dorothy kosir, individually and on behalf of all others similarly...
TRANSCRIPT
UNITED STATES DISTRICT COURTWESTERN DISTRICT OF WISCONSI N
JAMES and DOROTHY KOSIR, Individually andOn Behalf of All Others Similarly Situated, CIVIL ACTION NO .
Plaintiffs,
vs .
GREAT WOLF RESORTS, INC., JOHN EMERY,JAMES A. CALDER, BRUCE D. NEVIASER,ELAN BLUTINGER, RANDY CHURCHEY,MICHAEL M. KNETTER, ALISSA N. NOLAN,HOWARD SILVER, and MARC B . VACCARO,
CLASS ACTION COMPLA INT
JURY TRIAL DEMANDED
Defendants .
Plaintiffs, James and Dorothy Kosir ("Plaintiffs"), allege the following based upon th e
investigation of Plaintiffs' counsel, which included , among other things, a review of the defendants '
public documents, conference calls and announcements made by defendants, United States Securities
and Exchange Commission ("SEC") filings, wire and press releases published by and regarding
Great Wolf Resorts, Inc. ("Great Wolf' or the "Company") securities analysts' reports an d
advisories about the Company, and information readily obtainable on the Internet .
NATURE OF THE ACTION
1 . This is a federal securities class action brought on behalf of a class consisting of al l
persons and entities, other than defendants, who purchased or otherwise acquired Great Wolf
securities between December 14, 2004, and July 28, 2005, inclusive (the "Class Period"), including
those who purchased stock pursuant to or traceable to the Company's initial public offering on or
about December 14, 2004 (the "Offering" or the "IPO") .
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2. Great Wolf operates as a family entertainment resort company in the United States.
The Companyowns, operates , and develops drive-to family reso rts featuring indoor water parks and
other family-oriented entertainment activities . The Company was formed in May 2004 to succee d
to the family entertainment resort business of its predecessor companies , The Great Lakes
Companies, Inc . and a number of its related entities. Collectively referred to as ("Great Lakes" .)
3. In December 2004, Great Wolf commenced a public offering, with the intent to
acquire, from Great Lakes, its resorts and the resorts currently under construction, as well as certai n
resort development and management operations , in exchange for an aggregate of 14,033,501 shares
of its common stock and $97 .6 million . In the IPO, the Company issued 14,000,000 shares of stock
to public investors and planned to use a portion of the proceeds as partial consideration for the
purchase of the reso rts . Additionally, the Company issued shares to existing predecessor entities ,
and, pursuant to a subsequent registration statement and prospectus, issued restricted shares t o
"formation transactions participants," as the remainder of the consideration . According to Great
Wolf, after the expiration of a 180-day period following consummation of this offering, recipient s
of restricted shares in the formation transactions would generally be able to sell their restricte d
shares .
4. Investors purchased Great Wolf's shares pursuant to registration statements, which
contained misleading and exaggerate statements regarding Great Wolf's future prospects and the
intrinsic value ofthe Company's business . The Company's presentation of its results was inherentl y
unreliable as Great Wolf based its quarterly and annual guidance on non-GAAP EBITDA, which
was defined by Great Wolf as net income plus (a) interest expense, net, (b) income taxes, (c )
depreciation and amortization , (d) non-cash employee compensation , (e) costs associated with early
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extinguishment of debt, and (f) pre-opening costs of resorts under and Adjusted Net Income, whic h
was defined by Great Wolf as net income without the effects of (a) non-cash employe e
compensation, (b) costs associates with early extinguishment of debt, and (c) pre-opening costs o f
resorts under development, measures .
5. On June 14, 2005,just prior to the expiration of the lockup provision for the restricted
shares, Great Wolfrevised downward its previously announced financial guidance while remaining
positive about its future prospects . The warning concealed from investors the actual state of affair s
at Great Wolf, in order to keep the Company's stock artificially inflated to preserve value fo r
restricted shareholders until the end of the lockup period . Then, on July 28, 2005, Great Wolf
announced that its results were significantly below the Company' s previously announced guidance .
On this news, shares of Great Wolf fell $6 .12 per share, or 30 percent, to close, on July 28, 2005, at
$13.65 per share .
6. The complaint al leges that defendants' Class Period representations regarding Great
Wolf were materially false and misleading when made for the following reasons: (1) that the
Company lacked an adequate internal system of controls necessary to accurately ascertain the
Company's overall condition ; (2) that the Company's quarterly and annual guidance based on
non-GAAP EBITDA and Adjusted Net Income concealed the true financial health of the Company;
and (3) that as a consequence of the foregoing, the Company's statements with respect to its future
prospects and the intrinsic value of its business lacked in all reasonable basis .
JURISDICTION AND VENUE
7 . The claims asserted herein arise under and pursuant to Sections 11, 12(a)(2) and1 5
of the Securities Act [15 U .S .C. §§ 77k, 771(a)(2) and 77o] and Sections 10(b) and 20(a) of the
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Exchange Act [ 15 U.S.C. §§ 78j(b), 78n(a), and 78t(a)], and Rule 10b-5 promulgated thereunder by
the SEC [17 C .F .R. § 240.1Ob-5] .
8 . This Court has jurisdiction of this action pursuant to Section 22 of the Securities Ac t
[15 U.S .C. §77v], Section 27 of the Exchange Act and 28 U.S .C . §§ 1331 and 1337 .
9. Venue is properly laid in this District pursuant to Section 22 of the Securities Act,
Section 27 ofthe Exchange Act and 28 U .S .C . § 1391(b) and (c). Many of the acts and transaction s
alleged herein, including the preparation and dissemination of materially false and misleadin g
information, occurred in substantial part in this Judicial District .
10. 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 th e
facilities of the national securities exchange.
PARTIES
11 . Plaintiffs, James and Dorothy Kosir, as set forth in the accompanying certification ,
incorporated by reference herein , purchased Great Wolf securities at artificially in flated prices .
12. Defendant Great Wolf is a Delaware corporation with its principal executive offices
located at 122 West Washington Avenue, Madison, Wisconsin 53703 .
13 . Defendant John Emery ("Emery") was, at al l relevant times, the Company's Chie f
Financial Officer. Defendant Emery signed the Company 's Registration Statements .
14. Defendant James A. Calder ("Calder") was, at all relevant times , the Company' s
Chief Financial Officer . Defendant Calder signed the Company' s Registration Statements .
15. Defendant Bruce D. Neviaser ("Neviaser") was, at all relevant times, the Company' s
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Chairman of the Board. Defendant Neviaser signed the Company's Registration Statements .
16. Defendant Elan Blutinger (`Blutinger") was, at all relevant times, the Company's
Director. Defendant Blutinger signed the Company's Registration Statements .
17. Defendant Randy Churchey ("Churchey") was, at all relev ant times , the Company' s
Director. Defendant Churchey signed the Company's Registration Statements .
18. Defendant Michael M. Knetter ("Knetter") was, at all relevant times, the Company' s
Director. Defendant Knetter signed the Company's Registration Statements .
19. Defendant Alissa N. Nolan ("Nolan") was, at all relevant times , the Company' s
Director. Defendant Nolan signed the Company 's Registration Statements .
20. Defendant Howard Silver ("Silver") was, at all relevant times, the Company' s
Director. Defendant Silver signed the Company's Registration Statements .
21 . Defendant Marc B . Vaccaro ("Vaccaro") was, at all relevant times, the Company' s
Director. Defendant Vaccaro signed the Company's Registration Statements .
22 . Defendants enumerated in IN 13-22 are collectively referred to hereinafter as th e
"Individual Defendants ." The Individual Defendants, because of their positions with the Company,
possessed the power and authority to control the contents of Great Wolf s quarterly reports, pres s
releases and presentations to securities analysts, money and portfolio managers and institutional
investors, i .e., the market . Each defendant was provided with copies of the Company's reports an d
press releases alleged herein to be misleading prior to or shortly after their issuance and had th e
ability and opportunity to prevent their issuance or cause them to be corrected . Because of their
positions and access to material non-public information available to them but not to the public, eac h
of these defendants knew that the adverse facts specified herein had not been disclosed to and were
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being concealed from the public and that the positive representations which were being made wer e
then materially false and misleading . The Individual Defendants are liable for the false statement s
pleaded herein, as those statements were each "group-published" information, the result of the
collective actions of the Individual Defendants .
BACKGROUND
23 . Great Wolf operates as a family entertainment resort company in the United States .
The Company was formed in May 2004 to succeed to the family entertainment resort business of it s
predecessor companies, The Great Lakes Companies, Inc . and a number of its related entities, whic h
were refered to collectively as Great Lakes . Great Lakes had developed and operated hotels sinc e
1995. In 1999, Great Lakes began its resort operations by purchasing the Great Wolf Lodge in
Wisconsin Dells, Wisconsin and developing the Great Wolf Lodge in Sandusky, Ohio, which opene d
in 2001 . In 2003, Great Lakes opened two additional Great Wolf Lodge resorts, one in Traverse
City, Michigan and the other in Kansas City, Kansas . In June 2004 , Great Lakes opened the Blue
Harbor Resort in Sheboygan, Wisconsin . Great Lakes had two additional Great Wolf Lodge resort s
under construction, one in Williamsburg, Virginia and the other in the Pocono Mountains region o f
Pennsylvania, that are scheduled to open in the Spring and Fall of 2005, respectively.
24. In December 2004, Great Wolf commenced a public offering, with the intent to
acquire, from its predecessor companies, each of these resorts and the resorts currently unde r
construction, as well as certain resort development and management operations, in exchange for an
aggregate of 14,033,501 shares of its common stock and $97 .6 million . In the IPO, the Company
issued 14,000,000 shares of stock to public investors and planned to use a portion of the proceed s
as partial consideration for the purchase of the resorts . Additionally, the Company issued shares to
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existing predecessor entities, and, pursuant to a subsequent registration statement and prospectus,
issued restricted shares to "formation transactions participants," as the remainder of th e
consideration . According to the Great Wolf, After the expiration of a 180-day period following
consummation of this offering, recipients of restricted shares in the formation transactions woul d
generally be able to sell their unregistered shares .
SUBSTANTIVE ALLEGATIONS
25. On or about December 14, 2004, the Prospectus (the "Prospectus") with respect to
the IPO , which forms part of the Registration Statement fi led with the SEC on Form S-1/A on
December 7, 2004 ("December 2004 Registration Statement"), became effective and 14,000,000
shares of common stock were sold to the public resulting in gross proceeds of $23 8,000,000 for the
Company.
26. In the Company's December 2004 Registration Statement, Great Wolf made the
following disclosures regarding the Company' s business and its approach to financial reporting :
Our Business
We are a family entertainment resort company that provides ourguests with a high-quality vacation at an affordable price . We are thelargest owner, operator and developer in the United States of drive-tofamily resorts featuring indoor waterparks and other family-orientedentertainment activities, based on the number of resorts in operation .We provide a MI-service entertainment resort experience to ourtarget customer base : families with children ranging in ages from 2 to14 years old that live within a convenient driving distance from ourresorts . Our resorts provide a consistent and comfortable environmentthroughout the year where our guests can enjoy our various amenitiesand activities . We are a fully integrated resort company with in-houseexpertise and resources in resort and indoor waterpark development,management, marketing and financing .
Upon completion of this offering, we will own and operate four
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existing Great Wolf Lodge® resorts, our signaturenorthwoods-themed resorts, and one Blue Harbor Resort, anautical-themed property. In addition, we will own two Great WolfLodge resorts that are under construction and scheduled to open forbusiness during 2005 . We will also be the licensor and manager of anadditional Great Wolf Lodge resort in Niagara Falls, Ontario that isowned and under development by an affiliate of Ripley EntertainmentInc ., or Ripley's . We are currently evaluating 12 to 14 additionalmarkets for potential future development of Great Wolf Lodgeresorts, six of which are in active site negotiation . We anticipate thatmost of our future resorts will be developed under our Great WolfLodge brand, but we may develop additional nautical-themed resortsin other appropriate markets .
We deliver value to our guests by providing an affordable and funfamily vacation experience. Our resorts are located within aconvenient driving distance of our target customer base, providingour guests with a less expensive, more convenient alternative to airtravel .
Non-GAAP Financial Measures
We use EBITDA as a measure of our operating performance .EBITDA is a supplemental non-GAAP financial measure . EBITDAis commonly defined as net income plus (a) interest expense, (b)income taxes and (c) depreciation and amortization .
EBITDA as calculated by us is not necessari ly comparable tosimilarly titled measures by other compan ies. In addition, EBITDA(a) does not represent net income or cash flows from operations asdefined by GAAP; (b) is not necessarily indicative of cash availableto fund our cash flow needs; and (c) should not be considered as analternative to net income, operating income, cash flows fromoperating activities or our other financial information as determinedunder GAAP.
We believe EBITDA is useful to an investor in evaluating ouroperating performance because :
• a significant portion of our assets consists of property andequipment that are depreciated over their remaining useful lives i n
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accordance with GAAP. Because depreciation and amort ization arenon-cash items, we believe that presentation of EBITDA is a usefulmeasure of our operating performance ;
• it is widely used in the hospitality and entertainment industriesto measure operating performance without regard to items suchas minority interests and gain on sale of real estate ; and
• we believe it helps investors meaningfully evaluate and compare theresults of our operations from period to period by removing theimpact of items directly resulting from our asset base, primarilydepreciation and amortization, from our operating results .
Our management uses EBITDA:
• as a measurement of operating performance because it assistsus in comparing our operating performance on a consistent basisas it removes the impact of items directly resulting from our assetbase, primarily depreciation and amortization and non-recurringor unusual items, from our operating results ;
• for planning purposes, including the preparation of our annualoperating budget;
• as a valuation measure for evaluating our operatingperformance and our capacity to incur and service debt, fundcapital expenditures and expand our business; and
• as one measure in determining the value of other acquisitionsand dispositions .
We also expect that covenants in our new revolving credit facilitywill require us to meet financial tests based upon EBITDA.
Using a measure such as EBITDA has material limitations . Theselimitations. include the difficulty associated with comparing resultsamong companies and the inability to analyze certain significantitems, including depreciation and interest expense, which directlyaffect our net income or loss . Management compensates for theselimitations by considering the economic effect of the excludedexpense items independently, as well as in connection with itsanalysis of net income .
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The tables shown below reconcile net loss to EBITDA for the periodspresented .
Consolidated Pro FormaNine Months Ended Year EndedSeptember 30, 2004 December 31, 2003
----------------------------------------- -
Net (loss)------------------
$(465)
------------------- -
$(646 )Adjustments:
Interest expense, net 4 ,092 3,173Income tax expense (benefit) (310) (431 )Depreciation and amort ization 15,105 15,327
EBITDA $18,422 $17,423
Predecessor
Nine Months EndedSeptember 30, Year Ended December 31 ,
--------------------------------------------------------------------------------2004 2003 2003 2002 2001
--------------------------------------------------------------------------------Net income (loss)
$(4,961) $1,177 $(4,543) $(6,755) $(1,177 )Adjustments :
Interest expense, net5,130 4,205 6,542 2,920 3,468
Income tax expense
Depreciation and amortization9,569 6,731 10,440 4,169 3,996
EBITDA$9,738 $12,113 $12,439 $334 $6,287
Dells/Sandusky
Nine Months EndedSeptember 30, Year Ended December 31 ,
--------------------------------------------------------------------------------2004 2003 2003 2002 2001
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Net income (loss)$3,167 $ 4,189
Adjustments :Interest expense, net
3,424 3,502Income tax expense
$ 2,116 $ 2,822 $(2,214)
4,666 4,896 5,086
Depreciation and amortization5,552 5,752 8,090 8,414
EBITDA8,764
$ 12,143 $ 13,443 $ 14,872 $ 16,132 $11,636
(Emphasis added.)
27. On December 14, 2004, Great Wolf announced the pricing of its IPO of 14,000,000
shares of its common stock at a price of $17.00 per share. The Company had granted the
underwriters an option to purchase up to 2,100,000 additional shares of common stock from th e
Company to cover over-allotments, if any . The IPO was expected to close on December 20, 2004 .
28. On December 20, 2004, Great Wolf announced that it had closed its IPO of 16 . 1
million shares of common stock, including 2 .1 million shares issued in connection with the exercis e
in full of the over-allotment option granted to Citigroup Global Markets Inc ., as representative of the
underwriters . The IPO raised net proceeds of approximately $249 .5 million.
29 . On February 10, 2005, Great Wolf filed a registration statement with the SEC on
Form S-1/A ("February 2005 Registration Statement") in connection with 14,032,896 shares of the
Company's stock sold by stockholders who were issued restricted stock during the IPO . Therein,
the Company, in relevant part, stated :
Non-GAAP Financial Measures
We use EBITDA as a measure of our operating performance .
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EBITDA is a supplemental non-GAAP financial measure . EBITDAis commonly defined as net income plus (a) interest expense, (b)income taxes and (c ) depreciation and amortization .
EBITDA as calculated by us is not necessarily comparable tosimilarly titled measures by other companies . In addition, EBITDA(a) does not represent net income or cash flows from operations asdefined by GAAP ; (b) is not necessarily indicative of cash availableto fund our cash flow needs ; and (c) should not be considered as analternative to net income, operating income, cash flows fromoperating activities or our other financial information as determinedunder GAAP.
We believe EBITDA is useful to an investor in evaluating ouroperating performance because :
• a significant portion of our assets consists of property andequipment that are depreciated over their remaining useful lives inaccordance with GAAP . Because depreciation and amortization arenon-cash items, we believe that presentation of EBITDA is a usefulmeasure of our operating performance ;
• it is widely used in the hospitality and entertainment industries tomeasure operating performance without regard to items such asminority interests and gain on sale of real estate ; and
• we believe it helps investors meaningfully evaluate and compare theresults of our operations from period to period by removing theimpact of items directly resulting from our asset base, primarilydepreciation and amortization, from our operating results .
Our management uses EBITDA :
• as a measurement of operating performance because it assists us incomparing our operating performance on a consistent basis as itremoves the impact of items directly resulting from our asset base,primarily depreciation and amortization and non-recurring or unusualitems, from our operating results ;
• for planning purposes, including the preparation of our annualoperating budget;
• as a valuation measure for evaluating our operating performance and
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our capacity to incur and service debt, fund capital expenditures andexpand our business ; and
• as one measure in determining the value of other acquisitions anddispositions .
We also expect that covenants in our new revolving credit facilitywill require us to meet financial tests based upon EBITDA .
Using a measure such as EBITDA has material limitations . Theselimitations include the difficulty associated with comparing resultsamong companies and the inability to analyze certain significantitems, including depreciation and interest expense, which directlyaffect our net income or loss . Management compensates for theselimitations by considering the economic effect of the excludedexpense items independently, as well as in connection with itsanalysis of net income.
The tables shown below reconcile net loss to EBITDA for the periodspresented .
Consolidated Pro Form aNine Months Ended Year EndedSeptember 30, 2004 December 31, 200 3
Net (loss) $(465) $(646 )Adjustments :
Interest expense, net 4,092 3,173Income tax expense (benefit) (310) (431 )Depreciation and amort ization 15,105 15,327
EBITDA $18,422 $17,423
Predecessor
Nine Months EndedSeptember30, Year Ended December 31 ,
2004 2003
Net income (loss)$(4,961) $1,177
2003 2002 200 1
$(4,543 ) $(6,755 ) $(1,177 )
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Adjustments :Interest expense, net
5,130 4,205 6,542Income tax expense
Depreciation and amort ization9,569 6,731 10,440
EBITDA$9,738 $12,113 $12,439
2,920 3,468
4,169 3,996
$334 $6,287
Dells/Sandusky--------------------------------------------------------------------------------Nine Months Ended
September 30, Year Ended December 31 ,
------------ -------------------------------------------------------------------
2004 2003 2003 2002 2001
Net income (loss )$3,167 $ 4,189 $ 2,116 $ 2,822 $(2,214 )
Adjustments :Interest expense, net
3,424 3,502 4,666 4,896 5,086Income tax expense
Depreciation and amortization5,552 5,752 8,090 8,414 8,764
EBITDA$ 12,143 $ 13,443 $ 14,872 $ 16,132 $11,636
(Emphasis added . )
30. On February 28, 2005, Great Wolf reported results for the fourth quarter and yea r
ended December 31, 2004 .
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Period EndedDecember 31, 2004 -Historical (a)
Year EndedDecember 31, 2004 -
Pro Forma (b)
Net income (loss) $(3,842) $(9,331 )
Net income (loss) per diluted share $(0.13) $(0 .31 )
Adjusted EBITDA $1,947 $23,896
Adjusted net income (loss) $(97 ) $(2,805 )
Adjusted net income ( loss) perdiluted share
$(0 .00) $(0 .09)
Revenues $4,629 $91,036
31 . Commenting on these results, defendant Emery stated :
"We are very satisfied with our operating results for 2004[ .] . . . Whilethe closing of the IPO was obviously a significant event in the life ofthe company, it did not distract us from providing great service andresort experiences to our guests . We believe our results continue toshow the strength of our operating model -- offering a drive-tofamily vacation at an affordable price within a comfortable, safesetting with a wide range of amenities for all members of thefamily.
With the completion of the IPO, we now are able to fully concentrateon consolidating and strengthening the consistency of our brand andour operations[ .] . . .We believe our portfolio of upscale, branded,drive-to resorts provides families with a great experience at a goodvalue. We are very focused on our marketing efforts to our coregroup of customers, families with children from two to 14 years oldthat live within a convenient driving distance of one of our resorts .Our family customers use our resorts for their primary vacation or forweekend/holiday getaways, and provide us with a broad base ofcustomers . We also seek to attract other customer types, such assmall companies, business groups and social clubs, who find ourmeeting facilities both unique and accommodating . The combinationof all these factors helped contribute positively to our results . "(Emphasis added.)
32. On May 5, 2005, Great Wolf reported the following results for the first quarter ended
March 31, 2005 .
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Net income (loss) $(2,325)
Net income (loss) per diluted share $(0.08)
Adjusted EBITDA $7,06 6
Adjusted net income $766
Adjusted net income per diluted share $0.0 3
Revenues $26,996
33 . Commenting on these results , defendant Emery stated :
"We enjoyed a solid first quarter , our first full quarter since our initialpublic offering in December 2004[.] . . .March revenues wereparticularly strong, principally due to the timing of the Easter holidayand school spring breaks . One of our key indicators is same storetotal revenue per available room, or Total RevPAR, which includesall revenue sources at the resort and is a good measure of our overal lperformance . Same store Total RevPAR in the first quarter increased7 .8 percent . Our resorts were all at or near their expected operatingresults for the quarter. We saw particular strength in the TraverseCity and Kansas City markets, with Total RevPAR increases of12.8% and 20 . 7% at these resorts ."
"We continue to receive very positive feedback from our guests aboutthe Great Wolf Resorts family experience[ .] . . .As we expand ourbrands to more and more locations, increasing numbers of familiesare staying with us and then coming back for repeat visits or referringothers to our resorts . We believe this is a particularly telling indicatorof guest satisfaction ."
34. Additionally, the Company gave the following guidance for it second, third, and
fourth quarters and for the full year 2005, as follows :
Second Quarter Third Quarter Fourth Quarter Full Year 2005Low-High Low High Low-High Low-High
Net income (loss) $(400)-$200 $9,700-$10,900 $(1,400)-$(800) $5,600-$8,000
Net income (loss) $(0.01)-$0 .0I $0.32-$0.36 $(0.05 )-$(0 .03 $0.18-$0 .26per diluted share
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Adjusted EBITDA(a)
$8,000-$9,000 $25 ,400-$27,400 $9 ,500-$10,500 $50,000-$54,000
Adjusted net $( 100)-$500 $ 10,300411,500 $(560)-$40 $10,400 -$ 12,800income ( loss) (a)
Adjusted net $0.00-$0.02 $0 .34-$0.38 $(0.02)-$0 .00 $0.34-$0.42income (loss) perdiluted share
35 . On June 14, 2005, Great Wolf revised earnings guidance for the second, third an d
fourth quarters and for the full year 2005 . The Company announced that in the second quarter o f
2005 its net loss would be $ 1,000 and net loss per diluted share would be $0 .03. As a result of thes e
factors, the Company has decreased its second quarter Adjusted EBITDA projection from a rang e
mid-point of $8 .5 million to $7 .0 million, and reduced its full year Adjusted EBITDA guidance from
a range mid-point of $52 .0 million to a range mid-point of $48 .5 million . More specifically, the
Company gave the following guidance :
Second Quarter Third Quarter Fourth Quarter Full Year 200 5Low-High Low-High Low-High
Net income (loss) $(1,000) $9,000-$10,200 $(2000)-$(1,400) $3,700-$5,500
Net income (loss) $(0 .03) $0.30-$0 .34 $(0.07)-$(0 .05) $0.12-$0 .1 8per diluted share
Adjusted EBITDA $7,000 $24,400-$26,400 58,50049,500 $47,000-$50,000(a)
Adjusted net $(700) $9,600-$10,800 $(1,160)-$(560) $8,500-$10,300income (loss) (a)
Adjusted net $(0 .02) $9,600-$10,800 $(0 .04)-$(0 .02) $0.28-$0 .3 4income (loss) pe rdiluted share
36. Commenting on the announcement , defendant Emery stated :
"With the upcoming expiration on June 18 of the lock-up periodfrom our IPO, we felt it appropriate to update our secondquarter and full year earnings guidance with our most recentview of operating results," said John Emery, chief executiv e
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officer. "Our goal is to provide an updated picture of our currentexpectations for the second quarter and the remainder of theyear ."
"Although our first quarter results were ahead of our originalprojections as a result of the Easter holiday and related school springbreaks falling in the first quarter this year, our budgeting expectationsfor 2005 underestimated the total impact of this shift on our secondquarter results," Emery said. "Additionally, in the Sandusky marketour Great Wolf Lodge resort has been impacted by a significantincrease in the number of competitive rooms of indoor waterparkresorts . During the second quarter of 2004, our 271-room resort wasthe only indoor waterpark resort in that market, while today indoorwaterpark resorts have more than 800 rooms in this market. As aresult of the increase in competitive pressure in this market, ourSandusky resort's results in the second quarter were negativelyimpacted, and we expect that situation to continue to affect theresort's operating results through the remainder of 2005 . Ourlong-term view on the Sandusky market is positive based on ourexperience with competition in the Wisconsin Dells market . Weexpect the new supply in the Sandusky market will be absorbed by agradual increase in overall demand over time . "
37 . The statements referenced above in IT 26, 29, 30-36 were each materially false an d
misleading because they failed to disclose and misrepresented the following adverse facts, among
others: ( 1) that the Company lacked an adequate internal system of controls necessary to accurately
ascertain the Company's overall condition; (2) that the Company's quarterly and annual guidance
based on non-GAAP EBITDA and Adjusted Net Income concealed the true financial health of the
Company; and (3) that as a consequence of the foregoing , the Company's statements with respect to
its future prospects and the intrinsic v alue of its business lacked in all reasonable basis .
The Truth Begins to Eme e
38 . On July 26, 2005, A.G. Edwards & Sons published an article revealing that A G
Edwards analysts had downgraded Great Wolf from hold to sell .
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39. On July 28, 2005, Great Wolf s management announced that results were below th e
Company's previously announced second quarter guidance due to a combination offactors, including
a slower than expected start to the summer season in the Midwest ; competitive pressures at its
Sandusky, Ohio resort; and a slower-than-expected occupancy ramp up at the company's Sheboygan ,
Wis. property . Commenting on the news , defendant Emery stated :
"We experienced a difficult quarter as a result of both external andinternal factors[ .] . . . External factors impacting results included marketconditions and increased competition. Internal factors included thetiming and flow of operational information to provide accurateforecasts and the lack of visibility of our customer booking patterns .
Across our portfolio, April and May numbers trended down fromprior years, and we provided revised guidance in mid-June, based onthe trends at that time[.] . . . However, late June is the critical period inthe second quarter, particularly the last two weeks when the summervacation season gets underway. Unfortunately, this June ran counterto our historical trends. For example, June bookings from the Detroitarea, which is a primary source of demand for two of our properties,declined more than 30 percent from the same month in 2004 . Thishad a negative impact on RevPAR at our Sandusky and Traverse Cityproperties, which declined 27 percent and 14 percent, respectively,from the prior year primarily as a result of the softness in theMichigan market . Our Sandusky resort was further impacted byincreased competition as that market continues to absorb a newsupply of rooms of indoor waterpark resorts . Results at our resortsin Wisconsin Dells, Williamsburg, and Kansas City trended betterwhen compared to the rest of our properties .
"At our Blue Harbor Resort in Sheboygan, Wis ., we continue to facechallenges. The overall development of Sheboygan as a touristdestination continues to lag behind our initial expectations, even nowthat the resort has been open for a year . Although we remainoptimistic about the long-term potential of the resort, it is apparentthat the resort's near-term results will be below our initialexpectations .
"Historically, as we approach the summer season, typically ourhighest occupancy period of the year, we ramp up our staffing i n
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order to provide appropriate training and service levels toaccommodate the increased number of guests. This year, the summertravel season got off to a very slow start, and revenues were notenough to offset this additional overhead. But it was not until the endof the quarter that we had sufficient data to identify the pattern andproblems," he noted . "The imbalance between revenues and costswas significant, and was a contributor to our EBITDA shortfall in thequarter .
"While it was a disappointing quarter, we believe that the issues wefaced are primarily shorter-term in nature, and we are taking steps toaddress them. To respond to the external factors, we areimplementing revised, targeted marketing programs at each of ourresorts for the second half of 2005 . Additionally, we have closelyreviewed all of our resorts' operating budgets for the remainder oftheyear and have taken steps to reduce or eliminate certain operatingcosts in order to align our cost structure more closely with our revisedrevenue expectations .
"Internally, we are implementing enhanced financial and operationsreporting so we can recognize shifting booking patterns more quickly .We recently hired Rajiv Castellino, a hospitality industry technologyveteran, as our new chief information officer to improve on currentinformation, reporting and analysis systems .
"Lastly, we will continue to diversify our resort portfoliogeographically to minimize our exposure in any one region . Inaddition to our developments in Ontario, Canada, the Poconos andWashington State, we have a number of projects in our pipeline thatwill further extend the reach of our brand geographically and advanceour national expansion plans.
"While we were disappointed in our second quarter results, webelieve that we are taking the proper steps to get back on track . Wesee nothing over the long term that diminishes our outlook for thequality of our product or the guest experience we offer ."
40. Also, on July 28, 2005, Great Wolf held a conference call to discuss its
announcement . During the conference call, the defendants stated :
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JOHN EMERY, CEO, GREAT WOLF RESORTS : Thank you, Jerry.Clearly we had a very difficult quarter. I will walk through a lot ofdetail here in the call and then we will be happy to take questionsafterwards . During the quarter, we saw a convergence of severalinternal and external operating issues , which I will discuss infurther detail as I walk through my comments .
I want to start with that we are very genuinely disappointed at ourinability to meet our revised earnings guidance . Our managementteam and myself in particular take full responsibility for our earningsestimates and trying to provide as accurate as estimates as possible ;and we were not able to do that when we issued our revised estimateson June 14. We did that on June 14 to try to provide a good andupdated view of the Company prior to our lock up . So we tried to dothe right thing . Unfortunately, we were not as accurate as we wouldhave liked to have been .
Our $3 .7 million shortfall from those estimates was due to a coupleof things . About $2 .3 million of that shortfall was a shift in demandin June . Typically, particularly late June is the start of our very busyseason for the summer that we did not forecast . The balance of thedifference, in addition to the 2.3 million, was the result of the timingof the recognition of the flowthroughs from some previous revenueshortfalls . So we had a couple of issues there that combined for thatissue. Many of these issues are within our control, and I will coversome of the specific steps that we are taking to address them shortly .
I really look at our issues in two broad categories ; one I wouldcall revenue/operating and the other is process management andsystems . They really do go hand-in-hand. We are a revenue-drivenbusiness, but our ability to react to shifts, whether it's a shift indemand in terms of how we market our properties, or a shift indemand in terms of how we run expenses on our properties, a lot ofthis deals in timing of information . So it is not just revenue, it ismaking sure our process and information flow is a management tool,not just a historical tool . That is a conversion process that frankly hasbeen in place as we have grown here in transition to a publiccompany. We are just not caught up to where we need to be. I willtalk about that in a second.
***
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We are also creating several additional positions in our operatinggroup to provide more depth and detailed analysis necessary tohelp recognize and adjust for shifting demand patterns . We needto get a little more systematic in how we do things. We are aCompany that came up knowing every property and what washappening at it every day. As we have grown, with the addition of thepressures of being a public company, we need to get a little moresystematic in how we approach some of this . Because we can't haveas thin a team as we have right now who are making thoseadjustments.
The systems and processes , the second part of our issue, inregards to the visibility of shifting patterns , it is really a timingthing. We obviously have good numbers . There's no mistake in ournumbers . This is not an issue where we figured out we made amistake in the way we calculated something . It is simply the timingof recognizing what is happening at the properties and the timing ofthe historical numbers . We need to improve on that .
We were not expecting to do updated forecast in the quarter, and wegot kind of caught up, and we did our best to make estimates, and wemissed those estimates . But what we need is a system that providesthat data, not just for this type of situation we wound up in thisquarter, but also as a management tool for Kim and her team to helpthem not just recognize shifts but react to those shifts more quickly .
One of the tough things in June is the bottom-line impact of ourrevenue shift was really big because we did not do a great job inmanaging the cost, because we didn't recognize it soon enough .Given that same revenue shift, with a little more leadtime, we wouldbe able to mitigate it much better . But you can't do it without muchleadtime. So it 's a combination of providing data to the operatinggroup to give them time to adjust for that , that will mitigate someof these issues.
I know, given the discussion we are having here, it doesn't appear thatway, but a lot of the financial stuff was already in-process . It is notreally reacting to the issues of the second quarter. It is simply gettingall this stuff in place once you're a public company . Looking back youalways wish you had done more faster. But the reality is, we havebeen public for six months, trying to catch up with all that, and justthe Sarbanes-Oxley.
-22-
We just changed accounting systems . We hired a CIO to help put inbetter systems . We have added several financial positions . All this isin place not as a result of what we figured out over the last coupleweeks, but has been in-process for the last two or three months . Butwe need to get it executed a little more quickly . It is not thatdifficult a task to figure out what you need to do. But we need toexecute it, and we need to execute it quickly .
But we do need to keep our operating team more focused on runningthis business . So we have tried to create estimates that allow ouroperating team to focus on what is best for the business, and notwondering every day where everything is versus a forecast, which hasbeen a tough time for us the past month or so here. Part of my job ismaking sure that we keep that focus on the business .
JIM CALDER, CFO, GREAT WOLF RESORTS : Thank you, John .I just have a couple very brief comments on Q2 results on capitalstructure and on the outlook and guidance . As we discussed in therelease today, the quarter was verydifficult, as John talked about, andled to financial results that were well below what we expected.
On an adjusted basis , we had EBITDA of 3.3 million ; and thatwas 3 .7 million below the revised guidance of 7 .0 million that wehad provided in mid-June. Our results for impacted by all thefactors that John has outlined, so I won't go into them in more depthhere .
***
On outlook guidance, in the earnings release we provide guidance forthe full-year 2005 revised guidance and for each of the quarters in thesecond half of the year. Our forecast for the full year is for adjustedEBITDA in the 34 to $40 million range ; and that is down from therange of 47 to $50 million that we issued in mid-June .
As John mentioned in his remarks, many of the issues that weencountered in the second quarter are going to continue in thesecond half of the year, and we're dealing with them as best w e
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can right now. We're taking a lot of steps to mitigate thesefactors, but based on current trends and our latest forecast ofrevenues and expenses, we feel the new lower guidance is theappropriate thing to issue at this point.
Also due to the volatility in some of the booking patterns and otheroperational trends we have seen during the second quarter, we havewidened the ranges for adjusted EBITDA guidance for Q3 and Q4 ;again just to make it a little more reasonable and reflect some of thosemarket conditions. That is the conclusion of our remarks . Operator,we will take questions at this time .
MICHAEL RIETBROCK, ANALYST, SMITH BARNEY :What isthe timeline on which you're going to get those repo rting systems upto speed , so you know what the flowthroughs in more real-time ?
JOHN EMERY : The timeline is effectively now. The people are inplace, the accounting system is in place . It is really more a processthan systems for this particular issue . It really is the process ofmaking sure we are monitoring all this stuff the way it relates to ourpublic forecast.
JIM CALDER: This is Jim. John is exactly right. We have thesystems now in place where going forward we will have very good,very complete bottom-line information for each of the properties byabout the 15th at the latest of the following month . John is right,what we 're working on now is the communication aspects of thatinformation internally, the analysis of it, and those types ofthings. So the systems are in place, we have the people in place, andthat is basically effective immediately.
JOHN EMERY: Fortunately, we're really focused on the processmore than the systems . Because the actual mechanical systems andpeople systems to do it are there, but we've got to get the processworking much more fluently.
GARY MCDANIEL, ANALYST, STANDARD & POOR'S :Youcan't give a dollar number on what you expect ADR to look like ona systemwide level in the second quarter?
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JOHN EMERY : I can't do it right now, because I would have to tieit into the ranges that we have given . That is the problem I had ; I can'tback into all that. (multiple speakers )
GARY MCDANIEL: Okay. How many events have utilized themeeting space in Sheboygan to date? How many events have used themeeting space in Sheboygan? Has that been a big draw?
JOHN EMERY: I don't have an event count here in front of me . I can
GARY MCDANIEL : A rough idea is fine .
JOHN EMERY : The meeting space at Sheboygan has been successfulas a social bal lroom . What we're trying to build is a conferencebusiness that is more midweek. So it has done a good job b ringing inbusiness in ce rtain respects . What were looking for is for that to fillin the September-October, the April-Mays, when the (indiscernible)is not there midweek .
We have changed our head of sales there to accommodate that . Thatchange was literally I think a month ago . So we expect to see betternumbers, but the conference booking business is at least asix-month-out business. So we're seeing some improvement for thefall . September looks okay. November right now still a little slow, butwe have five months to pick that up . So we're seeing improvementthere. But I don't exact numbers for you.
GARY MCDANIEL: Okay. Given the second-quarter problems youcited in not recognizing the revenue shortfall soon enough, thebudgeting problems you noted in Williamsburg, has that made youquestion your rapid expansion plans at all? Can you really grow asquickly as you ' re planning and still adequately manage thisbusiness?
JOHN EMERY: I believe that our expansion plans that we haveplanned are still well within what we can execute economically still(indiscernible) right for this business . I can tell you, we absolutelybetween management and our Board have discussed that topic. Wewill continue to discuss as the go forward . One of the things we willdo, I will give you an example, is we may make sure that we spaceout every opening to have at least 60 to 90 days between openings .
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We want to be very careful that we do this right . The developmentside is going very well . The projects that we have -- and just to beclear at Williamsburg, Williamsburg had a little flowthrough issue,but in terms of the big scheme of things, Williamsburg is doing great .So I wouldn't categorize Williamsburg as having a budget issue perse. I wanted to comment that is one of the things that we focused on .That by itself would not have created a second-quarter issue for us .
GARY MCDANIEL : Right, okay. But my question is, if you arehaving problems managing business in six hotels, how are yougoing to manage eight, and then how are you going to manage 10,12,14?
JOHN EMERY: That is a completely appropriate question . I dobelieve that we have the right leadership in place . I also believe weneed to add depth and bench strength below that leadership . We'vegot the right people that know where this business needs to go. Whatwe don 't have yet, even for our six properties, is a systemunderneath all those people that can bifurcate the day-to-day, thedevelopment, the branding. That is what we need to start doing .
** *
JEFF RANDALL, ANALYST, A .G. EDWARDS : Okay. With thenew hires for marketing and probably some there for internalcontrols, can you give sort an order of magnitude increase inG&A from, say, the 2Q '05 run rate? Just to give us an idea as tohow much that is going to go up over the balance of the year.
JOHN EMERY: You know what is frustrating is it really isn't thatmaterial. You're talking about adding a handful of bodies . Theones that we talked about for internal controls are already in place .They were already in the G&A. The people are here. The problem wehad there wasn't really number of people . It was what they werefocused on . They spent so much time -- I am not blaming this -- butSarbanes-Oxley and all this other stuff has sucked up so much timefrom everybody, from our property controllers on up throughcorporate that it's unbelievable . We underestimated what it wouldtake to be in compliance with that .
It's not like we have control issues . We have timing issues,because we haven 't been able to focus them properly . From aG&A standpoint the positions we are covering (ph) for Kim's group ,
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you are talking about a few hundred grand in total a year . It is not --that is where you're kicking yourself a little bit . It is -- we have beentrying to grow (indiscernible) and kind of make sure we arebringing the right people in and doing it prudently, not becauseof cost but because of integration . That caught up with us here,and we are going to need to integrate a little faster than weoriginally had planned.
BILL CROW, ANALYST, RAYMOND JAMES : John, when didyou guys become aware that -- I assume you get daily reports ofoccupancy from your properties . When did you become awarethat you weren 't going to hit the guidance that you had given ?
JOHN EMERY : Well, we did a little reforecast ourselves in late June,about the 23rd, and we still felt we were on track to make the bottomline. We knew revenue was a little soft but we thought we couldmake the bottom-line. But we didn't know our bottom-line impactuntil July.
BILL CROW : I'm just curious because I know you went out andmarketed to a bunch of clients at the end of June and clearly Iwould believe at that point you would know what occupancytrends have looked like . And I guess I'm a little surprised thatyou were at the very end of July and there was nopreannouncement given the materiality of the miss (ph).
JOHN EMERY : I absolutely agree with that . And we did our bestprior to going out to get comfortable that we were still okay with thenumbers that were out there because we absolutely would havechanged them if we thought we needed to . And that's why I said at thevery beginning of this call was, look, this isn't just about the Junenumbers being off, we had not caught up with where our bottom-linenumbers were on a timely basis to where we should have beenlooking back at what was going on .
We make no bones about that. We absolutely did not have theknowledge or visibility that we would have liked to have had at thatpoint in time looking back . And then when the bottom-linenumbers started rolling in based off where the final numberscame in in June , it wasn 't where we had obviously expected it tobe. And that 's our fault . We're not blaming anybody butourselves for not having a better handle on that.
-27-
BILL CROW: John , clearly there is management issues here witheither communication between the properties and headquartersor amongst headquarters people. It seems like that would be anissued that is exasperated by having split off offices with themanagement team in two different locations . Have you consideredconsolidating the management functions in one location?
JOHN EMERY : Bill, that is a fair question . Just to be clear, though,the only person split that works out of two offices really is that wehave our treasury group in Virginia . Everybody else is based here . JimCalder is here, Kim's here, Hernan's here, I am based here . I do spendtypically one day a week in Virginia and typically travel two days aweek. So I'm typically -- I'm in Madison, unless there's other(indiscernible), I'm in Madison every week . You know the way myjob is. My job is 80% travel, whether it's wherever it is or whateverI am doing .
41 . On this news, shares of Great Wolf fell $6.12 per share, or 30 percent , to close, on
July 28, 2005, at $13.65 per share.
POST CLASS PERIOD REVELATIONS
42. On August 1, 2005, Motley Fool published an article entitled "Great Wolf Not S o
Great." The article, in relevant part, stated :
Disappointment has a funny way ofsneaking up behind you, bumpingyou behind the knees , and scrambling away as you hit the g round. I'ma shareholder in Great Wolf Resorts(Nasdaq: WOLF), and that'spretty much what happened to me last week . The young leader inhotels with massive indoor water parks announced that a dreadfulstart to its key summer season meant that it was likely to miss itstargets for the rest of the year. This came on the heels of warningback in June that it would post a loss of $0.03 a share for its secondquarter.
The kicker here is that the quarter came in far worse than that . Thecompany wound up losing $0 .08 a share for the period as occupancy
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rates were down throughout the hotelier's lodges. It's not every daythat you see a company disappoint investors twice over the samequarter.
It gets worse, though . Two days earlier, A.G. Edwards put out a sellrating on the stock. I'm usually suspicious when analysts make aradical move so close to an earnings announcement. What do theyknow? Did somebody tip them off? I admit I was caught off guardhere. I figured the company had already warned back in June and thatit would have spoken up again if it its watered-down projections wereoverly ambitious . I had also seen cases like an analyst downgradingGoogle(Nasdaq: GOOG) and Yahoo!(Nasdaq : YHOO) just beforethey went on to zoom past Wall Street's bottom-line expectations .
I shouldn't have let my guard down . The folks at A.G. Edwardsclearly did their homework this time. Maybe they were scouting outthe various locations and came to the logical conclusion that bookingswere off this summer. Once A.G. Edwards issued the sellrecommendation so close to the company's earnings report, though,Great Wolf should have come clean and broken the bad news toeveryone ahead of the actual earnings report on Thursday morning .
So how can you trust management here? This company just wentpublic in December and it has already alienated investors and soiledits publicly traded reputation . Those stains don't exactly come off inthe wash. The company is going to spend a lot of time to win thatkind of confidence back -- or bite the bullet right away and bring innew management that can distance itself from this poorly executedmess.
What makes this even more bothersome is that earlier this year, Isingled out the stock as a worthy investment for our Motley Fool RuleBreakers newsletter. It's not the first call that hasn't exactly pannedout for the research service's subscribers . Past picks like TaserSystems(Nasdaq : TASR) and BioSante Pharmaceuticals(AMEX :BPA) have also taken their lumps .
Still, because 13 of the other 19 stocks have produced double-digitreturns since being featured in the newsletter, the average return of all22 selections since Rule Breakers' launch last October is a hearty12%. That's more than twice the market's return in that time . You maywant to check out some of those winners if you want to cheer yourselfup.
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As for Great Wolf, it may be in for a rough patch the next time itneeds to raise money to fund new resorts. This is one Wolf that bit thehand that fed it -- and then kept gnawing at it like a soup bone . That'sa pity because indoor water parks remain all the rage and Great Wolfseemed to have the right stuff to make it happen in this promisingniche in the otherwise sleepy lodging industry.
VIOLATIONS OF REGULATIONS G. S-K AND S-B
43 . Effective March 28, 2003, the SEC adopted new rules and amendments to addres s
public companies' disclosure or release of certain financial information that is calculated and
presented on the basis of methodologies other than in accordance with generally accepted accounting
principles (GAAP) . "Non-GAAP financial measures " are non-GAAP numerical measures of a
registrant's historical or future financial performance, financial position or cash flows .
44. The Individual Defendants themselves repeatedly stated that the non-GAAP
numerical measures in question in this complaint - EBITDA and adjusted net income (loss) - were
important financial measures . Indeed, defendants represented that EBITDA was a primary financia l
measure of the Company's historical and future financial performance, financial position, cash flows
and credit worthiness .
45. Thus, defendants regularly and systematically referred to theirnon-GAAP EBITD A
and adjusted net income measures as being important financial-performance drivers . According to
the defendants themselves , these were non-GAAP financial measures that were critical to
understanding the Company's financial performance .
46. Regulation G applies whenever a registrant with the SEC, or a person acting on its
behalf, discloses publicly or releases publicly any mate rial information that includes a non-GAAP
financial measure . Similarly, the amendments to Item 10 of Regulation S-K and Item 10 of
-30-
Regulation S-B apply to all registr ants using non-GAAP financial measures in filings with the SEC.
According to the Final Rule adopted by the SEC :
Disclosure pursuant to Regulation G that is materially deficient may,in addition to violating Regulation G, give rise to a violation ofSection 10(b) or Rule 1 Ob-5 thereunder if all the elements for such aviolation are present. In this regard, we reminded companies inDecember 2001 that, under certain circumstances, non-GAAPfinancial measures could mislead investors if they obscure thecompany's GAAP results . We continue to be of the view that somedisclosures of non-GAAP financial measures could give rise toactions under Rule I Ob-5 .
Section 3(b) of the Sarbanes-Oxley Act provides that a violation ofthat Act or the Commission's rules thereunder shall be treated for allpurposes as a violation of the Exchange Act .
47. Regulation G includes the general disclosure requirement that a registrant, or a person
acting on its behalf, shall not make public a non-GAAP financial measure that, taken together with
the information accompanying that measure, contains an untrue statement of a material fact or omits
to state a material fact necessary in order to make the presentation of the non-GAAP financial
measure, in light of the circumstances under which it is presented, not misleading .
48. Defendants violated Regulation G because :
(i) they took it upon themselves to publicly disclose, and indeed emphasize thei r
non-GAAP EBITDA and adjusted net income measures, as financial measures that were critical to
understanding and assessing the Company's financial performance;
(ii) the Company used deficient and defective raw financial data, processes and
systems to generate their non-GAAP EBITDA an d adjusted income measures ; and
(iii) the Company actual ly disclosed its non-GAAP EBITDA and adjusted net
income in a manner which was materially false and misleading in light of the circumstances unde r
-31-
which they were presented .
49. In addition, the amendments to Item 10 of Regulation S-K and Item 10 of Regulation
S-B require registrants using non-GAAP financial measures in filings with the Commission t o
provide a statement disclosing the reasons why the registrant' s management believes that
presentation of the non-GAAP financial measure provides useful information to investors regarding
the registrant's financial condition and results of operations.
50. Defendants eagerly fulfilled Item 10 of Regulation S-K and S-B's requirement to
explain why non-GAAP EBITDA and adjusted income provide useful information to investors .
However, the Company used deficient and defective raw financial data, processes and systems to
generate their non-GAAP EBITDA and adjusted income measures. Thus, defendants' assert ions
regarding the "usefulness" of their deceptive measures only furthered their fraud .
PLAINTIFFS' CLASS ACTION ALLEGATION S
51 . Plaintiffs bring this action as a class action pursuant to Federal Rule of Civi l
Procedure 23(a) and (b)(3) on behalf of a Class, who purchased or otherwise acquired Great Wol f
securities between December 14, 2004, and July 28, 2005, inclusive (the "Class Period"), includin g
purchasers of Great Wolf stock issued in connection with the Company's initial public offering on
or about December 14, 2004 (the "Offering" or the "IPO") .
52 . The members of the Class are so numerous that joinder of all members is imprac-
ticable . Throughout the Class Period, Great Wolf's common stock was actively traded on the
NASDAQ . While the exact number of Class members is unknown to Plaintiffs at this time and ca n
only be ascertained through appropriate discovery, Plaintiffs believe that there are hundreds o r
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thousands of members in the proposed Class . Record owners and other members of the Class ma y
be identified from records maintained by Great Wolf or its transfer agent and may be notified of th e
pendency ofthis action by mail, using the form of notice similar to that customarily used in securitie s
class actions .
53. Plaintiffs' claims are typical of the claims of the members of the Class, as al l
members of the Class are similarly affected by defendants ' wrongful conduct in violation of federal
law that is complained of herein .
54. Plaintiffs 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 .
55. 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 allege d
herein;
(b) whether statements made by defendants to the investing public during the Clas s
Period misrepresented material facts about the business , operations and management of Great Wolf;
and
(c) to what extent the members of the Class have sustained damages and the proper
measure of damages.
56. A class action is superior to all other available methods for the fair and efficien t
adjudication of this controversy since joinder of all members is impracticable . Furthermore, as the
-33-
damages suffered by individual Class members may be relatively small, the expense and burden o f
individual litigation make it impossible for members of the Class to individually redress the wrong s
done to them. There will be no difficulty in the management of this action as a class action .
SCIENTER ALLEGATIONS
57. 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 i n
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 Great Wolf, their control over, and/or receipt and/o r
modification of Great Wolfs allegedly materially misleading misstatements and/or their associations
with the Company which made them privy to confidential proprietary information concerning Grea t
Wolf, participated in the fraudulent scheme alleged herein .
UNDISCLOSED ADVERSE FACT S
58 . The market for Great Wolfs securities was open, well-developed and efficient at al l
relevant times . As a result of these materially false and misleading statements and failures t o
disclose, Great Wolf' s securities traded at artificially inflated prices during the Class Period .
Plaintiffs and other members of the Class purchased or otherwise acquired Great Wolf securities
relying upon the integrity of the market price of Great Wolf's securities and market informatio n
relating to Great Wolf, and have been damaged thereby .
59. During the Class Period, defendants materially misled the investing public , thereby
-34-
inflating the price of Great Wolf' s securities , bypublicly issuing false and misleading statements and
omitting to disclose material facts necessary to make defendants' statements, as set forth herein, not
false and misleading. Said statements and omissions were materially false and misleading in that
they failedto disclose material adverse information and misrepresented the truth about the Company,
its business and operations, as alleged herein.
60 . At all relevant times, the material misrepresentations and omissions particularized
in this Complaint directly or proximately caused or were a substantial contributing cause of th e
damages sustained by Plaintiffs and other members of the Class. As described herein , during the
Class Period, defendants made or caused to be made a series of materially false or misleadin g
statements about Great Wolf's business, prospects and operations . These material misstatements
and omissions had the cause and effect of creating in the market an unrealis tically positive
assessment of Great Wolf and its business , prospects and operations , thus causing the Company' s
securities to be overvalued and artificially inflated at all relevant times . Defendants' materially false
and misleading statements during the Class Period resulted in Plaintiffs and other members of th e
Class purchasing the Company's securities at artificially inflated prices, thus causing the damage s
complained of herein.
LOSS CAUSATION
61 . Defendants' wrongful conduct, as alleged herein, directly and proximately caused th e
economic loss suffered by Plaintiffs and the Class .
62. During the Class Period, Plaintiffs and the Class purchased securities of Great Wolf
at artificially inflated p rices and were damaged thereby. The price of Great Wolf's common stock
declined when the misrepresentations made to the market, and/or the information alleged herein to
-35-
had been concealed from the market, and/or the effects thereof, were revealed, causing investors '
losses .
Applicability Of Presumption Of Reliance :Fraud-On-The-Market Doctrine
63. At all relevant times, the market for Great Wolf securities was an efficient market for
the following reasons, among others :
(a) Great Wolf 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, Great Wolf filed periodic public reports with the SEC and
the NASDAQ;
(c) Great Wolf regularly communicated with public investors via established marke t
communication mechanisms, including through regular disseminations of press releases on the
national circuits of major news wire services and through other wide-ranging public disclosures, suc h
as communications with the financial press and other similar reporting services; and
(d) Great Wolf was followed by several securities analysts employed by majo r
brokerage firms who wrote reports which were distributed to the sales force and certain customer s
of their respective brokerage firms . Each of these reports was publicly available and entered th e
public marketplace.
64. As a result of the foregoing , the market for Great Wolf securities promptly digeste d
current information regarding Great Wolf from all publicly-available sources and reflected such
information in Great Wolf's stock price . Under these circumstances , all purchasers of Great Wolf
securities during the Class Pe riod suffered similar injury through their purchase of Great Wolf
-36-
securities at artificially inflated prices and a presumption of reliance applies .
NO SAFE HARBOR
65. The statutory safe harbor provided for forward-looking statements under certai n
circumstances does not apply to any of the allegedly false statements pleaded in this complaint .
Many 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 meaningfu l
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 ar e
liable for those false forward-looking statements because at the time each of those forward-lookin g
statements was made, the particular speaker knew that the particular forward-looking statement wa s
false, and/or the forward-looking statement was authorized and/or approved by an executive office r
of Great Wolf who knew that those statements were false when made .
FIRST CLAIMViolation Of Section 11 Of The Securities Act Against
Promulgated Thereunder Against All Defendants
66. Plaintiffs repeat and reallege each and every allegation contained above, excludin g
all allegations above that contain facts necessary to prove any elements not required to state a Sectio n
11 claim, including without limitation, scienter.
67. This claim is brought by Plaintiffs who obtained Great Wolf stock pursuant to the
Registration Statement on behalf of himself and other members of the Class . Each Class member
acquired their shares pursuant to or traceable to, and in reliance on, the Prospectus .
68 . Individual Defendants as signatories ofthe Registration Statement and the Prospectus ,
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as a directors and/or officers of Great Wolfand controlling persons of the issuer, owed to the holders
of the stock obtained through the Prospectus the duty to make a reasonable and diligent investigatio n
of the statements contained in the Registration Statement and the Prospectus at the time they becam e
effective to ensure that such statements were true and correct and that there was no omission o f
material facts required to be stated in order to make the statements contained therein not misleading .
Defendants knew, or in the exercise of reasonable care should have known , of the materia l
misstatements and omissions contained in or omitted from the Registration Statement and th e
Prospectus as set forth herein. As such, defendants are liable to the Class .
69. Audit defendant and Underwriter Defendants owed to the holders of the stock
obtained through the Prospectus the duty to make a reasonable and diligent investigation of the
statements contained in the Registration Statement and the Prospectus at the time they becam e
effective to ensure that such statements were true and correct and that there was no omission o f
material facts required to be stated in order to make the statements contained therein not misleading .
Defendants knew, or in the exercise of reasonable care should have known, of the materia l
misstatements and omissions contained in or omitted from the Registration Statement and th e
Prospectus as set forth herein. As such, defendants are liable to the Class .
70. None of the defendants made a reasonable investigation or possessed reasonable
grounds for the belief that the statements contained in the Registration Statement and the Prospectus
were true or that there was no omission of material facts necessary to make the statements mad e
therein not misleading .
71 . Defendants issued and disseminated, caused to be issued and disseminated, and
participated in the issuance and dissemination of, material misstatements to the investing public
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which were contained in the Prospectus, which misrepresented or failed to disclose, inter alia, the
facts set forth above. By reason of the conduct herein alleged, each defendant violated and/or
controlled a person who violated § 11 of the Securities Act.
72. As a direct and proximate result of defendants ' acts and omissions in violation of the
Securities Act, the market price of Great Wolf stock was artificially inflated and Plaintiff and th e
Class suffered substantial damage in connection with their ownership of Great Wolf common stock
pursuant to the Registration Statement and the Prospectus .
73 . Great Wolf is the issuer of the stock sold via the Registration Statement . As issuer
of the stock, the Company is strictly liable to Plaintiffs and the Class for the material misstatements
and omissions therein.
74. At the times they obtained their shares of Great Wolf, the Plaintiffs and members o f
the Class did so without knowledge of the facts concerning the misstatements or omissions allege d
herein.
75. This action is brought within one year after discovery of the untrue statements and
omissions in and from the Prospectus should have been made through the exercise of reasonabl e
diligence, and within three years of the effective date of the Prospectus .
76. By virtue of the foregoing, Plaintiffs and the other members of the Class are entitle d
to damages under Section 11 as measured by the provisions of Section 11(e), from the defendant s
and each of them, jointly and severally .
SECOND CLAIMViolations of Section 12(a)(2) of the Securities Act
Against All Defendant s
77. Plaintiffs repeat and reallege each and every allegation contained above .
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78. This Count is brought pursuant to Section 12(a)(2) of the Securities Act on behalf o f
the Class, against all defendants.
79. Defendants were sellers and offerors and/or solicitors of purchasers of the shares
offered pursuant to the Prospectus .
80. The Prospectus contained untrue statements of material facts, omitted to state othe r
facts necessary to make the statements made not misleading, and concealed and failed to disclos e
material facts . The Individual Defendants' actions of solicitation included participating in th e
preparation of the false and misleading Prospectus .
81 . Defendants owed to the purchasers of Great Wolf Securities, including Plaintiffs an d
other class members, the duty to make a reasonable and diligent investigation of the statement s
contained in the IPO materials, including the Prospectus contained therein, to ensure that such
statements were true and that there was no omission to state a material fact required to be stated i n
order to make the statements contained therein not misleading . Defendants knew of, or in the
exercise of reasonable care should have known of, the misstatements and omissions contained in th e
IPO materials as set forth above .
82. Plaintiffs and other members ofthe Class purchased or otherwise acquired Great Wolf
Securities pursuant to and/or traceable to the defective Prospectus . Plaintiffs did not know, or in the
exercise of reasonable diligence could not have known, of the untruths and omissions contained in
the Prospectus .
83. Plaintiffs, individually and representatively, hereby offer to tender to defendants those
securities which Plaintiffs and other Class members continue to own, on behalf of all members o f
the Class who continue to own such securities, in return for the consideration paid for thos e
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securities together with interest thereon . Class members who have sold their Great Wolf Securitie s
are entitled to rescissory damages .
84. By reason of the conduct alleged herein, these defendants violated, and/or controlle d
a person who violated, § 12(a)(2) of the Securities Act . Accordingly, Plaintiffs and members of the
Class who hold Great Wolf Securities purchased in the IPO have the right to rescind and recover the
consideration paid for their Great Wolf securities and hereby elect to rescind and tender their Great
Wolf securities to the defendants sued herein . Plaintiffs and Class members who have sold their
Great Wolf securities are entitled to rescissory damages .
THIRD CLAIMViolation of Section 15 of The Securities Act
Against Individual Defendants
85. Plaintiffs repeat and reallege each and every allegation contained above, excludin g
all allegations above that contain facts necessary to prove any elements not required to state a Sectio n
15 claim, including without limitation, scienter .
86. This count is asserted against Individual Defendants and is based upon Section 15 o f
the Securities Act .
87. Individual Defendants, by virtue of their offices, directorship and specific acts were ,
at the time of the wrongs al leged herein and as set forth herein , controlling persons of Great Wolf
within the meaning of Section 15 of the Securities Act . Individual Defendants had the power and
influence and exercised the same to cause Great Wolf to engage in the acts described herein .
88. Individual Defendants' position made them privy to and provided them with actua l
knowledge of the material facts concealed from Plaintiffs and the Class .
89. By virtue of the conduct alleged herein, Individual Defendants are liable for the
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aforesaid wrongful conduct and are liable to Plaintiffs and the Class for damages suffered .
FOURTH CLAIMViolation Of Section 10(b) O f
The Exchange Act Against And Rule IOb-5Promulgated Thereunder Against All Defendants
90. Plaintiffs repeat and reallege each and every allegation contained above as if fully se t
forth herein .
91 . During the Class Period, defendants carried out a plan, scheme and course of conduc t
which was intended to and, throughout the Class Period, did : (i) deceive the investing public ,
including Plaintiffs and other Class members, as alleged herein; and (ii ) cause Plaintiffs and other
members of the Class to purchase Great Wolf securities at artificially inflated prices . In furtherance
of this unlawful scheme, plan and course of conduct, defendants, and each of them, took the action s
set forth herein.
92. 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 statement s
not misleading ; and (c) engaged in acts, practices, and a course ofbusiness 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 Great Wolf securities in violation of Section 10(b) of the Exchange Act and Rul e
10b-5 . All defendants are sued either as primary participants in the wrongful and illegal conduc t
charged herein or as controlling persons as alleged below .
93. 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, operation s
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and future prospects of Great Wolf as specified herein .
94. These defendants employed devices, schemes, and artifices to defraud, while i n
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 Great Wolf s 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 mak e
the statements made about Great Wolf and its business operations and future prospects in light o f
the circumstances under which they 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 decei t
upon the purchasers of Great Wolf securities during the Class Period .
95 . 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 tea m
or had control thereof; (ii) each of these defendants, by virtue of his or 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/o r
reports ; (iii) each of these defendants enjoyed significant personal contact and familiarity with th e
other defendants and was advised of and had access to other members of the Company's managemen t
team, internal reports and other data and information about the Company's finances, operations, an d
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 they knew or recklessly disregarded wa s
materially false and misleading.
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96. 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 t o
ascertain and to disclose such facts, even though such facts were available to them. Such defendants '
material misrepresentations and/or omissions were done knowingly or recklessly and for the purpos e
and effect of concealing Great Wolf s operating condition and future business prospects from th e
investing public and supporting the artificially inflated price of its securities . As demonstrated b y
defendants' overstatements and misstatements of the Company's business, operations and earning s
throughout the Class Period, defendants, if they did not have actual knowledge of th e
misrepresentations and omissions alleged, were reckless in failing to obtain such knowledge by
deliberately refraining from taking those steps necessary to discover whether those statements wer e
false or misleading.
97. As a result of the dissemination of the materially false and misleading informatio n
and failure to disclose material facts, as set forth above, the market price of Great Wolf securities
was artificially inflated during the Class Period . In ignorance of the fact that market prices of Great
Wolfs publicly-traded securities were artificially inflated, and re lying directly or indirectly on the
false and misleading statements made by defendants, or upon the integrity of the market in whic h
the securities trade, and/or on the absence of material adverse information that was known to o r
recklessly disregarded by defendants but not disclosed in public statements by defendants during th e
Class Period, Plaintiffs and the other members of the Class acquired Great Wolf securities during
the Class Period at artificially high prices and were damaged thereby .
98. At the time of said misrep resentations and omissions , Plaintiffs and other members
of the Class were ignorant of their falsity , and believed them to be true . Had Plaintiffs and the other
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members of the Class and the marketplace known the truth regarding the p roblems that Great Wolf
was experiencing, which were not disclosed by defendants, Plaintiffs and other members of the Clas s
would not have purchased or otherwise acquired their Great Wolf securities, or, if they had acquired
such securities during the Class Period, they would not have done so at the artificially inflated price s
which they paid .
99. By virtue of the foregoing, defendants have violated Section 10(b) of the Exchang e
Act, and Rule I Ob-5 promulgated thereunder .
100. As a direct and proximate result of defendants' wrongful conduct, Plaintiffs and the
other members of the Class suffered damages in connection with their respective purchases and sales
of the Company's securities during the Class Period.
FIFTH CLAIMViolation Of Section 20(a) Of
The Exchange Act Against the Individual Defendant s
101 . Plaintiffs repeat and reallege each and every allegation contained above as if fully se t
forth herein.
102. The Individual Defendants acted as controlling persons of Great Wolf within th e
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 th e
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 statement s
which Plaintiffs contends are false and misleading . The Individual Defendants were provided with
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or had unlimited access to copies of the Company's reports, press releases, public filings and other
statements alleged by Plaintiffs to be misleading prior to and/or shortly after these statements wer e
issued and had the ability to prevent the issuance of the statements or cause the statements to be
corrected .
103 . In particular, each of these defendants had direct and supervisory involvement in th e
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 .
104. As set forth above, Great Wolf and the Individual Defendants each violated Sectio n
10(b) and Rule I Ob-5 by their acts and omissions as alleged in this Complaint . By virtue of their
positions as controlling persons, the Individual Defend ants are liable pursuant to Section 20(a) of
the Exchange Act. As a direct and proximate result of defendants' wrongful conduct, Plaintiffs an d
other members of the Class suffered damages in connection with their purchases of the Company' s
securities during the Class Period .
WHEREFORE, Plaintiffs pray for relief and judgment , as follows :
(a) Determining that this action is a proper class action , designating Plaintiffs as Lead
Plaintiff and ce rtifying Plaintiffs as a class representative under Rule 23 of the Federal Rules of Civi l
Procedure and Plaintiffs' counsel as Lead Counsel ;
(b) Awarding compensatory damages in favor of Plaintiffs and the other Class
members against all defendants, jointly and severally, for all damages sustained as a result o f
defendants' wrongdoing, in an amount to be proven at trial, including interest thereon ;
(c) Awarding Plaintiffs and the Class their reasonable costs and expenses incurred
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in this action, including counsel fees and expert fees; and
(d) Such other and further relief as the Court may deem just and proper .
JURY TRIAL DEMANDE D
Plaintiffs hereby demand a trial by jury .
Dated :
SUSAN LACAVA, SCBy:Susan LaCava23 North PinckneyMadison, WI 53703(608) 258-1335
SCHIFFRIN & BARROWAY, LLPMarc A. TopazRichard A. ManiskasTamara Skvirsky280 King ofPrussia RoadRadnor, PA 19087Telephone: (610) 667-770 6
Attorneys for Plaintiffs
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