** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**WASHINGTON, D.C. 20549

 

**FORM 10-Q**

 

**(MARKONE)**

 

**QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLYPERIOD ENDED APRIL 29, 2006.**

**Commission File Number:  000-50659**

 

**GANDER MOUNTAIN COMPANY**

(Exact name of Registrant asSpecified in its Charter)

** **

| **Minnesota**                    | ** ** | ** **                                                                                                                   | ** ** | **41-1990949**      |
|----------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|
| (State  or Other Jurisdiction of |       | **180 East Fifth Street,  Suite 1300**                                                                                       |       | (I.R.S. Employer    |
| Incorporation or  Organization)  |       | **Saint Paul, Minnesota  55101**                                                                                             |       | Identification No.) |
|                             | ** ** | **(651) 325-4300**                                                                                                           |       |                |
|                             | ** ** | (Address, including zip  code, and telephone number, including area code, of Registrant’s Principal  Executive Offices) |       |                |

 

 

Indicateby check 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 x No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act. check one o largeaccelerated filer   x acceleratedfiler   onon-accelerated filer

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).  Yes o No x

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date:  Common Stock,$.01 par value; 14,285,287 shares outstanding as of June 1, 2006.

 

 

 

 

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**GANDERMOUNTAIN COMPANY**

**QUARTERLYPERIOD ENDED APRIL 29, 2006**

**Index**

 
| ** **                    | ** ** | ** ** | ** ** | ** **                                                                                  | ** ** | **Page** |
|-------------------------------|------------|------------|------------|---------------------------------------------------------------------------------------------|------------|----------|
| PART I. FINANCIAL INFORMATION |       |       |
|                          |       | Item 1.    |       | Unaudited Financial  Statements                                                             |       | 3        |
|                          |       |       |       | Statements of  Operations                                                                   |       | 3        |
|                          |       |       |       | Balance Sheets                                                                              |       | 4        |
|                          |       |       |       | Statements of Cash  Flows                                                                   |       | 5        |
|                          |       |       |       | Notes to  Unaudited Financial Statements                                                    |       | 6        |
|                          |       | Item 2.    |       | Management’s Discussion and  Analysis of Financial Condition and Results of Operations |       | 12       |
|                          |       | Item 3.    |       | Quantitative  and Qualitative Disclosures About Market Risk                                 |       | 19       |
|                          |       | Item 4.    |       | Controls and  Procedures                                                                    |       | 19       |
|                          |       |       |       |                                                                                        |       |     |
| PART II. OTHER  INFORMATION   |       |       |
|                          |       | Item 1.    |       | Legal Proceedings                                                                           |       | 20       |
|                          |       | Item 1A.   |       | Risk Factors                                                                                |       | 20       |
|                          |       | Item 2.    |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                |       | 20       |
|                          |       | Item 3.    |       | Defaults Upon  Senior Securities                                                            |       | 20       |
|                          |       | Item 4.    |       | Submission of  Matters to a Vote of Security Holders                                        |       | 21       |
|                          |       | Item 5.    |       | Other Information                                                                           |       | 21       |
|                          |       | Item 6.    |       | Exhibits                                                                                    |       | 21       |
| SIGNATURES                    |       | 22         |
|                               |            |            |            |                                                                                             |            |          |  |  |  |  |

 

 

2

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**PART I. FINANCIAL INFORMATION**

**ITEM 1.  FINANCIAL STATEMENTS**

 

**Gander Mountain Company**

**Statementsof Operations -Unaudited**

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

 

 
| ** **                                  | ** ** | **13 Weeks Ended** | ** **    |
|---------------------------------------------|------------|--------------------|---------------|
| ** **                                  | ** ** | **April 29,**      | ** **    | **April 30,** | ** ** |
| ** **                                  | ** ** | **2006**           | ** **    | **2005** | ** ** |
| Sales                                       |       | $                  |  155,581 |   | $ |  135,259 |   |
| Cost of goods sold                          |       | 128,589            |          | 109,949 |   |
| Gross profit                                |       | 26,992             |          | 25,310 |   |
| Operating expenses:                         |       |               |          |   |   |
| Store operating expenses                    |       | 35,855             |          | 32,570 |   |
| General and administrative expenses         |       | 9,353              |          | 8,384 |   |
| Gain on contract settlement                 |       | —             |          | (2,500 | ) |
| Pre-opening expenses                        |       | 765                |          | 2,759 |   |
| Loss from operations                        |       | (18,981            | )             | (15,903 | ) |
| Interest expense, net                       |       | 3,986              |          | 1,665 |   |
| Loss before income taxes                    |       | (22,967            | )             | (17,568 | ) |
| Income tax provision                        |       | —             |          | — |   |
| Net loss                                    |       | $                  |  (22,967 | ) | $ |  (17,568 | )  |
|                                        |       |               |          |   |   |
| Basic and diluted loss per  share           |       | $                  |  (1.61   | ) | $ |  (1.23 | )  |
|                                        |       |               |          |   |   |
| Weighted average common  shares outstanding |       | 14,285             |          | 14,235 |   |
|                                             |            |                    |               |  |  |  |  |  |

 

See accompanying notes to unaudited financialstatements.

 

3

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**Gander Mountain Company**

**BalanceSheets**

**(In thousands)**

 

 
| ** **                                                                                                             | ** ** | **April 29,** | ** **    | **January 28,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|---------------|---------------|-----------------|------------|
| ** **                                                                                                             | ** ** | **2006**      | ** **    | **2006**        | ** ** |
| **Assets**                                                                                                             |       | (Unaudited)   |          |            |       |
| Current assets:                                                                                                        |       |          |          |            |       |
| Cash and cash equivalents                                                                                              |       | $             | 1,576         |            | $          | 1,580 |   |
| Accounts receivable                                                                                                    |       | 12,061        |          | 7,215           |       |
| Inventories                                                                                                            |       | 332,617       |          | 308,395         |       |
| Prepaids and other current assets                                                                                      |       | 7,584         |          | 4,557           |       |
| Total current assets                                                                                                   |       | 353,838       |          | 321,747         |       |
| Property and equipment, net                                                                                            |       | 130,708       |          | 132,447         |       |
| Other assets, net                                                                                                      |       | 4,884         |          | 4,736           |       |
| Total assets                                                                                                           |       | $             | 489,430       |            | $          | 458,930 |   |
|                                                                                                                   |       |          |          |            |       |
| **Liabilities and shareholders’  equity**                                                                         | ** ** | ** **    | ** **    | ** **      | ** ** |
| Current liabilities:                                                                                                   |       |          |          |            |       |
| Borrowings under credit facility                                                                                       |       | $             | 200,555  |            | $          | 174,936 |   |
| Accounts payable                                                                                                       |       | 66,106        |          | 35,465          |       |
| Accrued and other current liabilities                                                                                  |       | 38,520        |          | 41,779          |       |
| Total current liabilities                                                                                              |       | 305,181       |          | 252,180         |       |
|                                                                                                                   |       |          |          |            |       |
| Unsecured conertible note  payable                                                                                     |       | 20,000        |          | 20,000          |       |
| Other long term  liabilities                                                                                           |       | 37,096        |          | 36,925          |       |
|                                                                                                                   |       |          |          |            |       |
| Shareholder's equity:                                                                                                  |       |          |          |            |       |
| Preferred stock ($.01 par value, 5,000,000 shares  authorized; no shares issued and outstanding)                       |       | —        |          | —          |       |
| Common stock ($.01 par value, 100,000,000 shares  authorized; 14,285,287 and 14,246,925 shares issued and outstanding) |       | 143           |          | 143             |       |
| Additional paid-in-capital                                                                                             |       | 192,552       |          | 192,257         |       |
| Notes receivable from shareholders                                                                                     |       | (4,100        | )             | (4,100          | )          |
| Accumulated deficit                                                                                                    |       | (61,442       | )             | (38,475         | )          |
| Total  shareholders' equity                                                                                            |       | 127,153       |          | 149,825         |       |
| Total liabilities and shareholders' equity                                                                             |       | $             | 489,430  |            | $          | 458,930 |   |

 

See accompanying notes to unaudited financialstatements.

 

4

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**Gander Mountain Company**

**Statementsof Cash Flows - Unaudited**

**(In thousands)**

 
| ** **                                     | ** ** | **13 Weeks Ended** | ** ** |
|------------------------------------------------|------------|--------------------|------------|
| ** **                                     | ** ** | **April 29,**      | ** ** | **April 30,** | ** ** |
| ** **                                     | ** ** | **2006**           | ** ** | **2005** | ** ** |
| **Operating activities**                       | ** ** | ** **         | ** ** | ** ** | ** ** |
| Net loss                                       |       | $                  | (22,967    | ) | $ | (17,568 | ) |
| Adjustments to reconcile  net loss to net cash |       |               |       |   |   |
| used in operating activities:                  |       |               |       |   |   |
| Depreciation and amortization                  |       | 5,462              |       | 3,727 |   |
| Stock-based compensation expense               |       | 301                |       | 14 |   |
| Loss on disposal of property and equipment     |       | 111                |       | — |   |
| Change in operating assets and liabilities:    |       |               |       |   |   |
| Accounts receivable                            |       | (4,846             | )          | (6,858 | ) |
| Inventories                                    |       | (24,222            | )          | (44,344 | ) |
| Prepaid expenses and other assets              |       | (3,341             | )          | (1,337 | ) |
| Accounts payable and other liabilities         |       | 27,547             |       | 53,325 |   |
| Net cash used in operating  activities         |       | $                  | (21,955    | ) | $ | (13,041 | ) |
|                                           |       |               |       |   |   |
| **Investing activities**                       | ** ** | ** **         | ** ** | ** ** | ** ** |
| Purchase of property and  equipment, net       |       | $                  | (3,668     | ) | $ | (13,723 | ) |
| Net cash used in investing  activities         |       | $                  | (3,668     | ) | $ | (13,723 | ) |
|                                           |       |               |       |   |   |
| **Financing activities**                       | ** ** | ** **         | ** ** | ** ** | ** ** |
| Borrowings under credit  facility, net         |       | $                  | 25,619     |   | $ | 26,745 |   |
| Proceeds from exercise of  stock options       |       | —             |       | 207 |   |
| Net cash provided by  financing activities     |       | $                  | 25,619     |   | $ | 26,952 |   |
| Net increase (decrease) in  cash               |       | (4                 | )          | 188 |   |
| Cash, beginning of period                      |       | 1,580              |       | $ | 1,033 |   |
| Cash, end of period                            |       | $                  | 1,576      |   | $ | 1,221 |   |
|                                                |            |                    |            |  |  |  |  |  |

 

See accompanying notes to unaudited financialstatements.

 

5

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**Gander Mountain Company**

**Notes toUnaudited Financial Statements**

**Quarterly Period Ended April 29,2006**

 

**1. Basis of Presentation**

The accompanying unaudited financialstatements of Gander Mountain Company (“we” or “us”) have been prepared inaccordance with the requirements for Form 10-Q and do not include all thedisclosures normally required in annual financial statements prepared inaccordance with U.S. generally accepted accounting principles. The interimfinancial information as of April 29, 2006 and for the 13 weeks ended April 29,2006 and April 30, 2005, is unaudited and has been prepared on the same basisas the audited annual financial statements. In the opinion of management, thisunaudited information includes all adjustments necessary for a fairpresentation of the interim financial information. All of these adjustments areof a normal recurring nature. These interim financial statements filed on thisForm 10-Q and the discussions contained herein should be read in conjunctionwith the annual financial statements and notes included in our Annual Report onForm 10-K for the fiscal year ended January 28, 2006, as filed with theSecurities and Exchange Commission, which includes audited financial statementsfor our three fiscal years ended January 28, 2006.

Our business isseasonal in nature and interim results may not be indicative of results for afull year. Historically, we have realized more of our sales in the latter halfof our fiscal year, which includes the hunting and holiday seasons. Ourbusiness is also impacted by the timing of new store openings. Both variationin seasonality and new store openings impact the analysis of the results ofoperations and financial condition for comparable periods.

**2. Stock-Based Compensation**

Effective January 29, 2006, weadopted the fair-value recognition provisions of the Financial AccountingStandards Board’s Statement No. 123 (revised 2004), *Share-Based Payment* (“SFAS 123R”), which requires themeasurement and recognition of compensation expense for all stock-based paymentawards made to employees and directors including employee stock option awardsand employee stock purchases made under our employee stock purchase plan. Weadopted the provisions of SFAS 123R, using the modified-prospective transitionmethod. Under this transition method, stock-based compensation expense wasrecognized in the financial statements for the 13 weeks ended April 29, 2006,for granted, modified or settled stock options and for expense related to theemployee stock purchase plan. The provisions of SFAS 123R apply to new stockoptions and stock options outstanding, but not yet vested, on the effectivedate of January 29, 2006. Results for prior periods have not been restated,in accordance with the modified-prospective transition method.

We previously applied the provisionsof Accounting Principles Board Opinion No. 25, *Accountingfor Stock Issued to Employees* (“APB No. 25”) and relatedinterpretations and provided the required pro forma disclosures in the notes tothe financial statements pursuant to Statement No. 123, *Accounting for Stock-Based Compensation.*Prior tofiscal 2006, generally no stock-based compensation expense was recognized inour statements of operations for employee stock options, as the exercise pricewas equal to the market price of our stock on the date of grant.

***Share******-******based******awards*****-** In February 2004, we adopted the 2004 Omnibus StockPlan, which currently authorizes the granting of stock-based awards covering upto 4,000,000 shares of common stock. 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. Under this plan, as of April29, 2006, there were 2,904,194 options to purchase common stockoutstanding.  The options granted underthis plan, for which vesting was not accelerated in fiscal year 2005, primarilyvest in three equal annual increments from the date of grant. Outstandingoptions to purchase common stock under this plan which are fully vested andexercisable were 1,846,170. These vested options have a weighted-averageexercise price of $13.80 per share, a weighted-average remaining life of 8.5years and have an aggregate intrinsic value of approximately $40,000 at April29, 2006.

 

6

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In February 2002, we implemented the 2002Stock Option Plan, a compensatory nonqualified stock option plan for certainstore and office management personnel. As of April 29, 2006, there were 156,116options outstanding under this plan to purchase common stock with the abilityto exercise being contingent upon the attainment of a $32.06 per share pricefor our common stock as of the end of a fiscal year based upon the higher ofthe closing price on the last day of the fiscal year or a five-day trailingaverage stock price taken at that time. These options have a 10-year life with vesting subject to our meetingthe targeted stock price of $32.06 per share at a fiscal year end.  The exercise price is $4.47 per share. We areno longer authorized to grant any awards under the 2002 Stock Option Plan.

Wehave also granted other options to certain members of our management team onseveral dates prior to fiscal year 2005. The exercise price in all cases wasthe fair value of the underlying common stock on the date of grant, withexercise periods of up to ten years. As of April 29, 2006, there were 897,352options to purchase common stock outstanding under these grants, all of whichare fully vested and exercisable. These vested options have a weighted-averageexercise price of $9.33 per share, a weighted-average remaining life of 5.6years and have an aggregate intrinsic value of approximately $410,000 at April29, 2006.

Asof April 29, 2006, there were a total of 3,957,662 options to purchase commonstock outstanding, under all of our stock option plans and non-plan stock options,with a weighted average exercise price of $10.40 and a weighted averageremaining life of 8.1 years.  Theseoptions vest in equal increments primarily over periods of three years from thedate of grant, although certain grants have been made with shorter vestingschedules and the vesting of certain stock options was accelerated in fiscal2005. The following table summarizes stock-based payment award activity for the13 weeks ended April 29, 2006:

 
| ** **                                                                         | ** ** | **Number of  Shares Under  Option** | ** ** | **Weighted-  Average  Exercise  Prices** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------------|------------|------------------------------------------|------------|
| Outstanding - January 28,  2006                                                    |       | 3,680,804                           |       | $                                        | 10.84      |   |
| Granted                                                                            |       | 395,767                             |       | $                                        | 6.45       |   |
| Exercised                                                                          |       | —                              |       | $                                        | 0.00       |   |
| Forfeited                                                                          |       | (118,909                            | )          | $                                        | 10.89      |   |
| Outstanding - April 29,  2006                                                      |       | 3,957,662                           |       | $                                        | 10.40      |   |
|                                                                               |       |                                |       |                                     |       |
| Weighted-average  Black-Scholes fair value of options   granted during the quarter |       | $                                   | 3.16       |                                     |

 

InFebruary 2005, our board of directors approved the establishment of an employeestock purchase plan (ESPP) that enables substantially all fulltime employees topurchase common stock by contributions through payroll deductions. Purchases ofcommon stock are made from accumulated employee contributions at the end ofdesignated six-month purchase periods. Pursuant to the terms of the ESPP, wehave currently established a 10% discount from the stock price on thedesignated purchase date. Since the purchase discount exceeds the amountallowed under SFAS 123R for non-compensatory treatment, we recorded expense of$6,000 for the ESPP in the 13 weeks ended April 29, 2006. There was not adesignated purchase date during the 13 weeks ended April 29, 2006 or April 30,2005. As of April 29, 2006, 28,362 shares had been issued under the ESPP and471,638 shares were available for issuance.

** **

**7**

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** **

**The stock options outstanding andexercisable for share-based payment awards as of April 29, 2006 were in thefollowing exercise price ranges:**

 
| ** **                     | ** **    | **Options Outstanding**  | ** ** | **Options Exercisable**                                              | ** ** |
|--------------------------------|---------------|--------------------------|------------|----------------------------------------------------------------------|------------|
| **Range of   Exercise Prices** | ** **    | **Number   Outstanding** | ** ** | **Weighted-**

**Average**

**Remaining**

**Contractual**

**Life** | ** ** | **Weighted**

**Average**

**Exercise**

**Price** | ** ** | **Number**

**Outstanding** | ** ** | **Weighted-**

**Average**

**Exercise**

**Price** | ** ** |
| $                              | 4.47  - 7.99  |                     | 1,167,474  |                                                                 | 9.2  Years |   | $ | 5.77 |   | 10,000 |   | $ | 5.00 |   |
| 8.00  - 11.99                  |          | 1,775,910                |       | 7.3  Years                                                           |       | 9.79 |   | 1,719,244 |   | 9.74 |   |
| 12.00  - 15.99                 |          | 80,400                   |       | 8.6  Years                                                           |       | 12.90 |   | 80,400 |   | 12.90 |   |
| 16.00  - 19.99                 |          | 757,728                  |       | 8  Years                                                             |       | 16.00 |   | 757,728 |   | 16.00 |   |
| 20.00  - 23.99                 |          | 136,150                  |       | 8.3  Years                                                           |       | 21.45 |   | 136,150 |   | 21.45 |   |
| 24.00  - 24.40                 |          | 40,000                   |       | 8  Years                                                             |       | 24.40 |   | 40,000 |   | 24.40 |   |
| $                              | 4.47  - 24.40 |                     | 3,957,662  |                                                                 | 8.1  Years |   | $ | 10.40 |   | 2,743,522 |   | $ | 12.34 |   |

*** ***

***Impact of the adoption of Statement 123R*** - The amountof compensation expense for stock-based awards to be recognized during a periodis based on the portion of the awards that are ultimately expected to vest. Weestimate option forfeitures at the time of grant and revise those estimates insubsequent periods if actual forfeitures differ significantly from thoseestimates. Cost is recognized using a straight-line amortization method overthe requisite service period**,**whichtypically is the vesting period. The impact on our results of operations andloss per share from recording stock-based compensation for the 13 weeks endedApril 29, 2006 is shown in the table below. There was no impact on cash flows.

 
| ** **                           | ** ** | **Before  123R  expense**                | ** ** | **Stock-  based  expense** | ** ** | **As reported** | ** ** |
|--------------------------------------|------------|------------------------------------------|------------|----------------------------|------------|-----------------|------------|
| ** **                           | ** ** | *(in  thousands, except per share data*) | ** ** |
| Cost of goods sold                   |       | $                                        | 128,581    |                       | 8          |            | $          | 128,589 |   |
| Store operating expenses             |       | 35,794                                   |       | 61                         |       | 35,855          |       |
| General and administrative  expenses |       | 9,186                                    |       | 167                        |       | 9,353           |       |
| Loss from operations                 |       | (18,745                                  | )          | (236                       | )          | (18,981         | )          |
| Net loss                             |       | (22,731                                  | )          | (236                       | )          | (22,967         | )          |
| Basic and diluted loss per  share    |       | $                                        | (1.59      | )                          | $          | (0.02           | )          | $ | (1.61 | ) |
|                                      |            |                                          |            |                            |            |                 |            |  |  |  |

 

                At April 29, 2006, there wasapproximately $2,500,000 of total unrecognized stock-based compensation expenserelated to unvested option awards. Unrecognized stock-based compensation isexpected to be recognized over a weighted-average period of 2.7 years.

Inaddition to stock-based compensation expense of $236,000, we recorded expenseof $65,000 for options to purchase stock issued to non-employees prior tofiscal year 2006.

 

8

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***                ValuationAssumptions*******- We have estimated the fairvalue of all stock option awards as of the date of the grant by applying theBlack-Scholes Merton option pricing valuation model. The application of thisvaluation model involves assumptions that are judgmental and sensitive in thedetermination of the resulting compensation expense. The key assumptions usedin determining the fair value of options granted in the 13-week period endedApril 29, 2006, and a summary of the methodology applied to develop eachassumption are as follows:

 

 
| ** **                           | ** ** | **13 Weeks Ended** | ** ** |
|--------------------------------------|------------|--------------------|------------|
| ** **                           | ** ** | **April 29, 2006** | ** ** | **April 30, 2005** | ** ** |
| Average risk-free interest  rate (1) |       | 4.69               | %          | 4.34 | % |
| Expected stock price  volatility (2) |       | 50                 | %          | 50 | % |
| Expected term (years) (3)            |       | 5                  |       | 5 |   |
| Expected dividend yield  (4)         |       | 0.0                | %          | 0.0 | % |

 

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*(1) Risk-Free Interest Rate*:This is the U.S. Treasury zero-coupon rate, as of the grant date, for issueshaving a term equal to the expected term of the stock option. An increase inthe risk-free interest rate will increase compensation expense.

*(2) Expected Stock Price Volatility*: This is ameasure of the amount by which a stock’s price is expected to fluctuate duringthe estimated expected life for an award. Due to lack of historical databecause of our short life as a public company, the volatility factor wasderived from considering volatility factors used by peers in our market sector.An increase in the expected stock price volatility will increase compensationexpense. 

*(3) Expected Term*: This is the period of timeover which granted stock options are expected to remain outstanding based onhistorical experience. This is an estimate based on management’s considerationof expected exercise behavior, past accelerations of vesting provisions, lifecycle of the company and the expected term factors used by peers in our marketsector.  An increase in the expected termwill increase compensation expense.

*(4) Expected Dividend Yield*: We historically have notmade any dividend payments, nor do we expect to pay dividends in theforeseeable future. An increase in the dividend yield will decreasecompensation expense.

***Pro forma Information for Period Prior tothe Adoption of Statement 123R*****-**Because we wentpublic in 2004, all options granted prior to 2004 were accounted for inaccordance with APB No. 25.  Our ESPP wasdeemed non-compensatory under the provisions of APB No. 25.  Stock-based compensation costs were reflectedin net earnings where the options granted under those plans had an exerciseprice that was less than the fair value of the underlying common stock on thedate of grant. Previously reported amounts have not been restated. The proforma information for the 13 weeks ended April 30, 2005 was as follows(presented alongside the actual results for the 13 weeks ended April 29, 2006for comparability):

 
| ** **                                                                                | ** ** | **13 Weeks Ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                                | ** ** | **April 29, 2006** | ** ** | **April 30, 2005** | ** ** |
| Net loss, as reported                                                                     |       | $                  | (22,967    | ) | $ | (17,568 | ) |
| Add: Stock-based employee  compensation expense in reported net loss                      |       | 236                |       | — |   |
| Deduct: Stock-based  employee compensation expense determined under the fair value method |       | (236               | )          | (7,165 | ) |
| Pro forma net loss                                                                        |       | $                  | (22,967    | ) | $ | (24,733 | ) |
| Loss per common share:                                                                    |       |               |       |   |   |
| Basic and diluted - as reported                                                           |       | $                  | (1.61      | ) | $ | (1.23 | ) |
| Basic and diluted - pro forma                                                             |       | $                  | (1.61      | ) | $ | (1.74 | ) |

 

9

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During fiscal 2005, our compensationcommittee of our board of directors accelerated the vesting for certainoutstanding options to purchase common stock that had exercise prices greaterthan the closing price of our common stock on the dates of approval. Weaccelerated the vesting of options to purchase a total of approximately 2,696,000shares of common stock, on March 2, 2005 and November 30, 2005. As a result ofthe accelerations, all of these options became fully exercisable and remainexercisable through their respective termination dates, which vary, but do notextend past 2015. The pro-forma expense of $7,165,000 reflected above for the13 weeks ended April 30, 2005 is primarily a result of the March 2, 2005vesting acceleration.

                ***Otherrecent accounting pronouncements -*** In November 2005, theFASB issued Staff Position No. FAS 123(R)-3, *TransitionElection Related to Accounting for the Tax Effects of Share-Based PaymentAwards* (“FSP 123R-3”). We elected to adopt the alternativetransition method provided in FSP 123R-3 for calculating the tax effects ofstock-based compensation under SFAS 123R. The alternative transition methodincludes simplified methods to establish the beginning balance of theadditional paid-in-capital pool (“APIC pool”) related to the tax effects ofstock-based compensation and for determining the impact on the APIC pool andstatements of cash flows of the tax effects of stock-based compensation awardsthat are outstanding upon adoption of SFAS 123R. Our adoption of this guidancedid not have a material impact on our net earnings, cash flows or financialposition.

**3. Capital Stock**

Since the completion of our initialpublic offering on April 26, 2004, and the filing of our amended and restatedarticles of incorporation in connection therewith, the authorized capital stockof our company consists of 100,000,000 shares of common stock, par value $.01per share, and 5,000,000 shares of preferred stock, par value $.01 per share.As of April 29, 2006, there were 14,285,287 shares of common stock and noshares of preferred stock outstanding.

**4. Credit Facility**

Our credit facility provides us withthe capital to fund the growth and operation of our business. Currently, therevolving credit facility provides availability of $275,000,000 which may befurther increased to $300,000,000, subject to certain conditions including theabsence of default. In addition to the existing $275,000,000 revolving creditfacilty, we have a $20,000,000 term loan for a total credit facility of$295,000,000. The credit facility has a maturity date of June 30, 2009.

On March 3, 2006, we amended andrestated our credit facility. The principal purpose of the amendment was to adda $20 million term loan to the credit facility. The amount of the term loan isnot deducted in determining availability under the revolving credit facility,except to the extent that the balance of the term loan exceeds approximately 4%to 5% of the eligible borrowing base. The term loan matures on June 30, 2009and bears interest at either (a) 2% over the higher of Bank of America’s primerate or the federal funds rate plus 0.5%, or (b) LIBOR plus 4%.  This additional financing was obtained tomaintain the liquidity levels necessary to fund continued growth and seasonalcash flow needs.

Effective May 25, 2006, we amendedour credit facility to adjust the level of the EBITDA covenants for the monthsof April 2006 through July 2006. As amended, testing of the EBITDA covenant isrequired when our availability is less than 10% of the lesser of (a) therevolving credit facility maximum on any given day or (b) the borrowing base,as defined and adjusted for certain reserves. The credit facility also specifies quarterly testing of the operatingcash flow covenant. Other substantive terms of the agreement were notmaterially changed in the May 25, 2006 amendment. We are in compliance with allcovenants of the credit facility.

Outstandingborrowings under the credit facility, including letters of credit, were $207.1million and $147.4 million as of April 29, 2006 and April 30, 2005,respectively. Our total remaining borrowing capacity under the credit facility,after subtracting letters of credit, was $24.1 million as of April 29, 2006 and$63.5 million as of April 30, 2005.

**5. Earnings Per Share**

Basic and diluted loss per share isbased upon the weighted average number of shares outstanding. All potentiallydilutive stock options have been excluded from the calculation of weightedaverage shares outstanding for both 13-week periods presented because theirinclusion would have an anti-dilutive effect on loss per share. In addition, wehave excluded any potentially dilutive shares related to the outstandingconvertible debt from the calculation of weighted average shares outstandingbecause their inclusion would have an anti-dilutive effect on loss

 

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per share. If the convertible debt instrument was convertedto common stock, these shares would amount to at least 1,250,000 shares ofstock with additional shares issued depending on the amount of accrued interestat the time of conversion.  As of April29, 2006 and April 30, 2005, there were a total of 3,957,662 and 3,004,407options to purchase common stock outstanding, respectively.

**6. Contract Settlement**

In March 2005, we received $2,500,000relating to the termination of our contract with the former provider of ourco-branded credit card services in consideration of the lost opportunity. Wehave reclassified this item in our fiscal 2005 statement of operations from areduction of general and administrative expenses to gain on contract settlementin the 13 weeks ended April 30, 2005.

**7. Selected Balance Sheet Information (in thousands)**

 
| ***Accrued and other current  liabilities consist of:*** | ** ** | **April 29,  2006** | ** **   | **January 28,  2006** | ** ** |
|----------------------------------------------------------|------------|---------------------|--------------|-----------------------|------------|
| Gift cards and gift  certificate liabilities             |       | $                   |  17,680 |                  | $          |  23,413 |   |
| Payroll and related fringe  benefits                     |       | 2,216               |         | 4,183                 |       |
| Sales, property and use  taxes                           |       | 4,758               |         | 3,436                 |       |
| Lease related costs                                      |       | 1,267               |         | 1,232                 |       |
| Insurance reserves and  liabilities                      |       | 1,676               |         | 1,453                 |       |
| Interest                                                 |       | 1,128               |         | 1,235                 |       |
| Capital lease obligations                                |       | 703                 |         | 697                   |       |
| Due-to-related parties                                   |       | 55                  |         | 89                    |       |
| Other accruals and current  liabilities                  |       | 9,037               |         | 6,041                 |       |
| **Accrued and other current liabilities**                |       | $                   | 38,520       |                  | $          | 41,779 |   |

 
| ***Other long-term liabilities  consist of:*** | ** ** | **April 29,  2006** | ** ** | **January 28,  2006** | ** ** |
|------------------------------------------------|------------|---------------------|------------|-----------------------|------------|
| Deferred rent                                  |       | $                   | 24,517     |                  | $          | 24,288 |   |
| Capitalized lease obligations                  |       | 10,775              |       | 10,953                |       |
| Insurance reserves and  other liabilities      |       | 1,804               |       | 1,684                 |       |
| **Other long-term liabilities**                |       | $                   | 37,096     |                  | $          | 36,925 |   |

 

**8. Contingencies - Litigation**

***Contingent Trademark Litigation*****- **On July 2,2004, we filed a complaint in the U.S. District Court for the District ofMinnesota seeking declaratory relief that the contingent trademark licensingprovision of a noncompetition agreement dated May 16, 1996, made between ourpredecessor and Cabela’s Incorporated, is invalid and unenforceable  Although the noncompetition provisions of thenoncompetition agreement expired in June 2003, Cabela’s contends that acontingent trademark licensing provision of the noncompetition agreement nowrequires us to grant Cabela’s a license to certain of our trademarks that werein existence in 1996.

                On August 18, 2005, the courtruled that the contingent trademark licensing provision is not legally invalidas a noncompetition agreement and dismissed our complaint.  The court also acknowledged that it had notbeen asked at that point to determine, and was not determining, the scope ofthe contingent trademark license or the parties respective rightsthereunder.  In December 2005, the courtgranted our motion to file an amended reply to Cabela’s counterclaim in whichwe raised multiple additional issues regarding the validity and enforceabilityof any trademark rights allegedly possessed by Cabela’s, and any limitationsupon our rights to engage in certain marketing activities under the trademarksat issue.  These issues remain before thecourt.  Discovery is currently underwayand the court has established a trial-ready date of May 1, 2007.

Weare not able to predict the ultimate outcome of such proceedings, but they maybe costly and disruptive. The total costs may not be reasonably estimated atthis time. The outcome of this dispute may impact the manner in 

 

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whichwe market our products in certain distribution channels in the future. Itis not expected to have any affect on the marketing of our products through ourretail stores.

##### ***DerivativeLitigation*******- Aspreviously reported, our company, as a nominal defendant, and certain of ourpresent and former directors were named as defendants in a purported derivativeaction,*Kurt Haberle v. Mark R. Baker, et al*,that was filed on February 11, 2005 in the U.S. District Court for theDistrict of Minnesota.   OnAugust 30, 2005, the court issued an order dismissing the complaintwithout prejudice on the grounds that plaintiff was required to make pre-suitdemand on our board of directors and failed to do so. The plaintiff filed amotion to alter or amend the judgment.  On May 16, 2006, the court enteredjudgment denying plaintiff’s motion and dismissed the case. The plaintiff has30 days to appeal the entry of the judgment. We do not expect the outcome ofthis litigation to have a material affect on our financial condition or resultsof operations.

***Other Legal Claims*****-**Various claims and lawsuitsarising in the normal course of business may be pending against us from time totime. The subject matter of these proceedings typically relate to commercialdisputes and employment issues. As of the date of this report, we are not aparty to any legal proceedings that are expected, individually or in theaggregate, to have a material adverse effect on our financial condition orresults of operations.

**9. Subsequent Event**

On May 25, 2006, we completed anamendment to our credit facility agreement. Refer to Note 4 for further information.

 

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

**ForwardLooking Statements**

                The following discussion maycontain forward-looking statements regarding us, our business prospects and ourresults of operations that are subject to certain risks and uncertainties posedby many factors and events that could cause our actual business, prospects andresults of operations to differ materially from those that may be anticipatedby such forward-looking statements. Factors that could cause or contribute to such differences include, butare not limited to, those described in the “Risk Factors” section of our Form10-K and other reports, as filed with the Securities and ExchangeCommission.  Readers are cautioned not toplace undue reliance on these forward-looking statements, which speak only asof the date of this report.  We undertakeno obligation to revise any forward-looking statements in order to reflectevents or circumstances that may subsequently arise. Readers are urged tocarefully review and consider the various disclosures made by us in this reportand in our other reports filed with the Securities and Exchange Commission thatadvise interested parties of the risks and factors that may affect ourbusiness.

The interim financials statements filed on this Form 10-Q andthe discussions contained herein should be read in conjunction with the annualfinancial statements and notes included in our Form 10-K, as filed with theSecurities and Exchange Commission, which includes audited financial statementsfor our three fiscal years ended January 28, 2006.

**Overview**

GanderMountain Company operates the nation’s largest retail network of storesspecializing in hunting, fishing, camping, marine and outdoor lifestyleproducts and services. We have expanded our store base from 26 stores in 1997to our current base of 100 conveniently located Gander Mountain outdoorlifestyle stores, providing approximately 5.2 million square feet of retailspace in 18 states — Arkansas, Colorado, Illinois, Indiana, Iowa, Kansas,Kentucky, Maryland, Michigan, Minnesota, New York, North Carolina, NorthDakota, Ohio, Pennsylvania, Texas, Virginia and Wisconsin. We anticipateopening  five additional new storesduring the remainder of fiscal 2006.

Our core strategy and focus is to provideour target customers with a unique combination of a broad assortment of outdoorequipment, accessories, related technical apparel and footwear; expertservices; convenient locations and value pricing. Our stores feature anextensive selection of leading national and regional brands as well as ourcompany’s owned brands. We tailor our merchandise assortments to take advantageof our customers’ seasonal and regional or local preferences. We seek tocombine this broad product offering with superior customer service based on ourstore associates’ extensive product knowledge and outdoor-related experience.

 

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Since its origin in 1960, our brand name hashad a heritage of strong appeal and relevance to consumers who participate inoutdoor sports and recreation activities, based on our “We Live Outdoors”culture and theme. From 1960 to 1996, our predecessor operated a nationwidecatalog business that, by 1996, included 17 retail stores. In 1996 and 1997,Holiday Companies, which at the time owned and operated a group of retailsporting goods stores, acquired these Gander Mountain retail stores, formed ourcompany and began to build a new outdoor lifestyle business.

In March2003, we began transforming our market position from a traditional specialtystore to a large-format, category-focused store by opening new stores in alarge format and increasing the selling space within our original, small-formatstores. Prior to March 2003, our typical store was approximately 31,000 squarefeet. Our large-format stores are over 50,000 square feet, and are located withconvenient access to a major highway. They have a warehouse-style shoppingenvironment characterized by concrete floors, open-bar joist ceilings,high-density racking and wide aisles, which reinforces our overall valueproposition to our customers and enables us to substantially increase thebreadth and depth of our product and service offerings. Most of ourlarge-format stores offer all-terrain vehicles (ATVs), and some carry anexpanded assortment of fishing and recreational boats. Our large-format storesoffer unique features and specialized services, including a full-servicegunsmith shop, a full-service archery pro shop, archery target lanes, and apower shop performing repairs for ATVs, boats and other small engines. Some ofthe large-format stores also include a bait shop that opens early for theconvenience of our customers. Nearly all of our stores have a Gander Mountain Lodge,which is an in-store meeting room available for public use, where we providehunter safety classes, outdoor-skills seminars and other community-focusedactivities. We utilize outside selling areas adjacent to some of ourlarge-format stores to display additional offerings of larger items such asATVs, boats, kayaks, trailers and canoes. These increase the efficiency of ourstores and also give those products greater visibility. Currently, 50 of our100 stores are large format stores.

Weare utilizing several strategic and operating initiatives aimed at improvingour merchandise offerings, enhancing profitability and expanding the number andgeographic diversity of our stores.  Wemeasure performance using key operating statistics such as comparable storesales, sales per square foot, gross margin percentage and store operatingexpenses, with a focus on labor, as a percentage of sales.

Wealso measure and evaluate investments in our retail locations, includinginventory and property and equipment. Inventory performance is primarilymeasured by inventory per square foot and by inventory turns, or the number oftimes store inventory turns over in a given period, and amounts of ownedinventory at various times based on payment terms from our vendors. The mostsignificant investments in property and equipment are made at the time a storeis opened by us.

Webelieve that the overall growth of our business will allow us to generallymaintain or increase our product gross margins. Increased merchandise volumes shouldenable us to improve our purchasing leverage and achieve greater supportthroughout the supply chain. The mix of merchandise in our total sales alsoinfluences our product gross margins. As we continue sales and store growth, anumber of other factors may impact, positively or negatively, our product grossmargin percentage, including:

•                  the introduction of newproduct categories with varying gross margin percentage characteristics,

•                  changes in the merchandisemix at our current locations,

•                  differences in merchandisemix by geographic location,

•                  price competition,

•                  clearance activities inconnection with seasonal inventory management,

•                  closeout sales in connectionwith store relocations and consolidations,

•                  sourcing of products fromlocations outside the United States,

•                  vendor programs, and

•                  supply chain enhancements.

                Inaddition, our gross margin is impacted by store occupancy and distributioncosts. We monitor these costs in absolute dollars and as a percentage of sales.

 

 

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Themost significant store operating expenses are labor and related employeebenefits and advertising. We believe improved labor management within ourstores will allow us to better leverage payroll expenses over time. Ouremployee benefits include health insurance, the cost of which continues toincrease faster than the general rate of inflation. We continually monitor thiscost and review strategies to effectively control increases, but we are subjectto the overall trend of increases in health care costs. Advertising costs aremonitored as a percentage of sales. These costs are largely variable, which allows us to actively managethem to facilitate achieving our sales, gross margin percentage and storeoperating contribution objectives.

                Store operating contribution,which is calculated by deducting a store’s operating expenses from its grossmargin, is used to evaluate overall performance on an individual store basis.

                General and administrativeexpenses are monitored and controlled as a percentage of sales.  We have made significant investments ininfrastructure, including our information systems, distribution capabilitiesand personnel. Our current infrastructure facilitates our planned opening ofstores, which we believe enables us to leverage our expenses.  Accordingly, we expect these expenses todecrease as a percentage of sales over time.

                Pre-opening expenses willcontinue to be related to store openings, including relocations. These expenseswill fluctuate based on the number and timing of new store openings.

                Inventory turns are based oncost of sales and average inventory for the applicable period. We recognizethat our inventory turns may be lower than those of other retailers, which webelieve is due, in part, to the categories of merchandise we carry, includingfirearms, and the large quantities of merchandise we use in our in-storedisplays. We believe we have the opportunity to enhance our supply chain toimprove our inventory turns. Additionally, in merchandise categories thatexperience slower inventory turns, we continue to work with vendors to increaseour trade credit terms to reduce our investment in owned inventory. We cannotassure you that we will be able to improve our inventory turns or inventoryinvestment.

                Identification of appropriatenew store sites is essential to our growth strategy. We believe our focus onour larger store size and our ability to utilize either recycled, orsecond-use, facilities or build-to-suit locations provides us with increasedopportunities to find optimal real estate locations on attractive terms. Weevaluate and invest in new stores based on site-specific projected returns oninvestment.

**CriticalAccounting Policies and Use of Estimates**

                Our financial statements areprepared in accordance with U.S. generally accepted accounting principles.  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. We base our assumptions, estimates and judgments on historicalexperience, current trends and other factors that we believe to be relevant atthe time the 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 U.S. generally accepted accounting principles.However, because future events and their effects cannot be determined withcertainty, actual results could differ from our assumptions and estimates, andsuch differences could be material.

Ourcritical accounting policies and use of estimates are discussed and should beread in conjunction with the annual financial statements and notes included inour Form 10-K, as filed with the Securities and Exchange Commission, whichincludes audited financial statements for our three fiscal years ended January28, 2006.

 

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**Resultsof Operations**

The following table includesselected items in the unaudited statements of operations, reflected as apercentage of sales:

 

 
| ** **                          | ** ** | **13 Weeks Ended** | ** ** |
|-------------------------------------|------------|--------------------|------------|
| ** **                          | ** ** | **April 29, 2006** | ** ** | **April 30, 2005** | ** ** |
| Sales                               |       | 100.0              | %          | 100.0 | % |
| Cost of goods sold                  |       | 82.7               | %          | 81.3 | % |
| Gross profit                        |       | 17.3               | %          | 18.7 | % |
| Operating expenses:                 |       |               |       |   |   |
| Store operating expenses            |       | 23.0               | %          | 24.1 | % |
| General and administrative expenses |       | 6.0                | %          | 6.2 | % |
| Gain on contract settlement         |       | 0.0                | %          | (1.8 | )% |
| Pre-opening expenses                |       | 0.5                | %          | 2.0 | % |
| Loss from operations                |       | (12.2              | )%         | (11.8 | )% |
| Interest expense, net               |       | 2.6                | %          | 1.2 | % |
| Loss before income taxes            |       | (14.8              | )%         | (13.0 | )% |
| Income tax provision                |       | 0.0                | %          | 0.0 | % |
| Net loss                            |       | (14.8              | )%         | (13.0 | )% |

 

 

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. Non-comparable storesales include sales from our stores before they have begun their fifteenthmonth of operation.

Cost of goods sold includes the cost ofmerchandise, freight, distribution, inventory shrinkage and store occupancycosts. Store occupancy costs include rent, real estate taxes and common areamaintenance charges.

                Store operating expenses includestore associate payroll, taxes and fringe benefits, advertising, maintenance,utilities, depreciation, insurance, bank and credit card charges and otherstore level expenses.

                General and administrativeexpenses include all expenses associated with operating our corporateheadquarters.

                Pre-opening expenses consistprimarily of payroll, rent, recruiting, advertising and other costs incurredprior to a new store opening.

***Thirteen Weeks Ended April 29, 2006 compared to Thirteen Weeks EndedApril 30, 2005***

*Sales.*  Salesincreased by $20.3 million, or 15.0%, to $155.6 million in the first quarter offiscal 2006 from $135.3 million in the first quarter of fiscal 2005. Thisincrease primarily resulted from sales of $36.4 million from new stores not yetincluded in the comparable store sales base. This increase was partially offsetby a comparable store sales decrease of $13.3 million, and a $2.8 million salesdecrease from relocated or consolidated stores and changes in other revenues.Comparable store sales decreased 10.4% compared to a decrease of 1.0% in thefirst quarter of fiscal 2005. We opened two new stores during the first quarterof fiscal 2006 compared to six new stores during the first quarter of fiscal2005. Total square footage as of April 29, 2006 increased 22.7% to 5.1 millionsquare feet, as compared to April 30, 2005. We relocated one store during thequarter ended April 29, 2006. During the same quarter of fiscal 2005, we alsorelocated one store.

We believe the comparable store salesdecrease and the overall softness in sales is primarily attributable to (i)reduced spending in advertising and promotions of approximately  $2.6 million or 39%, (ii) our focus on oureveryday-low-price strategy which resulted in fewer promotions, and (iii) cannibalizationfrom some of the new store openings and new competition entering some of ourmarkets.

 

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                *GrossProfit.* Gross profit increased by $1.7 million, or 6.6%, to $27.0million in the first quarter of fiscal 2006 from $25.3 million in the firstquarter of fiscal 2005. As a percentage of sales, gross profit decreased 140basis points to 17.3% in the first quarter of fiscal 2006 from 18.7% in thefirst quarter of fiscal 2005.  Majorfactors primarily affecting gross margin in the current quarter were:

•                  an initial product marginincrease of approximately 120 basis points, offset by;

•                  a negative impact ofapproximately 160 basis points from increased store occupancy costs as a resultof reduced leverage from lower comparable store sales and lower sales persquare foot at our newer, less mature stores; and

•                  other factors negativelyimpacting margin, including reduced new store discounts as a result of openingnew stores with less inventory and a continuation in the trend toward higherfreight costs as fuel prices increased.

*Store Operating Expenses.*  Store operating expenses increased by $3.3million, or 10.1%, to $35.9 million in the first quarter of fiscal 2006 from$32.6 million in the first quarter of fiscal 2005. As a percentage of sales,store operating expenses decreased 110 basis points to 23.0% in the firstquarter of fiscal 2006 from 24.1% in the first quarter of fiscal 2005. Wereduced advertising and branding expenditures, deciding to allocate spending tothe back half of fiscal 2006 when our customers are shopping much morefrequently, resulting in a 235 basis point reduction in advertising spending.In addition, we had a modest gain in store labor productivity. The benefit ofthese reductions were offset in part by the de-leveraging of most otherexpenses as a result of lower than expected sales.

*General and Administrative Expenses.*  General and administrative expenses increasedby $1.0 million, or 11.6%, to $9.4 million in the first quarter of fiscal 2006from $8.4 million in the first quarter of fiscal 2005. As a percentage ofsales, general and administrative expenses decreased 20 basis points to 6.0% inthe first quarter of fiscal 2006 from 6.2% in the first quarter of fiscal 2005.

*Gain on Contract Settlement*.  In March 2005, we received a $2.5 millionnon-recurring payment relating to the termination of our contract with theformer provider of our co-branded credit card services in consideration of thelost opportunity.

*Pre-opening Expenses.*  Pre-opening expenses decreased $2.0 million,or 72.3%, to $0.8 million in the first quarter of fiscal 2006 from $2.8 millionin the first quarter of fiscal 2005. We opened two new stores in the firstquarter of fiscal 2006, compared to six new stores in the first quarter offiscal 2005.

*Interest Expense, net.*  Interest expense increased by $2.3 million,or 139.4%, to $4.0 million in the first quarter of fiscal 2006 from $1.7million in the first quarter of fiscal 2005. The increase resulted from higheraverage borrowings incurred to fund our growth, including the placement of $20million of convertible debt in August 2006. We also experienced higher averageinterest rates of approximately 250 basis points during the first quarter offiscal 2006, as compared to the first quarter of fiscal 2005.

*Income Tax Provision.* We did not record an incometax benefit for the first quarters of fiscal 2006 or fiscal 2005 due to theuncertainty of the realization of the net operating loss carry forwards. Wehave determined the realization of the tax benefit related to our net deferredtax asset is uncertain at this time and a valuation allowance was recorded forthe entire balance of our net deferred tax asset.

*Net Loss.*As a result of the factors discussed above, the netloss of $23.0 million for the first quarter of fiscal 2006 represented anincrease of $5.4 million from the net loss of $17.6 million for the firstquarter of fiscal 2005.

**Liquidityand Capital Resources**

                Our primary capital requirementsare for inventory, capital improvements, pre-opening expenses to support ournew store growth plans, and, to the extent of the highly seasonal nature of ourbusiness, operating losses.

*Operating Activities.*  Net cash used in operating activities for thefirst quarter of fiscal 2006 increased by $9.0 million to $22.0 million, ascompared to $13.0 million for the first quarter of fiscal 2005. The increasewas primarily due to: (i) a higher net loss of $5.4 million, and (ii) reducedleverage in accounts payable as a result of reduced property and equipmentpayables related to new stores.  Overall,our efforts to manage inventories have resulted in lower levels of inventoriesin our recently opened new stores, as well as a reduction in inventories in allour stores.

 

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*Investing Activities*.  Net cash used in investing activities was$3.7 million in the first quarter of fiscal 2006 and $13.7 million in the firstquarter of fiscal 2005, consisting of purchases of property and equipment. Weused cash primarily for tenant improvements and equipment to open new storesand to remodel and upgrade existing stores. There were two new stores opened inthe first quarter of fiscal 2006 and six new stores opened in the first quarterof fiscal 2005. Purchases of property and equipment in the first quarter offiscal 2005 also included expenditures for an upgrade to our distributioncenter, information technology equipment and office furniture and equipment atour new corporate headquarters.

*Financing Activities*. * *Net cash provided by financingactivities was $25.6 million in the first quarter of fiscal 2006, as comparedto $27.0 million in the first quarter of fiscal 2005. The reduced fundingneeded from our credit facility was due to the increase in cash used inoperations of $9.0 million being offset by a $10.0 million reduction inproperty and equipment purchases. Our financing activities were utilized tofund our continued store expansion, including inventory, property andequipment, and to fund our operating losses.

*Credit Facility. *To meet ourliquidity and capital needs, we entered into a credit facility with Bank ofAmerica, N.A.   This credit facilityprovided for revolving loans in an aggregate amount of up to $275 million,including up to $50 million in the form of letters of credit, and matures inJune 2009.  Availability under thefacility may be further increased to $300 million, subject to certainconditions including the absence of default. The actual availability under theamended credit facility is limited to 85% of eligible credit card receivablesplus the lesser of 68% to 75% of eligible inventory or 85% of the inventory’sliquidation value, in each case, net of specified reserves and less any lettersof credit outstanding. Interest on the outstanding indebtedness under the revolvingcredit facility currently accrues at the lender’s prime commercial lending rateplus 0% to 0.5% depending on our EBITDA, as defined in the credit agreement,or, if we elect, at the one, two, three or six month LIBOR plus 1.25% to 2.25%depending on such EBITDA. Our obligations under the credit facility are securedby interests in substantially all of our assets.

On March 3, 2006, we amended andrestated our credit facility. The principal purpose of the amendment was to adda $20 million term loan to the credit facility. The amount of the term loan isnot deducted in determining availability under the revolving credit facility,except to the extent that the balance of the term loan exceeds approximately 4%to 5% of the eligible borrowing base. The term loan matures on June 30, 2009and bears interest at either (a) 2% over the higher of Bank of America’s primerate or the federal funds rate plus 0.5%, or (b) LIBOR plus 4%.  This additional financing was obtained tomaintain the liquidity levels necessary to fund continued growth and seasonalcash flow needs.

Effective May 25, 2006, we amendedour credit facility to adjust the level of the EBITDA covenants for the monthsof April 2006 through July 2006. As amended, testing of the EBITDA covenant isrequired when our availability is less than 10% of the lesser of (a) therevolving credit facility maximum on any given day or (b) the borrowing base,as defined and adjusted for certain reserves. The credit facility continues tospecify quarterly testing of the operating cash flow covenant.  Other substantive terms of the agreement werenot materially changed in the May 25, 2006 amendment. We are in compliance withall covenants of the credit facility.

Outstandingborrowings under the credit facility, including letters of credit, were $207.1million and $147.4 million as of April 29, 2006 and April 30, 2005,respectively. Our total remaining borrowing capacity under the credit facility,after subtracting letters of credit, was $24.1 million as of April 29, 2006 and$63.5 million as of April 30, 2005.

*Income Taxes.*Due to the uncertainty of the realization ofnet operating loss carry forwards, we have determined the realization of thetax benefit related to our net deferred tax asset is uncertain at this time anda valuation allowance was recorded for the entire balance of our net deferredtax asset.

*Future Capital Requirements*.  Our future capital requirements willprimarily depend on the number of new stores we open and the timing of thoseopenings 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 technology and distributioncapabilities, is able to support a larger store base. We anticipate openingfive additional new stores during the remainder of fiscal 2006. However,business conditions, business strategy or other factors may cause us to adjustsuch plans.

                Additional needs for capital include funding seasonalinventory levels and operating losses due to our seasonality, and may includean investment for an expansion into another distribution channel in addition toour retail channel. We can provide no assurances at this time as to the timingof such an expansion, or whether such an expansion will occur. We also expectto continue to increase our direct product sourcing activities, requiring 

 

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additional funding possiblythrough increased letters of credit or trade credit. We intend to satisfy ourcapital requirements over the next twelve months with cash flows fromoperations, funds available under our credit facility, equipment financingleases and/or funds from additional borrowing capacity. However, if changes incapital requirements occur, including trade credit, vendor terms or otherfactors detailed from time to time in our filings with the Securities andExchange Commission, we may need to seek additional debt or equity financing inthe public or private capital markets. There is no assurance that financingwill be available to us on acceptable terms. Beyond fiscal 2006,we anticipateneeding additional financing to grow our business.

With the placement of thesubordinated unsecured convertible note in fiscal 2005, we have an obligationthat may require funding, depending on whether the holder of the noteultimately exercises the option to convert the debt into shares of commonstock.  If conversion fails to occur, $20million is due to the holder in fiscal 2010.

**Contractual Obligations and OtherCommitments**

Our material off-balance sheetarrangements are operating lease obligations and letters of credit.  We excluded these items from the balancesheet in accordance with U.S. generally accepted accounting principles. As ofApril 29, 2006, the minimum operating lease payments due within one year were$49.9 million. As of April 29, 2006, total minimum operating lease paymentsremaining over the life of the operating leases were $575.6 million. Theseobligation amounts include future minimum lease payments and exclude directoperating costs such as common area costs and real estate taxes.

Issued and outstanding letters-of-credit were $6.6 millionand $6.2 million at April 29, 2006 and April 30, 2005, respectively, and wererelated primarily to importing of merchandise and funding insurance programliabilities.

Inthe ordinary 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. The merchandise purchases for which we do have firm commitmentsoutstanding, in addition to letters-of-credit, were $0.6 million as ofApril 29, 2006.

**QuarterlyResults of Operations and Seasonality**

                Ourquarterly operating results may fluctuate significantly because of severalfactors, including the timing of new store openings and related expenses,profitability of new stores, weather conditions and general economicconditions. Our business is also subject to seasonal fluctuation, withapproximately 65% of our sales activity normally occurring during the third andfourth quarters of our fiscal year, which are primarily associated with thefall hunting seasons and the holiday season. The first half of our fiscal years have averaged approximately 35% ofour annual sales, including new store sales, over the past two years. However,this factor cannot necessarily be used as an indicator of future results. Ourcustomers’ demand for our products and therefore our sales, can besignificantly impacted by unseasonable weather conditions that affect outdooractivities and the demand for related apparel and equipment. This seasonalityalso impacts our inventory levels, which tend to rise beginning approximatelyin April, reach a peak in November, and decline to lower levels after theDecember holiday season.

                Our pre-opening expenses have and will continue tovary significantly from quarter to quarter, primarily due to the timing ofstore openings.  We typically incur mostpre-opening expenses for a new store during the three months preceding, and themonth of, its opening.  In addition, ourlabor and operating costs for a newly opened store can be greater during the firstone to two months of operation than what can be expected after that time, bothin aggregate dollars and as a percentage of sales.  Accordingly, the volume and timing of newstore openings in any quarter has had and is expected to continue to have a significantimpact on quarterly pre-opening costs and store labor and operatingexpenses.  Due to these factors, resultsfor any particular quarter may not be indicative of results to be expected forany other quarter or for a full fiscal year.

**CriticalAccounting Policies and Use of Estimates — Adoption of SFAS 123R**

Effective January 29, 2006, weadopted the fair-value recognition provisions of the Financial AccountingStandards Board’s Statement No. 123 (revised 2004), *Share-Based Payment* (“SFAS 123R”), which requires themeasurement and recognition of compensation expense for all stock-based paymentawards made to employees and directors including employee stock option awardsand employee stock purchases made under our employee stock purchase plan. We adoptedthe provisions of SFAS 123R, using the modified-prospective transition method.Under this transition method, stock-based compensation expense was recognizedin the financial statements for the 

 

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13-weeks ended April 29, 2006, for granted, modified, orsettled stock options and for expense related to the employee stock purchaseplan. The provisions of SFAS 123R apply to new stock options and stock optionsoutstanding, but not yet vested, on the effective date of January 29,2006. Results for prior periods have not been restated, in accordance with themodified-prospective transition method.

Theamount of compensation expense for stock-based awards to be recognized during aperiod is based on the portion of the awards that are ultimately expected tovest. We estimate option forfeitures at the time of grant and revise thoseestimates in subsequent periods if actual forfeitures differ significantly fromthose estimates. Cost is recognized using a straight-line amortization methodover the requisite service period**,**whichtypically is the vesting period. The impact on our results of operations andloss per share from recording stock-based compensation for the 13 weeks endedApril 29, 2006 is shown in the table below. There was no impact on cash flows.

 
| ** **                           | ** ** | **Before  123R  expense**                | ** ** | **Stock-  based  expense** | ** ** | **As reported** | ** ** |
|--------------------------------------|------------|------------------------------------------|------------|----------------------------|------------|-----------------|------------|
| ** **                           | ** ** | *(in  thousands, except per share data*) | ** ** |
| Cost of goods sold                   |       | $                                        | 128,581    |                       | 8          |            | $          | 128,589 |   |
| Store operating expenses             |       | 35,794                                   |       | 61                         |       | 35,855          |       |
| General and administrative  expenses |       | 9,186                                    |       | 167                        |       | 9,353           |       |
| Loss from operations                 |       | (18,745                                  | )          | (236                       | )          | (18,981         | )          |
| Net loss                             |       | (22,731                                  | )          | (236                       | )          | (22,967         | )          |
| Basic and diluted loss per  share    |       | $                                        | (1.59      | )                          | $          | (0.02           | )          | $ | (1.61 | ) |
|                                      |            |                                          |            |                            |            |                 |            |  |  |  |  |

 

                At April 29, 2006, there wasapproximately $2,500,000 of total unrecognized stock-based compensation expenserelated to unvested option awards. Unrecognized stock-based compensation isexpected to be recognized over a weighted-average period of 2.7 years.

 

**ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

                Weare exposed to market risk from changes in interest rates on borrowings underour credit facility. This floating rate indebtedness was $200.6 million atApril 30, 2006 and averaged $186.2 million during the first quarter of fiscal2006. Our average interest rate for the first quarter of fiscal 2006 under ourcredit facility is 250 basis points higher than the same period last year due primarilyto general interest rate movement. If short-term floating interest rates on ouraverage variable rate debt for the first quarter of fiscal 2006 had increasedby 100 basis points, our interest expense would have increased by approximately$0.5 million, assuming comparable borrowing levels. These amounts aredetermined by considering the impact of the hypothetical interest rates on ouraverage amount of floating rate indebtedness outstanding and cash equivalentsbalances.

                We have no derivative financialinstruments or derivative commodity instruments in our cash and cashequivalents.  We have no internationalsales, however, we import certain items for sale in our stores.  Substantially all of our purchases aredenominated in U.S. dollars.

 

**ITEM 4.  CONTROLS AND PROCEDURES**

                As of the end of the periodcovered by this report, we conducted an evaluation, under the supervision andwith the participation of the principal executive officer and principalfinancial and accounting 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 financial andaccounting officer concluded that our disclosure controls and procedures areeffective to ensure that information required to be disclosed by us in reportsthat we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in Securities andExchange Commission rules and forms.  

 

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Therewas no change 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. OTHERINFORMATION**

**ITEM 1.  LEGAL PROCEEDINGS**

***Contingent Trademark Litigation*****- **On July 2,2004, we filed a complaint in the U.S. District Court for the District ofMinnesota seeking declaratory relief that the contingent trademark licensingprovision of a noncompetition agreement dated May 16, 1996, made between ourpredecessor and Cabela’s Incorporated, is invalid and unenforceable  Although the noncompetition provisions of thenoncompetition agreement expired in June 2003, Cabela’s contends that acontingent trademark licensing provision of the noncompetition agreement nowrequires us to grant Cabela’s a license to certain of our trademarks that werein existence in 1996.

                On August 18, 2005, the courtruled that the contingent trademark licensing provision is not legally invalidas a noncompetition agreement and dismissed our complaint.  The court also acknowledged that it had notbeen asked at that point to determine, and was not determining, the scope ofthe contingent trademark license or the parties respective rightsthereunder.  In December 2005, the courtgranted our motion to file an amended reply to Cabela’s counterclaim in whichwe raised multiple additional issues regarding the validity and enforceabilityof any trademark rights allegedly possessed by Cabela’s, and any limitationsupon our rights to engage in certain marketing activities under the trademarksat issue.  These issues remain before thecourt.  Discovery is currently underwayand the court has established a trial-ready date of May 1, 2007.

Weare not able to predict the ultimate outcome of such proceedings, but they maybe costly and disruptive. The total costs may not be reasonably estimated atthis time. The outcome of this dispute may impact the manner in which wemarket our products in certain distribution channels in the future. It isnot expected to have any affect on the marketing of our products through ourretail stores.

##### ***DerivativeLitigation*******- Aspreviously reported, our company, as a nominal defendant, and certain of ourpresent and former directors were named as defendants in a purported derivativeaction,*Kurt Haberle v. Mark R. Baker, et al*,that was filed on February 11, 2005 in the U.S. District Court for theDistrict of Minnesota.   OnAugust 30, 2005, the court issued an order dismissing the complaintwithout prejudice on the grounds that plaintiff was required to make pre-suitdemand on our board of directors and failed to do so. The plaintiff filed amotion to alter or amend the judgment.  On May 16, 2006, the court enteredjudgment denying plaintiff’s motion and dismissed the case. The plaintiff has30 days to appeal the entry of the judgment. We do not expect the outcome ofthis litigation to have a material affect on our financial condition or resultsof operations.

***Other Legal Claims*****-**Various claims and lawsuitsarising in the normal course of business may be pending against us from time totime. The subject matter of these proceedings typically relate to commercialdisputes and employment issues. As of the date of this report, we are not aparty to any legal proceedings that are expected, individually or in theaggregate, to have a material adverse effect on our financial condition orresults of operations.

 

**Item 1A.  Risk Factors**

** **

Not applicable.

 

**Item 2.  Unregistered Sales of Equity Securities andUse of Proceeds**

** **

Not applicable.

 

**Item 3.  Defaults Upon Senior Securities**

** **

Not applicable.

 

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**Item 4.  Submission of Matters to a Vote of SecurityHolders**

** **

None.

 

**ITEM 5.  OTHER INFORMATION**

None.

 

**ITEM 6.  EXHIBITS**
| **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              |       | Amendment Agreement  No. 1, dated May 25, 2006, to Second Amended and Restated Loan and  Security Agreement, dated March 3, 2006, among the Registrant, Bank of  America, N.A., as administrative agent, Bank of America Securities, LLC, as  the lead arranger, Foothill Capital Corporation, as the syndication agent,  The CIT Group/Business Credit, Inc., as collateral agent, General  Electric Capital Corporation, as documentation agent, and the lenders named  therein |       | Incorporated by Reference  (3) |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       |                           |
| 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) |   | Incorporated by reference  to Exhibit 3.3 to Amendment No. 1 to the Registrant’s Registration Statement  on Form S-1 (Registration No. 333-112494), filed with the Commission on March  15, 2004. |
|-----|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Incorporated by reference  to Exhibit 3.4 to Amendment No. 1 to the Registrant’s Registration Statement  on Form S-1 (Registration No. 333-112494), filed with the Commission on March  15, 2004. |
| (3) |   | Incorporated by reference  to Exhibit 10 to the Registrant’s Current Report on Form 8-K (File No.  000-50659), filed with the Commission on May 31, 2006.                                    |

 

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**SIGNATURES**

                Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized. 
|               | GANDER MOUNTAIN COMPANY |
|--------------------|-------------------------|
|               |                    |
|               |                    |
| Date: June 8, 2006 | By:                     | /s/ Mark R. Baker |
|               |                    | Mark R. Baker |
|               |                    | *President and Chief Executive  Officer*  |
|               |                    | (Principal Executive  Officer) |
|               |                    |   |
|               |                    |   |
| Date: June 8, 2006 | By:                     | /s/ Dennis M. Lindahl |
|               |                    | Dennis M. Lindahl |
|               |                    | *Executive Vice President, Chief  Financial Officer and Treasurer*  |
|               |                    | (Principal Financial and  Accounting Officer) |

 

 

 

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**EXHIBITINDEX**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | ** ** | **Method of Filing**       |
|-----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|
| 3.1             |       | Amended  and Restated Articles of Incorporation of the Registrant                                                                                                                                                                                                                                                                                                                                                                                                                                              |       | Incorporated  By Reference |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       |                       |
| 3.2             |       | Amended  and Restated Bylaws of the Registrant                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       | Incorporated  By Reference |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       |                       |
| 10              |       | Amendment  Agreement No. 1, dated May 25, 2006, to Second Amended and Restated  Loan and Security Agreement, dated March 3, 2006, among Gander Mountain  Company, Bank of America, N.A., as administrative agent, Bank of America  Securities, LLC, as the lead arranger, Foothill Capital Corporation, as the  syndication agent, The CIT Group/Business Credit, Inc., as collateral  agent, General Electric Capital Corporation, as documentation agent, and the  lenders named therein |       | Incorporated  by Reference |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       |                       |
| 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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