was listed and actively traded on the NASDAQ, a highly efficient and automated

market;

(b) As a regulated issuer, Gander Mountain filed periodic public

reports with the SEC and the NASDAQ;

(c) Gander Mountain regularly communicated with public

investors via established market communication mechanisms, including through

regular disseminations of press releases on the national circuits of major newswire

services and through other wide-ranging public disclosures, such as

communications with the financial press and other similar reporting services; and

(d) Gander Mountain was followed by several securities analysts

employed by major brokerage firms who wrote reports, which were distributed to

the sales force and certain customers of their respective brokerage firms. Each of

these reports was publicly available and entered the public marketplace.

140. As a result of the foregoing, the market for Gander Mountain

securities promptly digested current information regarding Gander Mountain from

all publicly available sources and reflected such information in Gander Mountain's

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stock price. Under these circumstances, all purchasers of Gander Mountain

securities during the Class Period suffered similar injury through their purchase of

Gander Mountain securities at artificially inflated prices and a presumption of

reliance applies.

NO SAFE HARBOR

141. The statutory safe harbor provided for forward-looking statements

under certain circumstances does not apply to any of the allegedly false statements

pleaded in this complaint. Almost all of the specific statements pleaded herein

were not identified as “forward-looking statements” when made. To the extent

there were any forward-looking statements, there were no meaningful cautionary

statements identifying important factors that could cause actual results to differ

materially from those in the purportedly forward-looking statements.

Alternatively, to the extent that the statutory safe harbor does apply to any

forward-looking statements pleaded herein, Defendants are liable for those false

forward-looking statements because at the time each of those forward-looking

statements was made, the particular speaker knew that the particular forward-

looking statement was false, and/or the forward-looking statement was authorized

and/or approved by an executive officer of Gander Mountain who knew that those

statements were false when made.

THIRD CLAIM Violation Of Section 10(b) Of

The Exchange Act Against And Rule 10b-5 Promulgated Thereunder Against All Defendants



143. During the Class Period, Defendants carried out a plan, scheme and

course of conduct which was intended to and, throughout the Class Period, did: (i)

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deceive the investing public, including Plaintiff and other Class members, as

alleged herein; and (ii) cause Plaintiff and other members of the Class to purchase

Gander Mountain securities at artificially inflated prices. In furtherance of this

unlawful scheme, plan and course of conduct, Defendants, and each of them, took

the actions set forth herein.

144. Defendants (a) employed devices, schemes, and artifices to defraud;

(b) made untrue statements of material fact and/or omitted to state material facts

necessary to make the statements not misleading; and (c) engaged in acts,

practices, and a course of business which operated as a fraud and deceit upon the

purchasers of the Company's securities in an effort to maintain artificially high

market prices for Gander Mountain securities in violation of Section 10(b) of the

Exchange Act and Rule 10b-5. All Defendants are sued either as primary

participants in the wrongful and illegal conduct charged herein or as controlling

persons as alleged below.

145. Defendants, individually and in concert, directly and indirectly, by

the use, means or instrumentalities of interstate commerce and/or of the mails,

engaged and participated in a continuous course of conduct to conceal adverse

material information about the business, operations and future prospects of Gander

Mountain as specified herein.

146. Defendants employed devices, schemes, and artifices to defraud,

while in possession of material adverse non-public information and engaged in

acts, practices, and a course of conduct as alleged herein in an effort to assure

investors of Gander Mountain value and performance and continued substantial

growth, which included the making of, or the participation in the making of,

untrue statements of material facts and omitting to state material facts necessary in

order to make the statements made about Gander Mountain and its business

operations and future prospects in the light of the circumstances under which they

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were made, not misleading, as set forth more particularly herein, and engaged in

transactions, practices and a course of business which operated as a fraud and

deceit upon the purchasers of Gander Mountain securities during the Class Period.

147. Each of the Individual Defendants’ primary liability, and controlling

person liability, arises from the following facts: (i) the Individual Defendants were

high-level executives and/or directors at the Company during the Class Period and

members of the Company's management team or had control thereof; (ii) each of

these Defendants, by virtue of his/her responsibilities and activities as a senior

officer and/or director of the Company was privy to and participated in the

creation, development and reporting of the Company's internal budgets, plans,

projections and/or reports; (iii) each of these Defendants enjoyed significant

personal contact and familiarity with the other Defendants and was advised of and

had access to other members of the Company's management team, internal reports

and other data and information about the Company's finances, operations, and

sales at all relevant times; and (iv) each of these Defendants was aware of the

Company's dissemination of information to the investing public which he/she

knew or recklessly disregarded was materially false and misleading.

148. The Defendants had actual knowledge of the misrepresentations and

omissions of material facts set forth herein, or acted with reckless disregard for the

truth in that they failed to ascertain and to disclose such facts, even though such

facts were available to them. Defendants’ material misrepresentations and/or

omissions were done knowingly or recklessly and for the purpose and effect of

concealing Gander Mountain’s operating condition and future business prospects

from the investing public and supporting the artificially inflated price of its

securities. As demonstrated by Defendants’ overstatements and misstatements of

the Company’s business, operations and earnings throughout the Class Period,

Defendants, if they did not have actual knowledge of the misrepresentations and

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omissions alleged, were reckless in failing to obtain such knowledge by

deliberately refraining from taking those steps necessary to discover whether those

statements were false or misleading.

149. As a result of the dissemination of the materially false and

misleading information and failure to disclose material facts, as set forth above,

the market price of Gander Mountain securities was artificially inflated during the

Class Period. In ignorance of the fact that market prices of Gander Mountain

publicly-traded securities were artificially inflated, and relying directly or

indirectly on the false and misleading statements made by Defendants, or upon the

integrity of the market in which the securities trades, and/or on the absence of

material adverse information that was known to or recklessly disregarded by

Defendants but not disclosed in public statements by Defendants during the Class

Period, Plaintiff and the other members of the Class acquired Gander Mountain

securities during the Class Period at artificially high prices and were damaged

thereby.

150. At the time of said misrepresentations and omissions, Plaintiff and

other members of the Class were ignorant of their falsity, and believed them to be

true. Had Plaintiff and the other members of the Class and the marketplace known

the truth regarding the problems that Gander Mountain was experiencing, which

were not disclosed by Defendants, Plaintiff and other members of the Class would

not have purchased or otherwise acquired their Gander Mountain securities, or, if

they had acquired such securities during the Class Period, they would not have

done so at the artificially inflated prices which they paid.

151. By virtue of the foregoing, Defendants have violated Section 10(b)

of the Exchange Act, and Rule 10b-5 promulgated thereunder.

152. As a direct and proximate result of Defendants’ wrongful conduct,

Plaintiff and the other members of the Class suffered damages in connection with

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their respective purchases and sales of the Company's securities during the Class

Period. FOURTH CLAIM

Violation Of Section 20(a) Of The Exchange Act Against the Individual Defendants



154. The Individual Defendants acted as controlling persons of Gander

Mountain within the meaning of Section 20(a) of the Exchange Act as alleged

herein. By virtue of their high-level positions, and their ownership and contractual

rights, participation in and/or awareness of the Company’s operations and/or

intimate knowledge of the false financial statements filed by the Company with

the SEC and disseminated to the investing public, the Individual Defendants had

the power to influence and control and did influence and control, directly or

indirectly, the decision-making of the Company, including the content and

dissemination of the various statements which Plaintiff contend are false and

misleading. The Individual Defendants were provided with or had unlimited

access to copies of the Company’s reports, press releases, public filings and other

statements alleged by Plaintiff to be misleading prior to and/or shortly after these

statements were issued and had the ability to prevent the issuance of the

statements or cause the statements to be corrected.

155. In particular, each of these Defendants had direct and supervisory

involvement in the day-to-day operations of the Company and, therefore, is

presumed to have had the power to control or influence the particular transactions

giving rise to the securities violations as alleged herein, and exercised the same.

156. As set forth above, Gander Mountain and the Individual Defendants

violated Section 10(b) and Rule 10b-5 by their acts and omissions as alleged in

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this Complaint. By virtue of their positions as controlling persons, the Individual

Defendants are liable pursuant to Section 20(a) of the Exchange Act. As a direct

and proximate result of Defendants' wrongful conduct, Plaintiff and other

members of the Class suffered damages in connection with their purchases of the

Company's securities during the Class Period.

WHEREFORE, Plaintiff prays for relief and judgment, as follows:

(a) Determining that this action is a proper class action and

certifying Plaintiff as a class representative under Rule 23 of the Federal Rules of

Civil Procedure;

(b) Awarding compensatory damages in favor of Plaintiff and the

other Class members against all Defendants, jointly and severally, for all damages

sustained as a result of Defendants’ wrongdoing, in an amount to be proven at

trial, including interest thereon;

(c) Awarding Plaintiff and the Class their reasonable costs and

expenses incurred in this action, including counsel fees and expert fees; and

(d) Such other and further relief as the Court may deem just and

proper.

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JURY TRIAL DEMANDED

Plaintiff hereby demands a trial by jury.

Dated: August 9, 2005

HEAD, SEIFERT & VANDER WEIDE

By: /s Vernon J. Vander Weide Vernon J. Vander Weide, No. 112173 Thomas V. Seifert, No. 98863 333 South Seventh Street Suite 1140 Minneapolis, Minnesota 55402 Telephone: 612-339-1601 Plaintiff’s Liaison Counsel

SCHIFFRIN & BARROWAY, LLP

Eric Lechtzin 280 King of Prussia Road Radnor, PA 19087 Telephone: (610) 667-7706 Facsimile: (610) 667-7056 GOODKIND, LABATON, RUDOFF & SUCHAROW, LLP Ira A. Schochet Christopher J. Keller 100 Park Avenue New York, NY 10017 Telephone: (212) 907-0700 Facsimile: (212) 818-0477 Plaintiff’s Lead Counsel

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in re: gander mountain company securities litigation 05-cv

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