** **

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

** **

**FORM10-Q**

 

**(MARK ONE)**

 

**ý****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

** **

**FOR THE QUARTERLY PERIOD ENDED JULY 31, 2004.**

 

**OR**

 

**o****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

** **

**FOR THE TRANSITION PERIOD FROM                TO                **

 

**COMMISSION FILE NUMBER 0-50659.**

 

**GANDERMOUNTAIN COMPANY**

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITSCHARTER)

 

| **MINNESOTA**                                                   | ** ** | **41-1990949**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or Other Jurisdiction of  Incorporation or Organization) |       | (I.R.S. Employer Identification  No.) |
| ** **                                                      | ** ** | ** **                            |
| **4567 AMERICAN BOULEVARD WEST  MINNEAPOLIS, MINNESOTA**        | ** ** | **55437**                             |
| (Address of Principal Executive  Offices)                       |       | (Zip Code)                            |

** **

**(952) 830-8700**

(Registrant’s Telephone Number, IncludingArea Code)

 

**N/A**

(Former Name, Former Address and FormerFiscal Year, If Changed Since Last Report)

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes ýNo o

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Securities Exchange Act of 1934) Yes oNo ý

 

Indicate thenumber of shares outstanding of each of the issuer’s classes of common stock,as of the latest practicable date: Common Stock, $.01 par value; 14,221,925 shares outstanding as ofSeptember 8, 2004.

 

 

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**GANDER MOUNTAIN COMPANY**

**QUARTERLY PERIOD ENDED JULY 31, 2004**

**Form 10-QIndex**

 
| PART I. FINANCIAL INFORMATION |    |
|-------------------------------|---------|
|                          | Item 1. | Financial Statements |   |
|                          |    |   | Condensed Statements of Operations |   |
|                          |    |   | Condensed Balance Sheets |   |
|                          |    |   | Condensed Statements of Cash Flows |   |
|                          |    |   | Notes to Unaudited Condensed Financial  Statements |   |
|                          | Item 2. | Management’s Discussion and Analysis of Financial Condition and  Results of Operations |   |
|                          | Item 3. | Quantitative and Qualitative Disclosures About Market Risks |   |
|                          | Item 4. | Controls and Procedures |   |
| PART II. OTHER INFORMATION    |    |
|                          | Item 1. | Legal Proceedings |   |
|                          | Item 2. | Changes in Securities, Use of Proceeds and  Issuer Purchases of Equity Securities |   |
|                          | Item 3. | Defaults Upon Senior Securities |   |
|                          | Item 4. | Submission of Matters to a Vote of Security  Holders |   |
|                          | Item 5. | Other Information |   |
|                          | Item 6. | Exhibits and Reports on Form 8-K |   |
| SIGNATURES                    |    |

 

2

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**PART I****. FINANCIAL INFORMATION**

 

**ITEM 1.  FINANCIAL STATEMENTS**

 

**Gander Mountain Company**

**Condensed Statements of Operations - Unaudited**

**(In thousands, except per share data)**

 
| ** **                                                          | ** ** | **13 Weeks Ended** | ** ** | **26 Weeks Ended**  | ** ** |
|---------------------------------------------------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                                                          | ** ** | **July 31,  2004** | ** ** | **August 2,  2003** | ** ** | **July 31,  2004** | ** ** | **August 2,  2003** | ** ** |
| Sales                                                               |       | $                  | 128,096    |                | $          | 94,821 |   | $ | 226,815 |   | $ | 164,247 |   |
| Cost of goods sold                                                  |       | 96,558             |       | 72,571              |       | 176,010 |   | 129,875 |   |
| Gross profit                                                        |       | 31,538             |       | 22,250              |       | 50,805 |   | 34,372 |   |
|                                                                |       |               |       |                |       |   |   |   |   |
| Operating expenses:                                                 |       |               |       |                |       |   |   |   |   |
| Store operating expenses                                            |       | 26,968             |       | 18,135              |       | 50,600 |   | 34,296 |   |
| General and administrative expenses                                 |       | 6,115              |       | 5,601               |       | 12,613 |   | 10,674 |   |
| Pre-opening expenses                                                |       | 1,246              |       | 1,661               |       | 2,477 |   | 2,980 |   |
| Loss from operations                                                |       | (2,791             | )          | (3,147              | )          | (14,885 | ) | (13,578 | ) |
| Interest expense, net                                               |       | 895                |       | 1,241               |       | 2,397 |   | 2,057 |   |
| Loss before income taxes                                            |       | (3,686             | )          | (4,388              | )          | (17,282 | ) | (15,635 | ) |
| Income tax provision (benefit)                                      |       | —             |       | —              |       | — |   | — |   |
| Net loss                                                            |       | (3,686             | )          | (4,388              | )          | (17,282 | ) | (15,635 | ) |
|                                                                |       |               |       |                |       |   |   |   |   |
| Less preferred stock dividends                                      |       | —             |       | 4,131               |       | 4,305 |   | 8,262 |   |
|                                                                |       |               |       |                |       |   |   |   |   |
| Loss applicable to common shareholders                              |       | $                  | (3,686     | )                   | $          | (8,519 | ) | $ | (21,587 | ) | $ | (23,897 | ) |
|                                                                |       |               |       |                |       |   |   |   |   |
| Basic and diluted loss applicable to common  shareholders per share |       | $                  | (0.26      | )                   | $          | (8.75 | ) | $ | (2.71 | ) | $ | (24.56 | ) |
|                                                                |       |               |       |                |       |   |   |   |   |
| Weighted average common shares outstanding                          |       | 14,222             |       | 973                 |       | 7,962 |   | 973 |   |

 

See accompanying notes to unaudited condensedfinancial statements.

 

3

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**Gander Mountain Company**

**CondensedBalance Sheets**

**(In thousands)**

 
| ** **                                      | ** ** | **July 31,  2004** | ** ** | **January 31,  2004 (1)** | ** ** |
|-------------------------------------------------|------------|--------------------|------------|---------------------------|------------|
| ** **                                      | ** ** | **(unaudited)**    | ** ** | ** **                | ** ** |
| **Assets**                                      |       |               |       |                      |       |
| Current assets:                                 |       |               |       |                      |       |
| Cash and cash equivalents                       |       | $                  | 1,172      |                      | $          | 970 |   |
| Accounts receivable                             |       | 14,528             |       | 6,610                     |       |
| Inventories                                     |       | 253,710            |       | 180,361                   |       |
| Prepaids and other current assets               |       | 6,305              |       | 3,599                     |       |
|                                            |       |               |       |                      |       |
| Total current assets                            |       | 275,715            |       | 191,540                   |       |
|                                            |       |               |       |                      |       |
| Property and equipment, net                     |       | 65,684             |       | 54,421                    |       |
| Other assets                                    |       | 4,065              |       | 4,307                     |       |
|                                            |       |               |       |                      |       |
| Total assets                                    |       | $                  | 345,464    |                      | $          | 250,268 |   |
|                                            |       |               |       |                      |       |
| **Liabilities and shareholders’ equity**   |       |               |       |                      |       |
| Current liabilities:                            |       |               |       |                      |       |
| Borrowings under credit facility                |       | $                  | 83,469     |                      | $          | 102,058 |   |
| Accounts payable                                |       | 83,577             |       | 35,957                    |       |
| Accrued and other current liabilities           |       | 24,871             |       | 29,892                    |       |
|                                            |       |               |       |                      |       |
| Total current liabilities                       |       | 191,917            |       | 167,907                   |       |
|                                            |       |               |       |                      |       |
| Long term liabilities                           |       | 4,815              |       | 12,570                    |       |
|                                            |       |               |       |                      |       |
| Shareholders’ equity                       |       | 148,732            |       | 69,791                    |       |
|                                            |       |               |       |                      |       |
| Total liabilities and shareholders’ equity |       | $                  | 345,464    |                      | $          | 250,268 |   |

 

See accompanying notes tounaudited condensed financial statements.

 

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(1) The balance sheet as ofJanuary 31, 2004 has been condensed from the audited financial statements.

 

4

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**Gander Mountain Company**

**Condensed Statements of Cash Flows –Unaudited**

**(In thousands)**

 
| ** **                                                                   | ** ** | **26 Weeks Ended** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                   | ** ** | **July 31,  2004** | ** ** | **August 2,  2003** | ** ** |
| **Operating activities**                                                     |       |               |       |   |   |
| Net loss                                                                     |       | $                  | (17,282    | ) | $ | (15,635 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |       |               |       |   |   |
| Depreciation and amortization                                                |       | 5,264              |       | 3,785 |   |
| Change in operating assets and liabilities:                                  |       |               |       |   |   |
| Accounts receivable                                                          |       | (7,918             | )          | (5,182 | ) |
| Inventories                                                                  |       | (73,349            | )          | (64,186 | ) |
| Prepaid expenses and other assets                                            |       | (2,742             | )          | (2,118 | ) |
| Accounts payable and other liabilities                                       |       | 43,266             |       | 30,797 |   |
| Net cash used in operating activities                                        |       | (52,761            | )          | (52,539 | ) |
|                                                                         |       |               |       |   |   |
| **Investing activities**                                                     |       |               |       |   |   |
| Purchase of property and equipment                                           |       | (14,825            | )          | (11,075 | ) |
| Net cash used in investing activities                                        |       | (14,825            | )          | (11,075 | ) |
|                                                                         |       |               |       |   |   |
| **Financing activities**                                                     |       |               |       |   |   |
| Proceeds from sale of common stock, net of  expenses                         |       | 96,216             |       | — |   |
| (Repayments of) proceeds from notes with  affiliates                         |       | (9,839             | )          | 9,930 |   |
| (Repayments of) borrowings under credit  facility, net                       |       | (18,589            | )          | 53,901 |   |
| Net cash provided by financing activities                                    |       | 67,788             |       | 63,831 |   |
|                                                                         |       |               |       |   |   |
| Net increase in cash                                                         |       | 202                |       | 217 |   |
| Cash, beginning of period                                                    |       | 970                |       | 591 |   |
|                                                                         |       |               |       |   |   |
| Cash, end of period                                                          |       | $                  | 1,172      |   | $ | 808 |   |

 

See accompanying notes to unaudited condensed financial statements.

 

5

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**Gander Mountain Company**

**Notes to Unaudited Condensed Financial Statements**

 

**1. Basisof Presentation**

 

The accompanying unaudited condensed financial statements ofGander Mountain Company (“we” or “us”) have been prepared in accordance withthe requirements for Form 10-Q and do not include all the disclosures normallyrequired in annual financial statements prepared in accordance with accountingprinciples generally accepted in the United States of America.  The interim financial information as of July31, 2004, and for the 13 and 26 weeks ended July 31, 2004 and August 2, 2003,is unaudited and has been prepared on the same basis as the audited annualfinancial statements.  In the opinion ofmanagement, such unaudited information includes all adjustments necessary for afair presentation of the interim financial information.  All such adjustments are of a normalrecurring nature.  These interimfinancial statements and the related notes should be read in conjunction withthe annual financial statements and notes included in the final prospectusrelating to our initial public offering, as filed with the Securities andExchange Commission, which includes audited financial statements for our threefiscal years ended January 31, 2004.

 

Our business is seasonal in nature and interim results may notbe indicative of results for a full year. Historically, we have realized moreof our sales in the latter half of our fiscal year, which includes the huntingand holiday seasons. Our business is also impacted by the timing of new storeopenings. Both seasonality and new store openings impact the analysis of theresults of operations and financial condition for comparable periods.

 

**2. InitialPublic Offering and Capital Stock**

 

On April 26,2004, we completed our initial public offering of 6,583,750 shares of commonstock, including the underwriters’ over-allotment, resulting in proceeds to usof $96.2 million, net of transaction costs of $9.1 million.  We used $9.8 million of the net proceeds torepay all of our debt to Holiday Companies and the remaining $86.4 million toreduce outstanding indebtedness under our credit facility with Fleet Retail Group,Inc.

 

Uponcompletion of our initial public offering and the filing of our Amended andRestated Articles of Incorporation in connection therewith, the authorizedcapital stock of our company consists of 100,000,000 shares of common stock,par value $.01 per share, and 5,000,000 shares of preferred stock, par value$.01 per share.  Our previouslyoutstanding Class A, B and C convertible preferred stock was converted into6,664,927 shares of common stock and our outstanding Class A and B common stockwas recapitalized into 973,248 shares of common stock.  As of July 31, 2004, there were 14,221,925shares of common stock outstanding.

 

**3.Stock-Based Compensation**

 

We continue toapply Accounting Principles Board (APB) No. 25, *Accountingfor Stock Issued to Employees*, and related interpretations inaccounting for stock-based compensation plans. Accordingly, compensationexpense has not been recognized for employee stock options as the exerciseprice for options granted is greater than or equal to our stock price on thedate of grant.

 

In February2004, we granted options to purchase 109,728 shares of common stock to certainofficers with an exercise price of $16.00 per share, the price to the public ofour shares in our initial public offering. These options will vest in three equal increments on July 31, 2004, andthe two subsequent anniversaries thereafter. These options are exercisable for a period of nine years from the dateof grant.

 

In February2004, we adopted the Gander Mountain Company 2004 Omnibus Stock Plan, whichauthorizes the granting of stock-based awards up to 2,144,000 shares of commonstock. This plan was approved by shareholders in March 2004.  Under this plan, awards may be made toemployees, directors, and consultants. The types of awards that may be granted under the plan includerestricted and unrestricted stock, incentive and nonstatutory stock options,stock appreciation rights and other stock awards.

 

As of July 31,2004, there are a total of 2,068,774 options to purchase common stockoutstanding with a weighted average exercise price of $12.04 and a weightedaverage remaining life of 8.5 years.

 

 

6

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The table below illustrates the effect on netloss and net loss per share applicable to common shareholders as if we hadapplied the fair value recognition provisions of Statement of FinancialAccounting Standard (SFAS) No. 123, *Accounting for Stock-BasedCompensation*, to stock-based employee compensation (in thousandsexcept per share data):

 
| ** **                                                                                | ** ** | **13 Weeks Ended** | ** ** | **26 Weeks Ended**  | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                                                                                | ** ** | **July 31,  2004** | ** ** | **August 2,  2003** | ** ** | **July 31,  2004** | ** ** | **August 2,  2003** | ** ** |
|                                                                                      |       |               |       |                |       |   |   |   |   |
| Net loss applicable to common shareholders,  as reported                                  |       | $                  | (3,686     | )                   | $          | (8,519 | ) | $ | (21,587 | ) | $ | (23,897 | ) |
| Add:   Stock-based employee compensation expense included in reported net  loss      |       | —             |       | —              |       | — |   | — |   |
|                                                                                      |       |               |       |                |       |   |   |   |   |
| Deduct: Stock-based employee compensation  expense determined under the fair value method |       | (829               | )          | (164                | )          | (1,147 | ) | (329 | ) |
|                                                                                      |       |               |       |                |       |   |   |   |   |
| Pro forma net loss applicable to common  shareholders                                     |       | $                  | (4,515     | )                   | $          | (8,683 | ) | $ | (22,734 | ) | $ | (24,226 | ) |
|                                                                                      |       |               |       |                |       |   |   |   |   |
| Net loss per share                                                                        |       |               |       |                |       |   |   |   |   |
| Basic and diluted - as reported                                                           |       | $                  | (0.26      | )                   | $          | (8.75 | ) | $ | (2.71 | ) | $ | (24.56 | ) |
|                                                                                      |       |               |       |                |       |   |   |   |   |
| Basic and diluted - pro forma                                                             |       | $                  | (0.32      | )                   | $          | (8.92 | ) | $ | (2.86 | ) | $ | (24.90 | ) |

 

The weightedaverage fair value of options granted during the 13 and 26 weeks ended July 31,2004, was $12.02 and $7.88, respectively, per option share. There were nooptions granted during the 13 or 26 weeks ended August 2, 2003. The fair valueof each grant is estimated on the date of grant using the Black-Scholes optionpricing model with the following assumptions:

 
| ** **                      | ** ** | **13 Weeks Ended** | ** ** | **26 Weeks Ended**  | ** ** |
|---------------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                      | ** ** | **July 31,  2004** | ** ** | **August 2,  2003** | ** ** | **July 31,  2004** | ** ** | **August 2,  2003** | ** ** |
|                            |       |               |       |                |       |   |   |   |   |
| Risk-free interest rate         |       | 3.57% to 3.74%     |       | NA                  |       | 3.57% to 3.74% |   | NA |   |
| Expected dividend yield         |       | 0%                 |       | NA                  |       | 0% |   | NA |   |
| Expected stock price volatility |       | 50%                |       | NA                  |       | 50% |   | NA |   |
| Expected life of stock options  |       | 5 years            |       | NA                  |       | 5 years |   | NA |   |

 

**4.Earnings Per Share**

 

Basic anddiluted loss applicable to common shareholders per share is based upon theweighted average number of shares outstanding. All potentially dilutive stock options have been excluded from thecalculation of weighted average shares outstanding because their inclusionwould have an anti-dilutive effect on loss per share.  Options to purchase 2,068,774  and 1,061,837 shares of common stock wereoutstanding at the end of the second fiscal quarters ended July 31, 2004, andAugust 2, 2003, respectively.

 

Theaccompanying condensed unaudited financial statements report loss applicable tocommon shareholders and loss applicable to common shareholders per share inaccordance with accounting principles generally accepted in the United Statesof America.  We also disclose thisinformation on a pro forma basis below. We closed the initial public offering of our common stock on April 26,2004.  The pro forma amounts assume thatthe conversion of the convertible preferred shares to common shares, our32-for-1 stock split and our initial public offering took place at thebeginning of the 13 and 26 week periods ended July 31, 2004, and August 2,2003. The pro forma amounts exclude the preferred stock dividends that areassumed extinguished and the interest expense on the portions of our debt toHoliday Companies and our credit facility indebtedness that would have beenpaid down with the proceeds from the initial public offering, net of $0 taxes.We believe the use of pro forma amounts provides meaningful information due tothe significant increase in outstanding shares as a result of our initialpublic offering and the elimination of our preferred stock dividends. 

 

7

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| ** **                                                      | ** ** | **13 Weeks Ended** | ** ** | **26 Weeks Ended**  | ** ** |
|-----------------------------------------------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                                                      | ** ** | **July 31,  2004** | ** ** | **August 2,  2003** | ** ** | **July 31,  2004** | ** ** | **August 2,  2003** | ** ** |
| **Pro Forma Data (Basic and Diluted)**                          |       |               |       |                |       |   |   |   |   |
| Pro forma net loss applicable to common  shareholders           |       | $                  | (3,686     | )                   | $          | (3,468 | ) | $ | (16,340 | ) | $ | (14,163 | ) |
| Pro forma net loss applicable to common  shareholders per share |       | $                  | (0.26      | )                   | $          | (0.25 | ) | $ | (1.15 | ) | $ | (1.09 | ) |
| Pro forma weighted average common shares  outstanding           |       | 14,222             |       | 14,089              |       | 14,222 |   | 13,022 |   |
|                                                            |       |               |       |                |       |   |   |   |   |
| **Reconciliation of Pro Forma Data to GAAP**                    |       |               |       |                |       |   |   |   |   |
| Loss applicable to common shareholders                          |       | $                  | (3,686     | )                   | $          | (8,519 | ) | $ | (21,587 | ) | $ | (23,897 | ) |
| Preferred stock dividends                                       |       | —             |       | 4,131               |       | 4,305 |   | 8,262 |   |
| Interest expense reduction                                      |       | —             |       | 920                 |       | 942 |   | 1,472 |   |
| Pro forma net loss applicable to common  shareholders           |       | $                  | (3,686     | )                   | $          | (3,468 | ) | $ | (16,340 | ) | $ | (14,163 | ) |
|                                                            |       |               |       |                |       |   |   |   |   |
| Weighted average common shares outstanding                      |       | 14,222             |       | 973                 |       | 7,962 |   | 973 |   |
| Conversion of preferred stock                                   |       | —             |       | 6,665               |       | 3,149 |   | 6,665 |   |
| Additional shares issued in IPO                                 |       | —             |       | 6,451               |       | 3,111 |   | 5,384 |   |
| Pro forma weighted average common shares  outstanding           |       | 14,222             |       | 14,089              |       | 14,222 |   | 13,022 |   |

 

We continued to reflect the accretion ofcumulative unpaid dividends on our previously outstanding Class A, B and Cconvertible preferred stock, in accordance with accounting standards, until theclosing of our initial public offering. No such dividends were paid and any unpaid cumulative dividends wereextinguished with the changes in capital structure completed in connection withour initial public offering. Accordingly, no such obligation or reduction tonet income/(loss) are reflected in our quarterly results of operations afterMay 1, 2004.

 

**ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**ForwardLooking Statements**

 

The followingdiscussion may contain forward-looking statements regarding us, our businessprospects and our results of operations that are subject to certain risks anduncertainties posed by many factors and events that could cause our actualbusiness, prospects and results of operations to differ materially from thosethat may be anticipated by such forward-looking statements.  Factors that could cause or contribute tosuch differences include, but are not limited to, those described in the “RiskFactors” section of the final prospectus relating to our initial public offering,as filed with the Securities and Exchange Commission.  Readers are cautioned not to place unduereliance on these forward-looking statements, which speak only as of the dateof this report.  We undertake noobligation to revise any forward-looking statements in order to reflect eventsor circumstances that may subsequently arise. Readers are urged to carefully review and consider the variousdisclosures made by us in this report and in our other reports filed with theSecurities and Exchange Commission that advise interested parties of the risksand factors that may affect our business.

 

These interim financials statements filed on this Form 10-Qand the discussions contained herein should be read in conjunction with theannual financial statements and notes included in the final prospectus relatingto our initial public offering, as filed with the Securities and ExchangeCommission, which includes audited financial statements for our three fiscalyears ended January 31, 2004.

 

**Overview**

 

The GanderMountain brand name has a long heritage and strong appeal to outdoor lifestylecustomers given the brand’s 36 year history as a nationwide catalog operationfrom 1960 to 1996, which by 1996 was augmented with 17 retail stores.  In 1996 and 1997, Holiday Companies, which atthe time owned and operated a group of retail sporting goods stores, acquiredthese Gander Mountain retail stores, formed our company and began to build anew outdoor lifestyle business.  We haveexpanded our store base from 26 stores in 1997 to 70 Gander Mountain stores inten states as of July 31, 2004.

 

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We have builtour business by offering our customers a broad and deep assortment of national,regional and owned-brand hunting, fishing and camping equipment, accessoriesand related technical apparel and footwear at low prices, accompanied byknowledgeable customer service.  Oursuccess will depend on our ability to grow our business by building new storesand by increasing sales in our existing stores.

 

We haveembarked on a series of strategic and operating initiatives aimed at improvingour merchandise offerings, enhancing profitability and accelerating new storeopenings.  We are transforming our marketposition from a traditional specialty store to a larger format,category-focused store by opening new larger format stores and increasing theselling space within our existing stores. The larger format strategy has allowed us to offer our customers abroader and deeper assortment of merchandise. These improvements, along with our “every day low price” policy on keyequipment and accessories, have driven sales at new stores and had a positiveimpact on comparable store sales in recent quarters.

 

We measureperformance using such key operating statistics as comparable store sales,sales per square foot, gross margin percentage and store operating expenses,with a focus on labor, as a percentage of sales.  These results translate into store operatingcontribution, which we use to evaluate overall performance on an individualstore basis.  Store operatingcontribution is calculated by deducting a store’s operating expenses from itsgross margin. In addition, general and administrative expenses are monitored inabsolute amounts, as well as on a percentage of sales basis. Pre-openingexpenses are analyzed based on the number of store openings, market attributesand store size.

 

We alsomeasure and evaluate investments in our retail locations, including inventoryand property and equipment.  Inventoryperformance is primarily measured by inventory turns, or the number of timesstore inventory turns over in a given period, and amounts of owned inventory atvarious times based on payment terms from our vendors.  The most significant investments in propertyand equipment are made at the time a store is opened by us.

 

We believethat the overall growth of our business will allow us to maintain or increaseour gross margins.  Increased merchandisevolumes enable us to improve our purchasing leverage and achieve greatersupport throughout the supply chain.  Ourgross margins are also influenced by the mix of merchandise in our totalsales.  As we continue sales and storegrowth, a number of other factors may impact, positively or negatively, ourgross margin percentage, including:

 

•                  the introductionof new product categories with varying gross margin percentage characteristics,

•                  changes in themerchandise mix at our current locations,

•                  differences inmerchandise mix by geographic location,

•                  price competition,

•                  closeout salesin connection with store relocations,

•                  sourcing ofproducts from locations outside the United States,

•                  vendor programs,and

•                  supply chainenhancements.

 

The mostsignificant store operating expenses are labor and related employee benefitsand advertising.  We believe thecombination of increased sales volume and improved labor management within ourstores will allow us to better leverage payroll expenses over time.  Our employee benefits include healthinsurance, the cost of which continues to increase faster than the general rateof inflation.  We continually monitorthis cost and review strategies to effectively control increases, but we aresubject to the overall trend of increases in health care costs.  Advertising costs are monitored as apercentage of sales.  These costs arelargely variable, which allows us to actively manage them to facilitateachieving our sales, gross margin percentage and store operating contributionobjectives.

 

Storeoperating contribution is measured as a percentage of sales.  It gives us an overall measure as to whetheror not individual locations and markets are meeting our financial objectives.

 

General andadministrative expenses are monitored and controlled as a percentage ofsales.  In anticipation of ouraccelerated growth plans, we have made significant investments ininfrastructure, including our information systems, distribution capabilitiesand management. These investments included an enterprise-wide merchandising anddistribution system from Retek and a financial system from Oracle, implementedin fiscal 2000.  Our currentinfrastructure facilitates the opening of stores at a greater rate, which webelieve enables us to leverage our expenses. Accordingly, we expect such expenses to decrease as a percentage ofsales over time.

 

Pre-openingexpenses will continue to be related to store openings, including relocations.These expenses will fluctuate as we open additional stores.

 

9

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Inventory turnsare based on sales and average inventory for the applicable period.  We recognize that our inventory turns may belower than those of other retailers, which we believe is due to the categoriesof merchandise we carry, including firearms, and the large quantities ofmerchandise we use in our in-store displays. We believe we have the opportunity to enhance our supply chain toimprove our inventory turns. Additionally, in merchandise categories that experience slower inventoryturns, we continue to work with vendors to increase our trade credit terms toreduce our investment in owned inventory. We cannot assure you that we will be able to improve our inventory turnsor inventory investment.

 

Identificationof appropriate new store sites is essential to our growth strategy.  We believe our focus on our larger store sizeand our flexible real estate strategy provides us with increased opportunitiesto find optimal real estate locations on attractive terms. We evaluate andinvest in new stores based on site-specific projected returns on investment.During fiscal years 2001, 2002 and 2003, we opened seventeen, two and tenstores, respectively, including new stores and store relocations.  In the first half of fiscal 2004, we openedfive stores, adding approximately 364,000 square feet and bringing our totalsquare footage to 2.9 million square feet.

 

**CriticalAccounting Policies and Use of Estimates**

 

Our financial statements are prepared in accordance withaccounting principles generally accepted in the United States of America.  In connection with the preparation of thefinancial statements, we are required to make assumptions, make estimates andapply judgments that affect the reported amounts of assets, liabilities, revenue,expenses and the related disclosures.  Webase our assumptions, estimates and judgments on historical experience, currenttrends and other factors that we believe to be relevant at the time theconsolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions,estimates and judgments to ensure that our financial statements are presentedfairly and in accordance with accounting principles generally accepted in theUnited States of America.  However, becausefuture events and their effects cannot be determined with certainty, actualresults could differ from our assumptions and estimates, and such differencescould be material.

 

Our criticalaccounting policies and use of estimates are discussed and should be read inconjunction with the annual financial statements and notes included in thefinal prospectus relating to our initial public offering, as filed with theSecurities and Exchange Commission, which includes audited financial statementsfor our three fiscal years ended January 31, 2004.

 

10

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**Results ofOperations**

 

The followingtable includes selected items in the Unaudited Condensed Statements ofOperations, reflected as a percentage of sales: 

 
| ** **                          | ** ** | **13 Weeks Ended** | ** ** | **26 Weeks Ended**  | ** ** |
|-------------------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                          | ** ** | **July 31,  2004** | ** ** | **August 2,  2003** | ** ** | **July 31,  2004** | ** ** | **August 2,  2003** | ** ** |
| Sales                               |       | 100.0              | %          | 100.0               | %          | 100.0 | % | 100.0 | % |
| Cost of goods sold                  |       | 75.4               | %          | 76.5                | %          | 77.6 | % | 79.1 | % |
| Gross profit                        |       | 24.6               | %          | 23.5                | %          | 22.4 | % | 20.9 | % |
|                                |       |               |       |                |       |   |   |   |   |
| Operating expenses:                 |       |               |       |                |       |   |   |   |   |
| Store operating expenses            |       | 21.0               | %          | 19.1                | %          | 22.3 | % | 20.9 | % |
| General and administrative expenses |       | 4.8                | %          | 5.9                 | %          | 5.6 | % | 6.5 | % |
| Pre-opening expenses                |       | 1.0                | %          | 1.8                 | %          | 1.1 | % | 1.8 | % |
| Loss from operations                |       | -2.2               | %          | -3.3                | %          | -6.6 | % | -8.3 | % |
| Interest expense, net               |       | 0.7                | %          | 1.3                 | %          | 1.0 | % | 1.2 | % |
| Loss before income taxes            |       | -2.9               | %          | -4.6                | %          | -7.6 | % | -9.5 | % |
| Income tax provision (benefit)      |       | 0.0                | %          | 0.0                 | %          | 0.0 | % | 0.0 | % |
| Net loss                            |       | -2.9               | %          | -4.6                | %          | -7.6 | % | -9.5 | % |

 

Salesconsist of sales from comparable stores, new stores and non-comparablestores.  A store is included in the comparablestore base in its fifteenth full month of operations.  A relocated store returns to the comparablestore base in its fifteenth full month after relocation. New store salesinclude sales from stores we opened during the current period. Non-comparablestore sales include sales in the current period from our stores opened duringthe previous fiscal year before they have begun their fifteenth month ofoperation. During the quarter, we changed this internal measurement from thefourteenth month to the fifteenth month to better reflect comparable salesactivity in the stores and minimize the effect of grand opening activities.

 

Cost of goodssold includes the cost of merchandise, freight, distribution, inventoryshrinkage and store occupancy costs. Store occupancy costs include rent, realestate taxes and common area maintenance charges.

 

Storeoperating expenses include store associate payroll, taxes and fringe benefits,advertising, maintenance, utilities, depreciation, insurance, bank and creditcard charges and other store level expenses.

 

General andadministrative expenses include all expenses associated with operating ourcorporate headquarters.

 

Pre-openingexpenses consist primarily of payroll, recruiting, advertising and other costsincurred prior to a new store opening.

 

***Thirteen Weeks Ended July 31,2004 and Thirteen Weeks Ended August 2, 2003***

 

*Sales.*  Sales increased by $33.3 million, or 35.1%,to $128.1 million in the second quarter of fiscal 2004, from $94.8 million inthe second quarter of fiscal 2003. This increase primarily resulted from acomparable store sales increase of $1.4 million, or 1.8%, and sales of $32.8million from stores not yet included in the comparable store sales base, offsetby closed stores.

 

The increasein comparable store sales was primarily attributable to sales increases in ourhunting category, particularly new and used firearms, firearms security andpaintball. Our apparel and footwear categories also contributed to comparablestores sales, with most departments reporting gains.  The new store sales mix for the secondquarter of fiscal 2004 was relatively consistent with the comparable storesales mix, except for sales from new products introduced into new larger formatstores and a decrease in sales mix for the fishing category.

 

11

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Firearms saleswere enhanced by our co-branded credit card launched in September 2003, whichprovides customers with a one-time 5% discount and financing option onfirearms. New or expanded product categories, including ATVs and accessories,paintball, soft-air guns and cabin décor, showed solid results as well. Theseincreases were partially offset by overall decreases in sales mix for thefishing and camping categories.

 

*GrossProfit.* Gross profit increased by $9.3 million, or41.7%, to $31.5 million in the second quarter of fiscal 2004 from $22.2 millionin the second quarter of fiscal 2003. As a percentage of sales, gross profitincreased 1.1% to 24.6% in the second quarter of fiscal 2004 from 23.5% in thesecond quarter of fiscal 2003. Gross product margins increased approximately0.7% for the quarter but were offset by additional markdowns in the apparel,fishing and camping categories. The remaining net increase was primarily dueto:

 

•                  a 1.1% increaseas a percentage of sales from certain vendor allowances, which in prior yearswere reflected as reductions in advertising expense because proof ofperformance in advertising programs had been required prior to fiscal 2004, and

•                  an increase innet revenues from our co-branded credit card program, offset by

•                  closeout salesat two stores in anticipation of their relocation in the third quarter, and

•                  reduced leverageof store occupancy costs.

 

*StoreOperating Expenses.* Store operating expenses increased by $8.8 million, or 48.7%, to $27.0million in the second quarter of fiscal 2004 from $18.1 million in the secondquarter of fiscal 2003. As a percentage of sales, store operating expensesincreased 1.9% to 21.0% in the second quarter of fiscal 2004 from 19.1% in thesecond quarter of fiscal 2003.

 

Netadvertising expense increased 1.6% as a percentage of sales, due primarily tothe change in vendor allowance requirements discussed above. For the secondquarter of fiscal 2004, such vendor allowances are reflected as a reduction incost of sales and inventory versus as a reduction in advertising expense in thesecond quarter of fiscal 2003. Store labor costs in the second quarter offiscal 2004 improved over the prior year due to improved labor management andcomparable store sales increases. Offsetting this improvement was a 0.4% chargerelating to the removal of waterfall displays from 42 smaller format stores,which added approximately 1,000 square feet in retail selling space per store.Other expense increases include a rate increase in the credit card interchangefees and costs incurred to relocate stores.

 

*General andAdministrative Expenses.*  General and administrative expenses increasedby $0.5 million, or 9.2%, to $6.1 million in the second quarter of fiscal 2004from $5.6 million in the second quarter of fiscal 2003. As a percentage ofsales, general and administrative expenses decreased 1.1% to 4.8% in the secondquarter of fiscal 2004 from 5.9% in the second quarter of fiscal 2003, primarilydue to leveraging administrative and technology infrastructure expenses whileincreasing investments in merchandising and store operations functions.

 

*Pre-openingExpenses.* Pre-opening expenses decreased $0.4 million, or 25.0%, to $1.2 millionin the second quarter of fiscal 2004 from $1.6 million in the second quarter offiscal 2003. We opened three stores in the second quarter of both fiscal 2004and fiscal 2003.  The second quarter offiscal 2004 also included expenses for the 14 stores we are planning to open inthe second half of fiscal 2004.

 

*InterestExpense.* Interest expense decreased by $0.3 million, or 27.9%, to $0.9 million inthe second quarter of fiscal 2004 from $1.2 million in the second quarter offiscal 2003. The decrease in interest expense resulted from using proceeds fromour initial public offering in April 2004 to repay debt.

 

*Income TaxProvision (Benefit).* We have determined the realization of the tax benefit related to our netdeferred tax asset is uncertain at this time and a valuation allowance wasrecorded for the entire balance of our net deferred tax asset.

 

*Net Loss.*Thenet loss for the second quarter of fiscal 2004 of $3.7 million was reduced by$0.7 million from the net loss of $4.4 million for the second quarter of 2003,due to the factors discussed above.

 

*PreferredStock Dividend. *Untilthe closing of our initial public offering in April 2004, we continued toreflect the accretion of cumulative unpaid dividends on our previouslyoutstanding Class A, B and C convertible preferred stock in accordance withaccounting standards.  No such dividendswere paid and any unpaid cumulative dividends were extinguished with thechanges in capital structure associated with the closing of our initial publicoffering.  No such obligation orreduction to net income (loss) is reflected in our quarterly results ofoperations after May 1, 2004.

 

12

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***Twenty Six Weeks Ended July 31,2004 and Twenty Six Weeks Ended August 2, 2003***

 

*Sales.*  Sales increased by $62.6 million, or 38.1%,to $226.8 million in the first half of fiscal 2004 from $164.2 million in thefirst half of fiscal 2003. This increase primarily resulted from a comparablestore sales increase of $6.9 million, or 4.8%, and sales of $58.4 million fromstores not yet included in the comparable store sales base, offset by closedstores.

 

The increasein comparable store sales was primarily attributable to sales increases in ourhunting category, particularly new and used firearms, firearms security andpaintball. Our apparel and footwear categories also contributed to comparablestores sales with most departments reporting gains.  The new store sales mix for the first half offiscal 2004 was relatively consistent with the comparable store sales mix,except for sales from new products introduced into new larger format stores anda decrease in sales mix for the fishing category.

 

Firearms saleswere enhanced by our co-branded credit card launched in September 2003, whichprovides customers with a one-time 5% discount and financing option onfirearms. New or expanded product categories, including ATVs and accessories,paintball, soft-air guns and cabin décor, showed solid results as well. Theseincreases were partially offset by overall decreases in sales mix for thefishing and camping categories.

 

*GrossProfit.* Gross profit increased by $16.4 million, or47.8%, to $50.8 million in the first half of fiscal 2004 from $34.4 million inthe first half of fiscal 2003. As a percentage of sales, gross profit increased1.5% to 22.4% from 20.9%. Gross product margins increased 0.7% for the periodbut were offset by additional markdowns in the apparel, fishing and campingcategories. The remaining net increase was primarily due to:

 

•                  a 0.9% increaseas a percentage of sales from certain vendor allowances, which in prior yearswere reductions in advertising expense because proof of performance ofadvertising programs had been required prior to fiscal 2004,

•                  an increase innet revenues from our co-branded credit card program, and

•                  a decrease indistribution costs from leveraging comparable store sales increases anddistribution center initiatives that improved product handling efficiency,offset by

•                  closeout salesat two stores in anticipation of their relocation in the third quarter.

 

*StoreOperating Expenses.* Store operating expenses increased by $16.3 million, or 47.5%, to $50.6million in the first half of fiscal 2004 from $34.3 million in the first halfof fiscal 2003. As a percentage of sales, store operating expenses increased1.4% to 22.3% in the first half of fiscal 2004 from 20.9% in the first half offiscal 2003.

 

**Net advertising expense increased2.0% as a percentage of sales due primarily to the change in vendor allowancerequirements discussed above, which was 1.8%. For the first half of fiscal2004, such vendor allowances are reflected as a reduction in cost of sales andinventory versus as a reduction in advertising expense in fiscal 2003. Theremaining increase in advertising expense reflects an increased emphasis onbrand marketing throughout the year. Store labor costs in fiscal 2004 improved over the prior year with a0.8% reduction in payroll expenses as a percentage of sales due to improvedlabor management and comparable store sales increases. This improvement waspartially offset by a charge relating to the removal of waterfall displays from42 smaller format stores, increased credit card interchange fees and costsincurred to relocate stores.**

** **

*General andAdministrative Expenses.*  General and administrative expenses increasedby $1.9 million, or 18.2%, to $12.6 million in the first half of fiscal 2004from $10.7 million in the first half of fiscal 2003. As a percentage of sales,general and administrative expenses decreased 0.9% to 5.6% in the first half offiscal 2004 from 6.5% in the first half of fiscal 2003, primarily due toleveraging administrative and technology infrastructure expenses whileincreasing investments in merchandising and store operations functions.

 

*Pre-openingExpenses.* Pre-opening expenses decreased $0.5 million, or 16.9%, to $2.5 millionin the first half of fiscal 2004 from $3.0 million in the first half of fiscal2003. We opened five stores in the first half of both fiscal 2004 and fiscal2003. The second quarter of fiscal 2004 also included expenses for the 14stores we are planning to open in the second half of fiscal 2004.

 

*InterestExpense.* Interest expense increased by $0.3 million, or 16.6%, to $2.4 million inthe first half of fiscal 2004 from $2.1 million in the first half of fiscal2003.  The increase in interest expenseresulted from higher average borrowings used to fund our growth during thefirst half of fiscal 2004.

 

13

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*Income TaxProvision (Benefit).* We have determined the realization of the tax benefit related to our netdeferred tax asset is uncertain at this time and a valuation allowance wasrecorded for the entire balance of our net deferred tax asset.

 

*Net Loss.*Thenet loss for the first half of fiscal 2004 of $17.3 million increased by $1.7million from the net loss of $15.6 million for the first half of 2003, due tothe factors discussed above.

 

*PreferredStock Dividend. *Wecontinued to reflect the accretion of cumulative unpaid dividends on ourpreviously outstanding Class A, B and C convertible preferred stock inaccordance with accounting standards until the closing of our initial publicoffering.  No such dividends were paid,and any unpaid cumulative dividends were extinguished with the changes incapital structure associated with the closing of our initial publicoffering.  No such obligation orreduction to net income (loss) is reflected in our results of operations afterMay 1, 2004.

 

**Liquidityand Capital Resources**

 

Our primarycapital requirements are for inventory, capital improvements, pre-openingexpenses to support our new store growth plans, and, to the extent of thehighly seasonal nature of our business, operating losses.  Until the completion of our initial publicoffering, our main sources of liquidity were equity investments by, andadvances from, Holiday Companies and its affiliated entities, and borrowingsunder our credit facility.

 

On April 26, 2004, we closed the initial public offering ofour common stock, selling 6,583,750 shares of common stock, including theunderwriters’ over-allotment, at a price of $16.00 per share, resulting in netproceeds to us of $96.2 million. Transaction costs were $9.1 million and have been reflected as areduction of paid-in-capital.  Theproceeds were used to eliminate our outstanding note payable to HolidayCompanies in the amount of $9.8 million and reduce $86.4 million of outstandingindebtedness on our credit facility with Fleet Retail Group, Inc.  As of July 31, 2004, the availability on ourcredit facility was $65.4 million.

 

*Operating Activities. *Net cash used inoperating activities for the first half of fiscal 2004 increased by $0.3million to $52.8 million. The increase was primarily the result of increases ininventories and landlord receivables related to new stores, offset by higheraccounts payable levels.

 

*InvestingActivities*.  Netcash used in investing activities was $14.8 million in the first half of fiscal2004 and $11.1 million in the first half of 2003, consisting of purchases ofproperty and equipment. Additionally, there was $1.4 million in non-cashcapitalized lease obligations recorded in the first half of fiscal 2004, alongwith the corresponding leasehold improvement and equipment assets. We use cashprimarily for tenant improvements and equipment to open new and relocatedstores and to remodel and upgrade existing stores.  There were five new stores opened in both thefirst half of fiscal 2004 and the first half of fiscal 2003. Capitalexpenditures in the first half of fiscal 2004 also include $4.1 million ofinvestment for new store openings in the second half of fiscal 2004.

 

*FinancingActivities*. * *Net cash provided by financingactivities was $67.8 million in the first half of fiscal 2004, as compared to$63.8 million in the first half of fiscal 2003. During the first half of fiscal2004, we received net proceeds from our initial public offering of $96.2million, reduced debt by $96.2 million in total (including $9.8 million inHoliday Companies indebtedness) and borrowed $67.8 million under our creditfacility.  We borrowed $53.9 millionunder our credit facility during the first half of fiscal 2003 as well as $9.9million from Holiday Companies. The borrowings during these periods wereprimarily related to financing the increased inventory levels, property andequipment purchases for new store openings, and to the extent of the highlyseasonal nature of our business, operating losses.

 

To meet ourliquidity and capital needs, we entered into a credit facility with FleetRetail Group, Inc. in fiscal 2001.  Thiscredit facility currently provides for revolving loans in an aggregate amountof up to $175.0 million including up to $35.0 million in the form of letters ofcredit.  The facility can be increased to$200.0 million if we are not in default under the agreement.  The actual availability under our creditfacility is limited to the lesser of, on average, 65% of our eligible inventoryor 85% of our inventory’s liquidation value, in each case net of specifiedreserves and less any letters of credit outstanding.  Outstanding borrowings under the creditfacility as of July 31, 2004, including letters of credit of $6.3 million, were$89.7 million.  Our total remainingborrowing capacity under the credit facility as of July 31, 2004 is $65.4million.  Interest on the outstandingindebtedness under the credit facility currently accrues at the lender’s primecommercial lending rate plus 0% to 0.75% depending on our earnings beforeinterest, taxes, depreciation and amortization (EBITDA), as defined in thecredit agreement, or, if we elect, at the one, two, three or six month LIBORplus 1.50% to 2.25% depending on such EBITDA. Our obligations under the credit facility are secured by interests insubstantially all of our assets.  Thecredit facility expires June 30, 2007. As of July 31, 2004, we were in compliance with all covenants under ourcredit facility.

 

14

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Our futurecapital requirements will primarily depend on the number of new stores we openand the timing of those openings within a given fiscal year.  These requirements will include costsdirectly related to opening new stores and may also include costs necessary toensure that our infrastructure, including distribution capabilities, is able tosupport a larger store base. We have opened five stores, and plan to open 14additional stores, in fiscal 2004, including two relocated stores. In thesecond half of fiscal 2004, we expect our capital expenditures to beapproximately $19 million to $24 million, substantially all of which willrelate to planned store openings, store relocations and store remodels infiscal 2004.  Additional needs forcapital include funding seasonal inventory levels and, potentially, seasonallosses from operations.  We intend tosatisfy our capital requirements over the next twelve months with cash flowsfrom operations and funds available under our credit facility. However, ifcapital requirements for our business strategy change, or other factors changeour capital requirements, we may need to seek capital in the public markets.

 

Under our 2002Stock Option Plan, we have 217,472 options outstanding to purchase our commonstock with the ability to exercise being contingent upon the attainment of a$32.06 per share price for our common stock as of the end of a fiscal yearbased upon the higher of the closing price on the last day of the fiscal yearor a five-day trailing average taken at that time. The options have a 10 yearlife and vest in equal annual increments over three years beginning June 30,2004, subject to the attainment of the $32.06 price per share at a fiscal yearend. The exercise price is $4.47 per share. If the price of our common stock reaches $32.06 at a fiscal year end,the company will recognize approximately $3.6 million in expense, net of tax,assuming an effective tax rate of 40%, over the vesting period described above.

 

**ContractualObligations and Other Commitments**

 

Our materialoff-balance sheet arrangements are operating lease obligations and letters ofcredit.  We excluded these items from thebalance sheet in accordance with accounting principles generally accepted inthe United States of America. As of July 31, 2004, and January 31, 2004, theminimum operating lease obligations due within one year were $32.7  million and $25.7 million, respectively.These store operating leases generally provide for payment of direct operatingcosts, primarily common area costs and real estate taxes, in addition torent. These obligation amounts include future minimum lease payments andexclude direct operating costs.

 

Issued andoutstanding letters of credit amounted to $6.3 million at July 31, 2004, andwere related to importing of merchandise and insurance program liabilities.

 

In theordinary course of business, we enter into arrangements with vendors topurchase merchandise in advance of expected delivery.  Because most ofthese purchase orders do not contain any termination payments or otherpenalties if cancelled, they are not included as outstanding contractualobligations.

 

**Seasonality**

 

Our businessis seasonal in nature and interim results may not be indicative of results fora full year.  Our highest sales activitynormally occurs during the third and fourth quarters of our fiscal year, whichare primarily associated with the fall hunting seasons and the holidayseason.  The first half of our fiscalyears have averaged approximately 35% of our annual sales, including new storesales, over the past two years. However, this factor can not necessarily beused as an indicator of future results. Customers’ demand for our products, and therefore our sales, can besignificantly impacted by unseasonable weather conditions that affect outdooractivities and demand for related apparel and equipment.  This seasonality also impacts our inventorylevels, which tend to rise beginning approximately in April, reach a peak inNovember, and decline to lower levels after the December holiday season.

 

In the past,our pre-opening expenses have varied significantly from quarter to quarter,primarily due to the timing of store openings. We typically incur most pre-opening expenses for a new store during thethree months preceding, and the month of, its opening.  In addition, our labor and operating costsfor a newly opened store can be greater during the first one to two months ofoperation than what can be expected after that time, both in aggregate dollarsand as a percentage of sales. Accordingly, the volume and timing of new store openings in any quarterhas had and is expected to continue to have a significant impact on quarterlypre-opening costs and store labor and operating expenses.  Due to these factors, results for anyparticular quarter may not be indicative of results to be expected for anyother quarter or for a full fiscal year.

 

15

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**ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

We are exposed to market risk from changes in interest rateson borrowings under our credit facility with Fleet Retail Group, Inc., whichbears interest at the lower of the lender’s prime commercial lending rate plus0% to 0.75% depending on our EBITDA, as defined in the credit agreement, or theadjusted LIBOR rate for one, two, three or six months plus 1.50% to 2.25%depending on such EBITDA. Outstanding borrowings under our credit facility asof July 31, 2004, including letters of credit of $6.3 million, were $89.7million. If interest rates had increased by 100 basis points during our secondquarter of fiscal 2004, our interest expense would have increased byapproximately $0.2 million, based upon average borrowings under our creditfacility during the second quarter of fiscal 2004.

 

We have noderivative financial instruments or derivative commodity instruments in ourcash and cash equivalents.

 

We have nointernational sales, however, we import certain items for sale in ourstores.  Substantially all of ourpurchases are denominated in U.S. dollars and are paid under trade terms similarto our U.S vendors.

 

**ITEM 4.  CONTROLS AND PROCEDURES**

 

As of the endof the period covered by this report, we conducted an evaluation, under thesupervision and with the participation of the principal executive officer andprincipal financial officer, of our disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of1934 (the “Exchange Act”)).  Based onthis evaluation, the principal executive officer and principal financialofficer concluded that our disclosure controls and procedures are effective toensure that information required to be disclosed by us in reports that we fileor submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in Securities and ExchangeCommission rules and forms.  There was nochange in our internal control over financial reporting identified inconnection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of theExchange Act that occurred during the period covered by this report that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

**PART II****. OTHER INFORMATION**

 

**ITEM 1.****  LEGAL PROCEEDINGS**

 

OnJuly 2, 2004, we filed an Arbitration Demand with the American ArbitrationAssociation seeking arbitration of certain issues arising under ourNoncompetition Agreement (the “Agreement”) dated May 16, 1996, withCabela’s Incorporated (“Cabela’s”).  On July 2, 2004, we also filed aComplaint in the U.S. District Court for the District of Minnesota seeking adeclaratory judgment that a trademark licensing provision of the Agreement isunenforceable.  Although the noncompetition provisions of the Agreementexpired in June 2003, the Agreement may require us to grant a license tocertain of its trademarks that were in existence in 1996 to Cabela’s for itsuse in the “direct marketing business” (as defined in the Agreement) if weengage in active steps to enter the “direct marketing business.”  We filedthe Arbitration Demand and the Complaint to seek clarification as to theinterpretation and enforceability of the Agreement.

 

We are notable to predict the ultimate outcome of this litigation, but it may be costlyand disruptive.  The total costs may not be reasonably estimated at thistime. However, we do not expect costs incurred in connection with thislitigation during the fiscal year ending January 29, 2005 to exceed$500,000.  The outcome of this dispute may impact the manner in which wemarket our products in the future. It is not expected to impact the marketingof our products through retail stores.

 

**ITEM 2.****  CHANGES IN SECURITIES, USE OFPROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES**

 

Not applicable.

 

**ITEM 3.****  DEFAULTS UPON SENIOR SECURITIES**

 

Not applicable.

 

16

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**ITEM 4.****  SUBMISSION OF MATTERS TO A VOTEOF SECURITY HOLDERS**

 

None

 

**ITEM 5****.  OTHER INFORMATION**

 

Not applicable.

 

**ITEM 6.****  EXHIBITS AND REPORTS ON FORM8-K**

 

***(a) Exhibits filed with thisreport***

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                | ** ** | **Method of Filing**           |
|------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|
| 3.1              |       | Amended and  Restated Articles of Incorporation of the Registrant                                                                                                                                                                                                                                              |       | Incorporated  By Reference (1) |
|             |       |                                                                                                                                                                                                                                                                                                           |       |                           |
| 3.2              |       | Amended and  Restated Bylaws of the Registrant                                                                                                                                                                                                                                                                 |       | Incorporated  By Reference (2) |
|             |       |                                                                                                                                                                                                                                                                                                           |       |                           |
| 10.25            |       | Fourth Amendment  dated July 21, 2004, to Loan and Security Agreement among the Registrant,  Fleet Retail Group, Inc., as administrative, documentation and collateral  agent, Fleet Securities Inc., as the lead arranger, and Foothill Capital  Corporation as the syndication agent dated December 19, 2001 |       | Filed  Electronically          |
|             |       |                                                                                                                                                                                                                                                                                                           |       |                           |
| 10.26            |       | Amendment  No. 1 to Gander Mountain Company 2002 Stock Option Plan                                                                                                                                                                                                                                             |       | Incorporated  By Reference (3) |
|             |       |                                                                                                                                                                                                                                                                                                           |       |                           |
| 10.27            |       | Form of  Incentive Stock Option Agreement under Gander Mountain Company 2004 Omnibus  Stock Plan                                                                                                                                                                                                               |       | Incorporated  By Reference (4) |
|             |       |                                                                                                                                                                                                                                                                                                           |       |                           |
| 10.28            |       | Form of  Non-Statutory Stock Option Agreement (Employee) under Gander Mountain Company  2004 Omnibus Stock Plan                                                                                                                                                                                                |       | Incorporated  By Reference (5) |
|             |       |                                                                                                                                                                                                                                                                                                           |       |                           |
| 10.29            |       | Form of  Non-Statutory Stock Option Agreement (Director) under Gander Mountain Company  2004 Omnibus Stock Plan                                                                                                                                                                                                |       | Incorporated  By Reference (6) |
|             |       |                                                                                                                                                                                                                                                                                                           |       |                           |
| 31.1             |       | Rule  13a-14(a)/15d-14(a) Certification by Principal Executive Officer                                                                                                                                                                                                                                         |       | Filed  Electronically          |
|             |       |                                                                                                                                                                                                                                                                                                           |       |                           |
| 31.2             |       | Rule  13a-14(a)/15d-14(a) Certification by Principal Financial and Accounting  Officer                                                                                                                                                                                                                         |       | Filed  Electronically          |
|             |       |                                                                                                                                                                                                                                                                                                           |       |                           |
| 32               |       | Section 1350  Certifications                                                                                                                                                                                                                                                                                   |       | Filed  Electronically          |

 

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(1)          Incorporatedby reference to Exhibit 3.3 to Amendment No. 1 to the Registrant’s RegistrationStatement on Form S-1 (Registration No. 333-112494), filed with the Commissionon March 15, 2004.

(2)          Incorporatedby reference to Exhibit 3.4 to Amendment No. 1 to the Registrant’s RegistrationStatement on

 

17

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Form S-1 (Registration No. 333-112494), filed with the Commission onMarch 15, 2004.

(3)          Incorporatedby reference to Exhibit 99.2 to the Registrant’s Registration Statement on FormS-8 (Registration No.333-                   ),filed with the Commission on September 10, 2004.

(4)          Incorporatedby reference to Exhibit 99.4 to the Registrant’s Registration Statement on FormS-8 (Registration No.333-                   ),filed with the Commission on September 10, 2004.

(5)          Incorporatedby reference to Exhibit 99.5 to the Registrant’s Registration Statement on FormS-8 (Registration No.333-                   ),filed with the Commission on September 10, 2004.

(6)          Incorporatedby reference to Exhibit 99.6 to the Registrant’s Registration Statement on FormS-8 (Registration No.333-                   ),filed with the Commission on September 10, 2004.

 

**(b) *Reports on Form 8-K***

 

On May 20,2004, we furnished a Current Report on Form 8-K reporting that we issued apress release on May 19, 2004, disclosing our results of operations andfinancial condition for our fiscal quarter ended May 1, 2004.

 

On July 2,2004, we filed a Current Report on Form 8-K reporting that we filed anArbitration Demand with the American Arbitration Association seekingarbitration of certain issues arising under our Noncompetition Agreement datedMay 16, 1996, with Cabela’s Incorporated and that we also filed a Complaint inthe U.S. District Court for the District of Minnesota seeking a declaratoryjudgment that a trademark licensing provision of this noncompetition agreementis unenforceable.

 

**SIGNATURES**

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|                      |   GANDER  MOUNTAIN COMPANY                                                                                                                                                           |
|---------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                      |                                                                                                                                                                                           |
|                      |                                                                                                                                                                                           |
| Date:  September 13, 2004 |   By:  /s/ Mark R. Baker                                                                                                                                                             |   |
|                      |   Mark  R. Baker    *President and Chief Executive Officer*  (Principal Executive Officer)                                                                       |
|                      |                                                                                                                                                                                           |
|                      |                                                                                                                                                                                           |
| Date:  September 13, 2004 |   By:  /s/ Dennis M. Lindahl                                                                                                                                                         |   |
|                      |   Dennis  M. Lindahl    *Executive Vice President, Chief Financial  Officer,*  *Secretary and Treasurer*  (Principal Financial and Accounting Officer) |
|                           |                                                                                                                                                                                                |  |  |

 

18

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**EXHIBIT INDEX**

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                | ** ** | **Method of Filing**           |
|------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|
| 3.1              |       | Amended and  Restated Articles of Incorporation of the Registrant                                                                                                                                                                                                                                              |       | Incorporated  By Reference (1) |
|             |       |                                                                                                                                                                                                                                                                                                           |       |                           |
| 3.2              |       | Amended and  Restated Bylaws of the Registrant                                                                                                                                                                                                                                                                 |       | Incorporated  By Reference (2) |
|             |       |                                                                                                                                                                                                                                                                                                           |       |                           |
| 10.25            |       | Fourth  Amendment dated July 21, 2004, to Loan and Security Agreement among the Registrant,  Fleet Retail Group, Inc., as administrative, documentation and collateral  agent, Fleet Securities Inc., as the lead arranger, and Foothill Capital  Corporation as the syndication agent dated December 19, 2001 |       | Filed  Electronically          |
|             |       |                                                                                                                                                                                                                                                                                                           |       |                           |
| 10.26            |       | Amendment  No. 1 to Gander Mountain Company 2002 Stock Option Plan                                                                                                                                                                                                                                             |       | Incorporated  By Reference (3) |
|             |       |                                                                                                                                                                                                                                                                                                           |       |                           |
| 10.27            |       | Form of  Incentive Stock Option Agreement under Gander Mountain Company 2004 Omnibus  Stock Plan                                                                                                                                                                                                               |       | Incorporated  By Reference (4) |
|             |       |                                                                                                                                                                                                                                                                                                           |       |                           |
| 10.28            |       | Form of Non-Statutory  Stock Option Agreement (Employee) under Gander Mountain Company 2004 Omnibus  Stock Plan                                                                                                                                                                                                |       | Incorporated  By Reference (5) |
|             |       |                                                                                                                                                                                                                                                                                                           |       |                           |
| 10.29            |       | Form of  Non-Statutory Stock Option Agreement (Director) under Gander Mountain Company  2004 Omnibus Stock Plan                                                                                                                                                                                                |       | Incorporated  By Reference (6) |
|             |       |                                                                                                                                                                                                                                                                                                           |       |                           |
| 31.1             |       | Rule  13a-14(a)/15d-14(a) Certification by Principal Executive Officer                                                                                                                                                                                                                                         |       | Filed  Electronically          |
|             |       |                                                                                                                                                                                                                                                                                                           |       |                           |
| 31.2             |       | Rule  13a-14(a)/15d-14(a) Certification by Principal Financial and Accounting  Officer                                                                                                                                                                                                                         |       | Filed  Electronically          |
|             |       |                                                                                                                                                                                                                                                                                                           |       |                           |
| 32               |       | Section 1350  Certifications                                                                                                                                                                                                                                                                                   |       | Filed  Electronically          |

 

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(1)          Incorporatedby reference to Exhibit 3.3 to Amendment No. 1 to the Registrant’s RegistrationStatement on Form S-1 (Registration No. 333-112494), filed with the Commissionon March 15, 2004.

(2)          Incorporatedby reference to Exhibit 3.4 to Amendment No. 1 to the Registrant’s RegistrationStatement on Form S-1 (Registration No. 333-112494), filed with the Commissionon March 15, 2004.

(3)          Incorporatedby reference to Exhibit 99.2 to the Registrant’s Registration Statement on FormS-8 (Registration No.333-                   ),filed with the Commission on September 10, 2004.

(4)          Incorporatedby reference to Exhibit 99.4 to the Registrant’s Registration Statement on FormS-8 (Registration No. 333-                   ),filed with the Commission on September 10, 2004.

(5)          Incorporatedby reference to Exhibit 99.5 to the Registrant’s Registration Statement on FormS-8 (Registration No.333-                   ),filed with the Commission on September 10, 2004.

(6)          Incorporatedby reference to Exhibit 99.6 to the Registrant’s Registration Statement on FormS-8 (Registration No.333-                   ),filed with the Commission on September 10, 2004.

 

19

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