** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

 

**(MARK ONE)**

 

**ý****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

** **

**FOR THE QUARTERLY PERIOD ENDED OCTOBER 29, 2005.**

 

**OR**

 

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

** **

**FOR THE TRANSITION PERIOD FROM                     ****TO                      **

 

**COMMISSION FILE NUMBER 0-50659.**

 

**GANDER MOUNTAIN COMPANY**

(EXACT NAME OFREGISTRANT AS SPECIFIED IN ITS CHARTER)

 
| **MINNESOTA**                                                   | ** ** | **41-1990949**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or Other Jurisdiction of  Incorporation or Organization) |       | (I.R.S. Employer Identification No.) |
| ** **                                                      | ** ** | ** **                           |
| **180 EAST FIFTH STREET, SUITE 1300  ST PAUL, MINNESOTA**       | ** ** | **55101**                            |
| (Address of Principal Executive Offices)                        |       | (Zip Code)                           |

 

**(651) 325-4300**

(Registrant’sTelephone Number, Including Area Code)

 

 

(FormerName, Former Address and Former Fiscal Year, If Changed Since Last Report)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes ý No o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Securities Exchange Act of 1934). Yes o No ý

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act.)Yes o No ý

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date: Common Stock, $.01 par value; 14,264,073 shares outstanding as of December 1,2005.

 

 

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**GANDER MOUNTAIN COMPANY**

**QUARTERLY PERIOD ENDED OCTOBER 29, 2005**

**Form 10-QIndex**

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

 

2

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**PART I. FINANCIAL INFORMATION**

 

**ITEM 1.****  FINANCIAL STATEMENTS**

 

**Gander Mountain Company**

**Condensed Statements of Operations****- Unaudited**

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

 
| ** **                                       | ** ** | **13 Weeks Ended**   | ** ** | **39 Weeks Ended**   | ** ** |
|--------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                       | ** ** | **October 29,** | ** ** | **October 30,** | ** ** | **October 29,** | ** ** | **October 30,** | ** ** |
| ** **                                       | ** ** | **2005**             | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                       | ** ** | ** **           | ** ** | **(restated)**       | ** ** | ** ** | ** ** | **(restated)** | ** ** |
| Sales                                            |       | $                    | 214,421    |                 | $          | 178,145 |   | $ | 523,166 |   | $ | 404,960 |   |
| Cost of goods sold                               |       | 164,200              |       | 129,820              |       | 407,080 |   | 305,541 |   |
| Gross profit                                     |       | 50,221               |       | 48,325               |       | 116,086 |   | 99,419 |   |
|                                             |       |                 |       |                 |       |   |   |   |   |
| Operating expenses:                              |       |                 |       |                 |       |   |   |   |   |
| Store  operating expenses                        |       | 42,889               |       | 33,258               |       | 113,592 |   | 84,314 |   |
| General  and administrative expenses             |       | 8,857                |       | 6,933                |       | 24,178 |   | 19,546 |   |
| Pre-opening  expenses                            |       | 2,779                |       | 5,224                |       | 6,555 |   | 7,917 |   |
| Income (loss) from  operations                   |       | (4,304               | )          | 2,910                |       | (28,239 | ) | (12,358 | ) |
| Interest expense, net                            |       | 3,236                |       | 1,218                |       | 7,250 |   | 3,615 |   |
| Income (loss) before  income taxes               |       | (7,540               | )          | 1,692                |       | (35,489 | ) | (15,973 | ) |
| Income tax provision                             |       | —               |       | —               |       | — |   | — |   |
| Net Income (loss)                                |       | (7,540               | )          | 1,692                |       | (35,489 | ) | (15,973 | ) |
| Less preferred stock  dividends                  |       | —               |       | —               |       | — |   | 4,305 |   |
| Income (loss)  applicable to common shareholders |       | $                    | (7,540     | )                    | $          | 1,692 |   | $ | (35,489 | ) | $ | (20,278 | ) |
|                                             |       |                 |       |                 |       |   |   |   |   |
| Income (loss) per  common share                  |       |                 |       |                 |       |   |   |   |   |
| Basic                                            |       | $                    | (0.53      | )                    | $          | 0.12 |   | $ | (2.49 | ) | $ | (2.02 | ) |
| Diluted                                          |       | $                    | (0.53      | )                    | $          | 0.11 |   | $ | (2.49 | ) | $ | (2.02 | ) |
|                                             |       |                 |       |                 |       |   |   |   |   |
| Weighted average common  shares outstanding      |       |                 |       |                 |       |   |   |   |   |
| Basic                                            |       | 14,264               |       | 14,222               |       | 14,252 |   | 10,048 |   |
| Diluted                                          |       | 14,264               |       | 14,883               |       | 14,252 |   | 10,048 |   |

 

See accompanyingnotes to unaudited condensed financial statements.

 

3

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**Gander Mountain Company**

**Condensed Balance Sheets**

**(In thousands)**

 
| ** **                                       | ** ** | ** **           | ** ** | ** **           | ** ** |
|--------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                       | ** ** | **October 29,** | ** ** | **January 29,** | ** ** |
| ** **                                       | ** ** | **2005**             | ** ** | **2005****(1)**      | ** ** |
| ** **                                       | ** ** | **(unaudited)**      | ** ** | ** **           | ** ** |
| **Assets**                                       |       |                 |       |                 |       |
| Current assets:                                  |       |                 |       |                 |       |
| Cash  and cash equivalents                       |       | $                    | 1,589      |                 | $          | 1,033 |   |
| Accounts  receivable                             |       | 19,499               |       | 9,347                |       |
| Inventories                                      |       | 392,240              |       | 264,138              |       |
| Prepaids  and other current assets               |       | 9,072                |       | 5,806                |       |
|                                             |       |                 |       |                 |       |
| Total current assets                             |       | 422,400              |       | 280,324              |       |
|                                             |       |                 |       |                 |       |
| Property and equipment,  net                     |       | 136,071              |       | 101,430              |       |
| Other assets                                     |       | 4,704                |       | 4,089                |       |
|                                             |       |                 |       |                 |       |
| Total assets                                     |       | $                    | 563,175    |                 | $          | 385,843 |   |
|                                             |       |                 |       |                 |       |
| **Liabilities and shareholders’  equity**   |       |                 |       |                 |       |
| Current liabilities:                             |       |                 |       |                 |       |
| Borrowings  under credit facility                |       | $                    | 227,639    |                 | $          | 114,441 |   |
| Accounts  payable                                |       | 114,566              |       | 38,808               |       |
| Accrued  and other current liabilities           |       | 36,794               |       | 39,348               |       |
|                                             |       |                 |       |                 |       |
| Total current  liabilities                       |       | 378,999              |       | 192,597              |       |
|                                             |       |                 |       |                 |       |
| Long term liabilities:                           |       |                 |       |                 |       |
| Subordinated  convertible note                   |       | 20,000               |       | —               |       |
| Deferred  rent liabilities                       |       | 23,882               |       | 18,873               |       |
| Other  long term liabilities                     |       | 12,796               |       | 12,065               |       |
|                                             |       |                 |       |                 |       |
| Total long term  liabilities                     |       | 56,678               |       | 30,938               |       |
|                                             |       |                 |       |                 |       |
| Shareholders’ equity                        |       | 127,498              |       | 162,308              |       |
|                                             |       |                 |       |                 |       |
| Total liabilities and  shareholders’ equity |       | $                    | 563,175    |                 | $          | 385,843 |   |

 

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(1)  The balancesheet as of January 29, 2005 has been condensed from the audited financialstatements.

 

See accompanying notes tounaudited condensed financial statements.

 

4

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**Gander Mountain Company**

**Condensed Statements of Cash Flows****- Unaudited**

**(In thousands)**

 
| ** **                                                                   | ** ** | **39 Weeks Ended**   | ** ** |
|------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                   | ** ** | **October 29,** | ** ** | **October 30,** | ** ** |
| ** **                                                                   | ** ** | **2005**             | ** ** | **2004** | ** ** |
| ** **                                                                   | ** ** | ** **           | ** ** | **(restated)** | ** ** |
| **Operating activities**                                                     |       |                 |       |   |   |
| Net loss                                                                     |       | $                    | (35,489    | ) | $ | (15,973 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                 |       |   |   |
| Depreciation  and amortization                                               |       | 12,756               |       | 8,512 |   |
| Stock  option expense                                                        |       | 299                  |       | 14 |   |
| Property  and equipment write-offs                                           |       | 812                  |       | 547 |   |
| Change  in operating assets and liabilities:                                 |       |                 |       |   |   |
| Accounts  receivable                                                         |       | (10,152              | )          | (12,612 | ) |
| Inventories                                                                  |       | (128,102             | )          | (149,089 | ) |
| Prepaid  expenses and other assets                                           |       | (4,207               | )          | (3,041 | ) |
| Accounts  payable and other liabilities                                      |       | 78,820               |       | 99,863 |   |
| Net cash used in  operating activities                                       |       | $                    | (85,263    | ) | $ | (71,779 | ) |
|                                                                         |       |                 |       |   |   |
| **Investing activities**                                                     |       |                 |       |   |   |
| Purchase of property  and equipment, net                                     |       | $                    | (47,759    | ) | $ | (38,400 | ) |
| Net cash used in  investing activities                                       |       | $                    | (47,759    | ) | $ | (38,400 | ) |
|                                                                         |       |                 |       |   |   |
| **Financing activities**                                                     |       |                 |       |   |   |
| Borrowings under credit  facility, net                                       |       | $                    | 113,198    |   | $ | 24,476 |   |
| Proceeds from sale of  common stock, net of expenses                         |       | —               |       | 96,216 |   |
| Proceeds from  convertible debt issuance                                     |       | 20,000               |       | — |   |
| Proceeds from exercise  of stock options and stock sales                     |       | 380                  |       | — |   |
| Repayments of notes  with affiliates                                         |       | —               |       | (9,839 | ) |
| Net cash provided by  financing activities                                   |       | $                    | 133,578    |   | $ | 110,853 |   |
|                                                                         |       |                 |       |   |   |
| Net increase in cash                                                         |       | 556                  |       | 674 |   |
| Cash, beginning of  period                                                   |       | 1,033                |       | 970 |   |
|                                                                         |       |                 |       |   |   |
| Cash, end of period                                                          |       | $                    | 1,589      |   | $ | 1,644 |   |

 

Non-cashinvesting activities:  During the 39-weekperiod ended October 30, 2004, the Company purchased property andequipment totaling $2.4 million financed through capital lease transactions.

 

See accompanyingnotes to unaudited condensed financial statements.

 

5

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**Gander Mountain Company**

**Notes to Unaudited CondensedFinancial S****tatements**

**Quarterly Period Ended October 29, 2005**

 

**1. Basisof Presentation**

 

The accompanyingunaudited condensed financial statements of Gander Mountain Company (“we” or “us”)have been prepared in accordance with the requirements for Form 10-Q anddo not include all the disclosures normally required in annual financialstatements prepared in accordance with U.S. generally accepted accountingprinciples. The interim financial information as of October 29, 2005 andfor the 13 and 39 weeks ended October 29, 2005 and October 30, 2004,is unaudited and has been prepared on the same basis as the audited annualfinancial statements. In the opinion of management, this unaudited informationincludes all adjustments necessary for a fair presentation of the interimfinancial information. All of these adjustments are of a normal recurringnature. These interim financial statements filed on this Form 10-Q and thediscussions contained herein should be read in conjunction with the annualfinancial statements and notes included in our Annual Report on Form 10-Kfor the fiscal year ended January 29, 2005, as filed with the Securitiesand Exchange Commission, which includes audited financial statements for ourthree fiscal years ended January 29, 2005.

 

Our business is seasonal in nature andinterim results may not be indicative of results for a full year. Historically,we have realized more of our sales in the latter half of our fiscal year, whichincludes the hunting and holiday seasons. Our business is also impacted by thetiming of new store openings. Both variation in seasonality and new store openingsimpact the analysis of the results of operations and financial condition forcomparable periods.

 

**2.Recent Accounting Pronouncements**

 

In December 2004, the Financial AccountingStandards Board issued Statement No. 123R, “Share-Based Payment,” whichreplaces Statement of Financial Accounting Standards No. 123, “Accountingfor Stock-Based Compensation” and supercedes Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees.”  SFAS No. 123R eliminates the option ofusing the intrinsic value method to record compensation expense related tostock-based awards to employees and instead requires companies to recognize thecost of these awards based on their grant-date fair value over the relatedservice period of these awards.  We willadopt the provisions of this standard at the beginning of fiscal 2006. Untilthat time, we will continue to apply APB No. 25 and relatedinterpretations in accounting for our stock-based employee compensationplans.  Accordingly, any compensationcost for stock options is measured as the excess, if any, of the fair marketvalue of our stock at the measurement date over the employee’s option exerciseprice. Any resulting compensation expense is amortized ratably over the relatedvesting period.

 

Prior to the effective date of SFAS No. 123R,we will continue to provide the pro forma disclosures for past award grants asrequired under SFAS No. 123 and SFAS No. 148, “Accounting forStock-Based Compensation — Transition and Disclosure.”  SFAS No. 148 requires expanded and moreprominent disclosure in both annual and interim financial statements about themethod of accounting for stock-based employee compensation and the effect ofthe method on reported results.

 

We are currently evaluating therequirements under SFAS No. 123R and expect that the adoption of theprovisions of SFAS No. 123R may have a material impact on net income andnet income per common share.

 

In June 2005, theFASB’s Emerging Issues Task Force reached a consensus on Issue No. 05-6, “Determiningthe Amortization Period for Leasehold Improvements Purchased after LeaseInception or Acquired in a Business Combination”.  EITF 05-6 providesguidance on the amortization period for leasehold improvements in operatingleases that are either acquired significantly after the beginning of theinitial lease term or acquired as the result of a business combination. This guidance requires leasehold improvements purchased after the beginning ofthe initial lease term to be amortized over the shorter of the useful life ofthe assets or a term that includes required lease periods and renewal periodsthat are deemed to be reasonably assured at the date the leasehold improvementsare purchased.  This guidance is effective for our company as of thebeginning of this fiscal quarter ended October 29, 2005. The adoption ofthis statement did not have a material impact on our net earnings, cash flowsor financial position.

 

6

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In October 2005,the Financial Accounting Standards Board issued FASB Staff Position FAS 13-1, “Accountingfor Rental Costs Incurred During a Construction Period”. This clarificationrequires that any rental costs incurred after we take possession of a leasedproperty, or have effective control, shall be recognized as rental expense.Currently our policy is to capitalize such rental costs during the pre-openingperiod. The new guidance is effective at the beginning of fiscal 2006. Ouradoption of this guidance is not expected to have a material impact on our netearnings, cash flows or financial position.

 

**3.Restatement of Previously Issued Financial Statements**

 

During the fourth quarterof fiscal 2004, we performed a comprehensive review of our lease accountingpractices. As a result, we restated our financial statements for periods priorto fiscal 2004 and for the first three quarters of fiscal 2004. Therestatements arose from revisions to accounting for (i) the amortizationlives for leasehold improvements, (ii) construction allowances fromlandlords and (iii) certain pre-opening period rent holidays.  The restatement adjustments were non-cash andhad no impact on revenues or net cash flows. The following table shows theimpact of these adjustments as of October 30, 2004 and for the 13 and 39week periods ended October 30, 2004 (in thousands, except per share data):

 
| ** **                                                        | ** ** | **As  Previously  Reported**             | ** ** | **Adjustments** | ** ** | **As  Restated** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------------------|------------|-----------------|------------|------------------|------------|
| ** **                                                        | ** ** | **13 Weeks Ended October 30, 2004** | ** ** |
| **Statement of Operations Data**                                  | ** ** | ** **                               |       |            |       |             |       |
| Cost of goods sold                                                |       | $                                        | 130,035    |            | $          | (215             | )          | $ | 129,820 |   |
| Store operating  expenses                                         |       | 33,247                                   |       | 11              |       | 33,258           |       |
| General and  administrative expenses                              |       | 6,933                                    |       | —          |       | 6,933            |       |
| Pre-opening expenses                                              |       | 4,587                                    |       | 637             |       | 5,224            |       |
| Income from operations                                            |       | 3,343                                    |       | (433            | )          | 2,910            |       |
| Income before income  taxes                                       |       | 2,125                                    |       | (433            | )          | 1,692            |       |
| Income applicable to  common shareholders                         |       | $                                        | 2,125      |            | $          | (433             | )          | $ | 1,692 |   |
| Income applicable to  common shareholders per share  - Basic |       | $                                        | 0.15       |            | $          | (0.03            | )          | $ | 0.12 |   |
|                                                              | - Diluted  |                                     | $          | 0.14            |       | $                | (0.03      | ) | $ | 0.11 |   |
|                                                                   |            |                                          |            |                 |            |                  |            |  |  |  |  |

 
| ** **                                                          | ** ** | **39 Weeks Ended October 30, 2004** | ** ** |
|---------------------------------------------------------------------|------------|------------------------------------------|------------|
| **Statement of Operations Data**                                    | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of goods sold                                                  |       | $                                        | 306,046    |   | $ | (505 | ) | $ | 305,541 |   |
| Store operating  expenses                                           |       | 83,847                                   |       | 467 |   | 84,314 |   |
| General and  administrative expenses                                |       | 19,546                                   |       | — |   | 19,546 |   |
| Pre-opening expenses                                                |       | 7,063                                    |       | 854 |   | 7,917 |   |
| Loss from operations                                                |       | (11,542                                  | )          | (816 | ) | (12,358 | ) |
| Loss before income  taxes                                           |       | (15,157                                  | )          | (816 | ) | (15,973 | ) |
| Loss applicable to  common shareholders                             |       | $                                        | (19,462    | ) | $ | (816 | ) | $ | (20,278 | ) |
| Basic  and diluted loss applicable to common shareholders per share |       | $                                        | (1.94      | ) | $ | (0.08 | ) | $ | (2.02 | ) |

 

7

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| ** **                             | ** ** | **As of October 30, 2004** | ** ** |
|----------------------------------------|------------|---------------------------------|------------|
| **Balance Sheet Data**                 | ** ** | ** **                      | ** ** |
| Property and equipment,  net           |       | $                               | 79,297     |   | $ | 6,734 |   | $ | 86,031 |   |
| Accrued and other  current liabilities |       | 27,702                          |       | 519 |   | $ | 28,221 |   |
| Long term liabilities                  |       | 7,474                           |       | 12,324 |   | $ | 19,798 |   |
| Shareholders’ equity              |       | $                               | 150,865    |   | $ | (6,109 | ) | $ | 144,756 |   |

 
| ** **                                 | ** ** | **39 Weeks Ended October 30, 2004** | ** ** |
|--------------------------------------------|------------|------------------------------------------|------------|
| **Statement of Cash Flows Data**           | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net cash used in  operating activities     |       | $                                        | (79,549    | ) | 7,770 |   | $ | (71,779 | ) |
| Net cash used in  investing activities     |       | (30,630                                  | )          | (7,770 | ) | (38,400 | ) |
| Net cash provided by  financing activities |       | 110,853                                  |       | — |   | 110,853 |   |
| Net increase in cash                       |       | $                                        | 674        |   | $ | — |   | $ | 674 |   |
|                                            |            |                                          |            |  |  |  |  |  |  |  |

 

**4.Capital Stock**

 

Upon completion of ourinitial public offering on April 26, 2004, and the filing of our Amendedand Restated Articles of Incorporation in connection therewith, the authorizedcapital stock of our company consists of 100,000,000 shares of common stock,par value $.01 per share, and 5,000,000 shares of preferred stock, par value$.01 per share. As of October 29, 2005, there were 14,264,073 shares ofcommon stock and no shares of preferred stock outstanding.

 

In February 2005,our board of directors approved and, in June 2005, our shareholdersapproved the establishment of an employee stock purchase plan that enablessubstantially all full-time employees to purchase up to a total of 500,000shares of our common stock by contributions through payroll deductions.Purchases of common stock are made from accumulated employee contributions atthe end of designated six-month purchase periods and currently are executed at95% of the market price on the last payday of the purchase period.

 

**5.Credit Facility**

 

In February 2005, we amended ourcredit facility to increase our availability under the facility from $175,000,000to $225,000,000 and extended the maturity date to June 2009. In September 2005we exercised our option to increase the facility to $275,000,000. Availabilityunder the facility may be further increased to $300,000,000, subject to certainconditions including the absence of default. Other substantive terms of theagreement were not materially changed in the February or September amendments.In November 2005, we amended our credit facility to adjust the level ofEBITDA and operating cash flow covenants, as defined. The testing of the EBITDAcovenant is required when our availability under the facility is less than 10%of the facility on any given day. The amendment also specifies quarterly,rather than annual testing of the operating cash flow covenant beginning January 28,2006 and continuing each quarter thereafter. As of October 29, 2005, wewere in compliance with all covenants under this facility.

 

Outstanding borrowings under the credit facility,including letters of credit, were $233.7 million and $131.4 million as of October 29,2005 and October 30, 2004, respectively. Our total remaining borrowingcapacity under the credit facility, after subtracting letters of credit, was$41.3 million as of October 29, 2005 and $43.6 million as of October 30,2004.

 

**6.Placement of Convertible Debt**

 

On August 16, 2005, we completed a private offering of $20 millionof subordinated unsecured convertible notes (the “Notes”) in a transactionexempt from registration pursuant to Rule 506 promulgated under the SecuritiesAct of 1933, as amended. The Notes are held by a trust, the current beneficiaryof which is a member of our board of directors. The director was first electedto serve on the board of directors on the date of the closing of thetransaction.  The Notes are convertibleinto our common stock at any time by the holder at an initial conversion priceof $16.00 per share. The conversion price has no reset feature and adjusts onlyfor dividends, stock divisions or combinations, recapitalizations and similaroccurrences.  The Notes mature on August 16,2010 and bear interest at 7.0% per annum for the first two years, payablesemi-annually, after which the rate will float at a fixed spread of 3.50% onthe federal funds rate from a minimum of 6.0% to a maximum of 8.5%. We mayprepay the Notes, without penalty, any time after August 16, 2007, and wehave the option to require conversion of the Notes if the volume-weightedaverage closing price of our common stock reaches or exceeds $24.00 for any 20out of 30 consecutive trading days. Under the note purchase agreement enteredinto in connection with this transaction, we granted the holder certainregistration rights, as described therein. On October 17, 2005, theSecurities and Exchange 

 

8

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Commissiondeclared effective our registration statement on Form S-3 under theSecurities Act of 1933 registering the shares of our common stock issuable uponconversion of the Notes. The proceeds from the Notes were used to reduce theoutstanding borrowings under our credit facility. Transaction costs associatedwith the placement were approximately $85,000.

 

**7.Stock-Based Compensation**

 

Wecontinue to apply APB No. 25 and related interpretations in accounting forstock-based compensation plans. Accordingly, compensation expense has not beenrecognized for employee stock options as the exercise price for options grantedhas been greater than or equal to our stock price on the date of grant. Wehave, however, recognized expense for certain options where terms were modifiedsubsequent to the date of grant.

 

In February 2004,we adopted the Gander Mountain Company 2004 Omnibus Stock Plan, which currentlyauthorizes the granting of stock-based awards covering up to 4,000,000 sharesof common stock. This plan was approved by shareholders in March 2004 andan increase in the number of shares available under this plan was approved byshareholders in June 2005. Under this plan, awards may be made toemployees, directors, and consultants.  Thetypes of awards that may be granted under the plan include restricted andunrestricted stock, incentive and nonstatutory stock options, stockappreciation rights and other stock awards. Under this plan, as of October 29,2005, there were 2,098,178 options to purchase common stock outstanding, with aweighted average exercise price of $13.55 and a weighted average remaining lifeof 9.1 years. The options granted under this plan typically vest in equalincrements over periods up to three years from the date of grant, althoughcertain grants have been made with shorter vesting schedules.

 

On March 2, 2005,the compensation committee of our board of directors accelerated the vestingfor certain outstanding options to purchase common stock that had exercise pricesgreater than $10.53, the closing price of our common stock on that date.  We accelerated options to purchase 1,186,728shares of common stock, which included all options issued and outstanding underour 2004 Omnibus Stock Plan as of January 29, 2005, as well as optionsheld by two executive officers under February 2004 option grants that wereoutstanding on March 2, 2005.  On November 30,2005, the compensation committee of our board of directors accelerated thevesting of options to purchase approximately 983,000 shares of common stock,which included certain unvested options under our 2004 Omnibus Stock Plan thathad exercise prices greater than $5.69, the closing price of our common stockon that date. As a result of the accelerations, all of these options becamefully exercisable and will remain exercisable through their respectivetermination dates, which vary, but do not extend past 2015.

 

We tookthese actions because it will produce a more favorable impact on our resultsfrom operations once we adopt SFAS No. 123R.  Also, because these options had exerciseprices in excess of our stock price on the date the accelerations wereapproved, we believed that these options did not offer sufficient incentive tothe employees when compared to the potential future compensation expense thatwould have been attributable to the options under SFAS No. 123R.  Given the adoption of SFAS No. 123Rbeginning in fiscal 2006, we estimate that we eliminated approximately$3,900,000 of future expense as a result of the March 2, 2005 accelerationand approximately $4,200,000 of future expense as a result of the November 30,2005 acceleration.

 

As of October 29, 2005, there were a total of3,181,706 options to purchase common stock outstanding, under our stock optionplans and including non-plan stock options, with a weighted average exerciseprice of $11.91 and a weighted average remaining life of 8.1 years.

 

The tablebelow illustrates the effect on our net income (loss) and net income (loss) pershare applicable to common shareholders as if we had applied the fair valuerecognition provisions of SFAS No. 123 to stock-based employeecompensation for the periods presented.

 

9

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| ** **                                                                                 | ** ** | **13 Weeks Ended**   | ** ** | **39 Weeks Ended**   | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                                                                 | ** ** | **October 29,** | ** ** | **October 30,** | ** ** | **October 29,** | ** ** | **October 30,** | ** ** |
| **(in  thousands, except per share data)**                                                 | ** ** | **2005**             | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                 | ** ** | ** **           | ** ** | **(restated)**       | ** ** | ** ** | ** ** | **(restated)** | ** ** |
| Net  Income (loss) applicable to commonshareholders - **as reported**                      |       | $                    | (7,540     | )                    | $          | 1,692 |   | $ | (35,489 | ) | $ | (20,278 | ) |
| Add:  Stock-based employee compensationexpense included in reported net income  (loss)     |       | —               |       | —               |       | 242 |   | — |   |
| Deduct:  Stock-based employee compensation expense determined under the fair value  method |       | (561                 | )          | (894                 | )          | (8,425 | ) | (2,042 | ) |
| Net  income (loss) applicable to commonshareholders - **pro-forma**                        |       | $                    | (8,101     | )                    | $          | 798 |   | $ | (43,672 | ) | $ | (22,320 | ) |
| Income  (loss) per common share - **as reported**                                          |       |                 |       |                 |       |   |   |   |   |
| Basic                                                                                      |       | $                    | (0.53      | )                    | $          | 0.12 |   | $ | (2.49 | ) | $ | (2.02 | ) |
| Diluted                                                                                    |       | $                    | (0.53      | )                    | $          | 0.11 |   | $ | (2.49 | ) | $ | (2.02 | ) |
|                                                                                       |       |                 |       |                 |       |   |   |   |   |
| Income  (loss) per common share - **pro-forma**                                            |       |                 |       |                 |       |   |   |   |   |
| Basic                                                                                      |       | $                    | (0.57      | )                    | $          | 0.06 |   | $ | (3.06 | ) | $ | (2.22 | ) |
| Diluted                                                                                    |       | $                    | (0.57      | )                    | $          | 0.05 |   | $ | (3.06 | ) | $ | (2.22 | ) |

 

The stock-based compensation expense of $8,425,000 forthe 39 week period ended October 29, 2005, determined under the fair valuemethod, includes $6,589,000 of expense related to the acceleration of vestingthat otherwise would have been expensed over the remaining vesting period.

 

Theweighted average fair value of options granted during the 13 weeks ended October 29,2005 and the 13 weeks ended October 30, 2004, was $4.74 and $10.09,respectively, per option share. The fair value of each grant is estimated onthe date of grant using the Black-Scholes option-pricing model with thefollowing assumptions:

 
| ** **                       | ** ** | **13 Weeks Ended**   | ** ** | **39 Weeks Ended**   | ** ** |
|----------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                       | ** ** | **October 29,** | ** ** | **October 30,** | ** ** | **October 29,** | ** ** | **October 30,** | ** ** |
| ** **                       | ** ** | **2005**             | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Average risk-free  interest rate |       | 4.16                 | %          | 3.44                 | %          | 4.20 | % | 3.59 | % |
| Expected dividend yield          |       | 0                    | %          | 0                    | %          | 0 | % | 0 | % |
| Expected stock price  volatility |       | 0.50                 |       | 0.50                 |       | 0.50 |   | 0.50 |   |
| Expected life of stock  options  |       | 5 years              |       | 5 years              |       | 5 years |   | 5 years |   |

 

**8.Earnings Per Share**

 

Basic and diluted loss applicable to common shareholders 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 all periods that reflect a net loss becausetheir inclusion would have an anti-dilutive effect on loss per share. Inaddition, we have excluded any potentially dilutive shares related to theoutstanding convertible debt from the calculation of weighted average sharesoutstanding because their inclusion would have an anti-dilutive effect on lossper share in fiscal 2005.  For the 13weeks ended October 30, 2004, the weighted average shares outstandingincludes 661,000 incremental shares assumed issued, calculated under thetreasury stock method, for purposes of computing diluted income per commonshare. As of October 29, 2005 and October 30, 2004, there were atotal of 3,181,706 and 2,169,146 options to purchase common stock outstanding,respectively.

 

10

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Theaccompanying condensed unaudited financial statements report income (loss)applicable to common shareholders and income (loss) applicable to commonshareholders per share, in accordance with U.S. generally accepted accountingprinciples. We also disclose this information on a pro forma basis below.  We closed our initial public offering ofshares of common stock on April 26, 2004. The pro forma amounts assumethat the conversion of the convertible preferred shares to common shares, our 32-for-1stock split and our initial public offering took place at the beginning of the13-week and 39-week periods ended October 29, 2005, and October 30,2004. The pro forma amounts exclude the preferred stock dividends that areassumed extinguished and the interest expense on the portions of ourindebtedness that would have been paid down with the proceeds from the initialpublic offering, net of $0 taxes. We believe the use of pro forma amountsprovides meaningful information due to the significant increase in outstandingshares as a result of our initial public offering and the elimination of ourpreferred stock dividends.

 
| ** **                                                                                  | ** ** | **13 Weeks Ended**   | ** ** | **39 Weeks Ended**   | ** ** |
|---------------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                                                                  | ** ** | **October 29,** | ** ** | **October 30,** | ** ** | **October 29,** | ** ** | **October 30,** | ** ** |
| ** **                                                                                  | ** ** | **2005**             | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                  | ** ** | ** **           | ** ** | **(restated)**       | ** ** | ** ** | ** ** | **(restated)** | ** ** |
| **Pro Forma Data**                                                                          |       |                 |       |                 |       |   |   |   |   |
| Pro  forma income (loss) applicable to common shareholders                                  |       | $                    | (7,540     | )                    | $          | 1,692 |   | $ | (35,489 | ) | $ | (15,031 | ) |
| **Basic**** **- Pro forma  income (loss) applicable to common shareholders per share   |       | $                    | (0.53      | )                    | $          | 0.12 |   | $ | (2.49 | ) | $ | (1.06 | ) |
| **Diluted**** **-  Pro forma income (loss) applicable to common shareholders per share |       | $                    | (0.53      | )                    | $          | 0.11 |   | $ | (2.49 | ) | $ | (1.06 | ) |
|                                                                                        |       |                 |       |                 |       |   |   |   |   |
| **Reconciliation of Pro Forma Data to GAAP**                                                |       |                 |       |                 |       |   |   |   |   |
| Income  (loss) applicable to common shareholders (GAAP)                                     |       | $                    | (7,540     | )                    | $          | 1,692 |   | $ | (35,489 | ) | $ | (20,278 | ) |
| Preferred  stock dividends                                                                  |       | —               |       | —               |       | — |   | 4,305 |   |
| Interest  expense reduction                                                                 |       | —               |       | —               |       | — |   | 942 |   |
| Income  (loss) applicable to common shareholders (Pro forma)                                |       | $                    | (7,540     | )                    | $          | 1,692 |   | $ | (35,489 | ) | $ | (15,031 | ) |
|                                                                                        |       |                 |       |                 |       |   |   |   |   |
| ***Basic***                                                                                 |       |                 |       |                 |       |   |   |   |   |
| Weighted  average common shares outstanding (GAAP)                                          |       | 14,264               |       | 14,222               |       | 14,252 |   | 10,048 |   |
| Conversion  of preferred stock                                                              |       | —               |       | —               |       | — |   | 2,099 |   |
| Additional  shares issued in IPO                                                            |       | —               |       | —               |       | — |   | 2,075 |   |
| Weighted  average common shares outstanding (Pro forma)                                     |       | 14,264               |       | 14,222               |       | 14,252 |   | 14,222 |   |
|                                                                                             |            |                      |            |                      |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

11

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| ** **                                              | ** ** | **13 Weeks Ended**   | ** ** | **39 Weeks Ended**   | ** ** |
|---------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                              | ** ** | **October 29,** | ** ** | **October 30,** | ** ** | **October 29,** | ** ** | **October 30,** | ** ** |
| ** **                                              | ** ** | **2005**             | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                              | ** ** | ** **           | ** ** | **(restated)**       | ** ** | ** ** | ** ** | **(restated)** | ** ** |
| ***Diluted***                                           |       |                 |       |                 |       |   |   |   |   |
| Weighted  average common shares outstanding             |       | 14,264               |       | 14,222               |       | 14,252 |   | 10,048 |   |
| Incremental  shares from stock options                  |       | —               |       | 661                  |       | — |   | — |   |
| Weighted  average common shares outstanding (GAAP)      |       | 14,264               |       | 14,883               |       | 14,252 |   | 10,048 |   |
| Conversion  of preferred stock                          |       | —               |       | —               |       | — |   | 2,099 |   |
| Additional  shares issued in IPO                        |       | —               |       | —               |       | — |   | 2,075 |   |
| Weighted  average common shares outstanding (Pro forma) |       | 14,264               |       | 14,883               |       | 14,252 |   | 14,222 |   |

 

Wecontinued to reflect the accretion of cumulative unpaid dividends on ourpreviously outstanding Class A, B and C convertible preferred stock, inaccordance with U.S. generally accepted accounting principles, until theclosing of our initial public offering. None of these dividends were paid andany unpaid cumulative dividends were extinguished with the changes in capitalstructure completed in connection with our initial public offering.Accordingly, no related obligation or reduction to net income (loss) isreflected in our quarterly results of operations after May 1, 2004.

 

**9.Income Taxes / Net Operating Loss Limitation**

 

We have determined that a change in ownership, within the meaning of Section 382of the Internal Revenue Code, occurred effective February 8, 2005.  This change in ownership imposes a limitationon the amount of our net operating losses that we may deduct for tax purposesin any given year. Our tax net operating loss carry forward on January 29,2005 was approximately $35 million. The limitation restricts our deduction fornet operating losses to $7.1 million in 2005, $17.0 million in 2006, andbetween $1.0 million and $4.4 million each year for four years thereafter. Thisannual limitation is cumulative. If not fully utilized within the year, it iscarried forward for utilization in future years, in addition to the Section 382limitation for those years.  Due to theuncertainty of the realization of net operating loss carry forwards, we havedetermined the realization of the tax benefit related to our net deferred taxasset is uncertain at this time and a valuation allowance was recorded for theentire balance of our net deferred tax asset. We do not expect this limitationto materially impact our future tax provision for financial reporting purposes.

 

**10.Related Party Transactions and Subsequent Event**

 

On March 17, 2005,we amended the Shared Services Agreement dated as of February 2, 2004 byand between Holiday Companies and us. The amendment substantially reduced thenumber of services provided to us by Holiday Companies as we either providethese services internally or independently secure these services from thirdparty providers. For the 13 and 39-week periods ended October 29, 2005,the amounts paid for services provided by Holiday Companies were $25,000 and$406,000, respectively.

 

In November 2005,we assigned our rights in an aircraft purchase contract to Erickson PetroleumCorp., an affiliate of Holiday Companies. In exchange for the assignment, we received a payment of $1,450,000,including the refund of the $1,250,000 deposit previously paid to the aircraftmanufacturer.

 

See Note6, above, for a description of our issuance in August 2005 of subordinatedunsecured convertible notes to a trust, the current beneficiary of which is amember of our board of directors.

 

**11.Contract Settlement**

 

In March 2005, we received $2,500,000 relating to the terminationof our contract with the former provider of our co-branded credit card servicesin consideration of the lost opportunity. This payment to us is reflected as areduction of general and administrative expenses in the 39-week period ended October 29,2005.

 

12

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**12.Contingencies – Litigation**

 

We are exposed to anumber of asserted and unasserted legal claims encountered in the normal courseof business.  Set forth below is summaryinformation regarding the status of certain ongoing proceedings.  We are not able to predict the ultimateoutcome of the litigation described below, including whether or not appealswill be pursued, but such litigation may be costly and disruptive.  The total costs may not be reasonablyestimated at this time. Please refer to the information under the heading “LegalProceedings” in Part II of our Quarterly Report on Form 10-Q for thequarter ended October 29, 2005 for further information on theseproceedings.

 

*Cabela’sIncorporated* - OnAugust 18, 2005, the U.S. District Court for the District of Minnesotaissued a memorandum opinion and order in our action against Cabela’sIncorporated on the limited question of whether the contingent trademarklicensing provision in our Noncompetition Agreement with Cabela’s is legallyinvalid as a noncompetition agreement. The Court ruled that the provision is not legally invalid as anoncompetition agreement and dismissed the complaint. The court alsoacknowledged that it had not been asked to determine, and was not determining,the scope of the contingent trademark license or the parties respective rightsthereunder.  On November 10, 2005,we filed a motion for leave to amend our complaint against Cabela’s and assertadditional defenses to Cabela’s claims regarding the enforceability of thecontingent trademark license. On December 7, 2005, a magistrate judgeissued an order denying our motion to amend the complaint. The case remainspending because of certain counterclaims filed by Cabela’s which raise theissues discussed above, our additional defenses and other issues. The outcomeof this dispute may impact the manner in which we market our products in thefuture. It is not expected to affect the marketing of our products throughretail stores.

 

*Securities Litigation -*****The Consolidated Class Action Complaint in the actionentitled *In re Gander Mountain Company Securities Litigation*,which was filed on August 9, 2005 in the U.S. District Court for theDistrict of Minnesota, alleges that the defendants, including our company andeight of our present and former directors and executive officers, made falseand misleading public statements about our company, and our business andprospects, in the registration statement and prospectus for our initial publicoffering, and in filings with the SEC and press releases issued thereafter, andthat the market price of our stock was artificially inflated as a result. TheConsolidated Class Action Complaint alleges claims under Sections 11 and15 of the Securities Act of 1933, and under Sections 10(b) and 20(a) ofthe Securities and Exchange Act of 1934. We believe that we, and the otherdefendants, have meritorious defenses to the lead plaintiffs’ claims and wehave moved to dismiss the Consolidated Class Action Complaint. The Courtheard our motion on December 2, 2005, but has not yet issued its ruling.

 

*Derivative Litigation -*****On May 6, 2005, we moved to dismiss the purportedderivative action, *Kurt Haberle v. MarkBaker, et al*, in which our company, as a nominal defendant, and 12of our present and former directors were named as defendants.  On August 30, 2005, the U.S. DistrictCourt for the District of Minnesota issued a memorandum opinion and orderdismissing the complaint on the grounds that plaintiff was required to makepre-suit demand on our board of directors and failed to do so. The plaintiffhas filed a motion for leave to amend its complaint.  The Court has not issued a ruling on thismotion.

 

**ITEM 2.****  MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Forward LookingStatements**

 

Thefollowing discussion may contain forward-looking statements regarding us, ourbusiness prospects and our results of operations that are subject to certainrisks and uncertainties posed by many factors and events that could cause ouractual business, prospects and results of operations to differ materially fromthose that may be anticipated by such forward-looking statements.  Factors that could cause or contribute tosuch differences include, but are not limited to, those described in the “RiskFactors Affecting Current and Future Results” section of our Form 10-Kand other reports, as filed with the Securities and Exchange Commission.  Readers are cautioned not to place unduereliance on these forward-looking statements, which speak only as of the dateof this report.  We undertake noobligation to revise any forward-looking statements in order to reflect eventsor circumstances that may subsequently arise. Readers are urged to carefullyreview and consider the various disclosures made by us in this report and inour other reports filed with the Securities and Exchange Commission that adviseinterested parties of the risks and factors that may affect our business.

 

The interim financials statementsfiled on this Form 10-Q and the discussions contained herein 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 

 

13

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January 29, 2005.

 

**Overview**

 

TheGander Mountain brand name has a 45-year heritage and strong appeal to outdoorlifestyle customers. 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. We have expandedour store base from 26 stores in 1997 to 98 Gander Mountain stores in 18 statesas of October 29, 2005. We opened nine and fourteen new stores during ourthird quarters ended October 29, 2005 and October 30, 2004, respectively,while closing two stores in each of those quarters.  We do not plan to open any stores during thefourth quarter of fiscal 2005 and currently plan to open a total of six toeight stores in fiscal 2006, including two relocations.  However, business conditions, businessstrategy or other factors may cause us to adjust our fiscal 2006 store growthplans.

 

We are transforming our market position from atraditional specialty store to a larger format, category-focused store byopening larger format stores and increasing the selling space within ourexisting stores. The larger format strategy has allowed us to offer ourcustomers a broader and deeper assortment of merchandise. We offercompetitively priced hunting, fishing, camping and boating equipment, accessoriesand related technical apparel and footwear, as well as gunsmith, archery, ATVand marine services. Our stores feature national, regional and local brands aswell as our owned brands, and our associates provide knowledgeable customerservice. Our success will depend, in part, on our ability to grow our businessby building new stores, as well as by increasing sales in our existing storesand becoming profitable on a long-term basis.

 

We are utilizing several strategic andoperating initiatives aimed at improving our merchandise offerings, enhancingprofitability and expanding the number and geographic diversity of ourstores.  We measure performance usingsuch key operating statistics as comparable store sales, sales per square foot,gross margin percentage and store operating expenses, with a focus on labor, asa percentage of sales. These results translate into store operatingcontribution, which we use to evaluate overall performance on an individualstore basis. Store operating contribution is calculated by deducting a store’soperating expenses from its gross margin. In addition, general andadministrative expenses are monitored in absolute amounts, as well as on apercentage of sales basis. Pre-opening expenses are analyzed based on thenumber of store openings, market attributes and store size.

 

We also measure and evaluateinvestments in our retail locations, including inventory and property andequipment. Inventory performance is primarily measured by inventory per squarefoot and by inventory turns, or the number of times store inventory turns overin a given period, and amounts of owned inventory at various times based onpayment terms from our vendors. The most significant investments in propertyand equipment are made at the time a store is opened by us.

 

Webelieve that the overall growth of our business will allow us to generallymaintain or increase our 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 gross margins. As we continue sales and store growth, a numberof other factors may impact, positively or negatively, our gross marginpercentage, including:

 

•                  the introduction of new product categories with varyinggross margin percentage characteristics,

 

•                  changes in the merchandise mix at our currentlocations,

 

•                  differences in merchandise mix by geographic location,

 

•                  price competition,

 

•                  clearance activities in connection with seasonalinventory management,

 

•                  closeout sales in connection with store relocations andconsolidations,

 

•                  sourcing of products from locations outside the UnitedStates,

 

•                  vendor programs, and

 

•                  supply chain enhancements.

 

14

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The most significant store operatingexpenses are labor and related employee benefits and advertising. We believethe combination of increased sales volume and improved labor management withinour stores 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 ismeasured as a percentage of sales. It gives us an overall measure as to whetheror not individual locations and markets are meeting our financial objectives.

 

General and administrative expensesare 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 will continue tobe related to store openings, including relocations. These expenses willfluctuate based on the number and timing of new store openings.

 

Inventory turns are based on cost ofsales and average inventory for the applicable period. We recognize that ourinventory turns may be lower than those of other retailers, which we believe isdue, in part, to the categories of merchandise we carry, including firearms,and the large quantities of merchandise we use in our in-store displays. Webelieve we have the opportunity to enhance our supply chain to improve ourinventory turns. Additionally, in merchandise categories that experience slowerinventory turns, we continue to work with vendors to increase our trade creditterms to reduce our investment in owned inventory. We cannot assure you that wewill be able to improve our inventory turns or inventory investment.

 

Identification of appropriate newstore sites is essential to our growth strategy. We believe our focus on ourlarger store size and our ability to utilize recycled, or second use,facilities and build-to-suit locations provides us with increased opportunitiesto find optimal real estate locations on attractive terms. We evaluate andinvest in new stores based on site-specific projected returns on investment.

 

**CriticalAccounting Policies and Use of Estimates**

 

Our financial statements are preparedin 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 January 29,2005.

 

**Results ofOperations**

 

The following table includes selecteditems in the Unaudited Condensed Statements of Operations, reflected as apercentage of sales:

 

15

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| ** **                           | ** ** | **13 Weeks Ended**   | ** ** | **39 Weeks Ended**   | ** ** |
|--------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                           | ** ** | **October 29,** | ** ** | **October 30,** | ** ** | **October 29,** | ** ** | **October 30,** | ** ** |
| ** **                           | ** ** | **2005**             | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                           | ** ** | ** **           | ** ** | **(restated)**       | ** ** | ** ** | ** ** | **(restated)** | ** ** |
| Sales                                |       | 100.0                | %          | 100.0                | %          | 100.0 | % | 100.0 | % |
| Cost of goods sold                   |       | 76.6                 | %          | 72.9                 | %          | 77.8 | % | 75.4 | % |
| Gross profit                         |       | 23.4                 | %          | 27.1                 | %          | 22.2 | % | 24.6 | % |
| Operating expenses:                  |       |                 |       |                 |       |   |   |   |   |
| Store  operating expenses            |       | 20.0                 | %          | 18.7                 | %          | 21.7 | % | 20.8 | % |
| General  and administrative expenses |       | 4.1                  | %          | 3.9                  | %          | 4.6 | % | 4.8 | % |
| Pre-opening  expenses                |       | 1.3                  | %          | 2.9                  | %          | 1.3 | % | 2.0 | % |
| Income (loss) from  operations       |       | -2.0                 | %          | 1.6                  | %          | -5.4 | % | -3.1 | % |
| Interest expense, net                |       | 1.5                  | %          | 0.7                  | %          | 1.4 | % | 0.9 | % |
| Income (loss) before  income taxes   |       | -3.5                 | %          | 0.9                  | %          | -6.8 | % | -3.9 | % |
| Income tax provision                 |       | 0.0                  | %          | 0.0                  | %          | 0.0 | % | 0.0 | % |
| Net income (loss)                    |       | -3.5                 | %          | 0.9                  | %          | -6.8 | % | -3.9 | % |

 

A store is included inthe comparable store 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. During the quarter ended July 31, 2004, we changedthis internal measurement from the fourteenth month to the fifteenth month tobetter reflect comparable sales activity in the stores and minimize the effectof grand opening activities. This change did not have a material impact on thecomparable store sales measurement.

 

Cost of goods soldincludes the cost of merchandise, freight, distribution, inventory shrinkageand store occupancy costs. Store occupancy costs include rent, real estatetaxes and common area maintenance charges.

 

Store operating expensesinclude store associate payroll, taxes and fringe benefits, advertising,maintenance, utilities, depreciation, insurance, bank and credit card chargesand other store level expenses.

 

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

 

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

 

***Thirteen Weeks Ended October 29, 2005 compared toThirteen Weeks Ended October 30, 2004 (Restated)***

 

*Sales.*  Sales increased by $36.3 million, or 20.4%,to $214.4 million in the third quarter of fiscal 2005, from $178.1 million inthe third quarter of fiscal 2004. This increase primarily resulted from salesof $53.3 million from new stores not yet included in the comparable store salesbase. This increase was partially offset by a comparable store sales decreaseof $12.0 million, or 8.5%, and a $5.0 million sales decrease primarily fromrelocated or consolidated stores.  Weopened nine new stores during the third quarter of fiscal 2005 compared tofourteen new stores during the third quarter of fiscal 2004. Total squarefootage as of October 29, 2005 increased 33.5% to 5.0 million square feet,as compared to October 30, 2004. We closed one store and relocated anotherstore during the quarter ended October 29, 2005. During the same quarterof fiscal 2004 we relocated two stores.

 

Comparable store sales decreased 8.5%compared to a decrease of 7.5% in the third quarter of fiscal 2004.

Webelieve our business was adversely impacted by certain factors, including theweather, directly from unseasonable weather patterns in certain of ouroperating markets, and indirectly, from the impact of three devastatinghurricanes; a downturn in consumer confidence, much of which we believe wasdriven by higher energy prices; and for certain of our comparable stores,competition entering our markets as well as cannibalization from some of ourown new store openings.

 

*GrossProfit.* Gross profit increasedby $1.9 million, or 3.9%, to $50.2 million in the third quarter of fiscal 2005from $48.3 million in the third quarter of fiscal 2004. As a percentage ofsales, gross profit decreased 370 basis 

 

16

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points to 23.4% in the third quarter of fiscal2005 from 27.1% in the third quarter of fiscal 2004.  Major factors primarily affecting grossmargin in the current quarter were:

 

•                  a base product margin increase of approximately 100basis points, offset by,

•                  a negative impact of approximately 100 basis pointsresulting from decreased revenues from the new credit card program as comparedto our previous program,

•                  changes in our product mix, primarily increased salesof lower-margin categories such as firearms and ATV’s and less penetration ofhigher-margin apparel and footwear, accounted for a decrease of 50 basispoints,

•                  aggressive seasonal clearance sales of merchandise in August andSeptember negatively impacted gross margin by 110 basis points,

•                  a negative impact of approximately 60 basis points fromhigher distribution costs, as a result of higher fuel costs and inefficienciesat our distribution center, and

•                  a negative impact of 110 basis points from increasedstore occupancy costs, as a result of reduced leverage from lower comparablestore sales and lower sales per square foot at our newer, less mature stores.

 

*Store Operating Expenses.*  Store operatingexpenses increased by $9.6 million, or 29.0%, to $42.9 million in the thirdquarter of fiscal 2005 from $33.3 million in the third quarter of fiscal 2004.As a percentage of sales, store operating expenses increased 130 basis pointsto 20.0% in the third quarter of fiscal 2005 from 18.7% in the third quarter offiscal 2004. A 30 basis point reduction in our advertising spending was offsetby reduced leverage in labor costs and depreciation due to the comparable storesales decline and higher benefits costs.

 

*General and Administrative Expenses.*  General andadministrative expenses increased by $2.0 million, or 27.8%, to $8.9 million inthe third quarter of fiscal 2005 from $6.9 million in the third quarter offiscal 2004. As a percentage of sales, general and administrative expensesincreased 20 basis points to 4.1% in the third quarter of fiscal 2005 from 3.9%in the third quarter of fiscal 2004. The increase was primarily due toadditional investment in infrastructure in anticipation of higher sales levels,increased legal fees and costs required for Sarbanes-Oxley compliance.

 

*Pre-opening Expenses.*  Pre-opening expenses decreased $2.4million, or 46.8%, to $2.8 million in the third quarter of fiscal 2005 from$5.2 million in the third quarter of fiscal 2004. We opened nine new stores inthe third quarter of fiscal 2005, compared to the fourteen new stores in thethird quarter of fiscal 2004. Our pre-opening expenses per store in the thirdquarter of fiscal 2005 were approximately 20% lower than in the third quarterof fiscal 2004.

 

*Interest Expense, net.*  Interestexpense increased by $2.0 million, or 165.7%, to $3.2 million in the thirdquarter of fiscal 2005 from $1.2 million in the third quarter of fiscal 2004.The increase resulted from higher average borrowings incurred to fund ourgrowth, including the placement of $20 million of convertible debt in August 2005.We also experienced higher average interest rates of approximately 200 basispoints during the third quarter of fiscal 2005, as compared to the thirdquarter of fiscal 2004.

 

*Income Tax Provision.* We did not record an income tax benefit for the third quarters of fiscal2005 or fiscal 2004 due to the uncertainty of the realization of the netoperating loss carry forwards. We have determined the realization of the taxbenefit related to our net deferred tax asset is uncertain at this time and avaluation allowance was recorded for the entire balance of our net deferred taxasset.

 

*Net Loss.*As aresult of the factors discussed above, the net loss of $7.5 million for thethird quarter of fiscal 2005 represented a decrease of $9.2 million from thenet income of $1.7 million for the third quarter of fiscal 2004.

 

***Thirty-Nine Weeks Ended October 29, 2005 compared toThirty-Nine Weeks Ended October 30, 2004 (Restated)***

 

*Sales.*  Sales increased by $118.2 million, or 29.2%, to$523.2 million in the nine months of fiscal 2005, from $405.0 million in thenine months of fiscal 2004. This increase primarily resulted from sales of$151.1 million from new stores not yet included in the comparable store salesbase. This increase was partially offset by a comparable store sales decreaseof $17.5 million, or 5.1%, and a $15.4 million sales decrease primarily fromrelocated or consolidated stores. We opened nineteen new stores during the ninemonths of fiscal 2005 and relocated or consolidated three stores. During thenine months of fiscal 2004, we opened nineteen new stores and relocated 

 

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two stores.

 

Comparable store sales decreased 5.1%after a decrease of 0.7% in the nine months of fiscal 2004. We experiencednegative comparable store sales across most of our product categories. Webelieve the nine month period of fiscal 2005 was negatively impacted by directand indirect weather factors in the third quarter of fiscal 2005; decreasedconsumer confidence driven by higher energy prices; and competition enteringour markets as well as cannibalization from some of our own new store openings.

 

Marine accessories salesproduced a positive comparable store sales result for the nine months of fiscal2005 as a result of expansion of the marine product offering and our increasedfocus on the marine market.  ThePowersports category continued to reflect an increased share of the sales mixfor the nine months of fiscal 2005, driven largely by ATV sales in new largerformat stores, sales of ATV accessories and sales of powerboats. Powerboatswere a newly introduced product offering in early 2005. Our firearms businesscontinues to gain market share, reflecting consistent gains as a percentage of thesales mix. The apparel/footwear categories declined as a percentage of thesales mix, primarily driven by weather factors.

 

*Gross Profit.* Gross profitincreased by $16.7 million, or 16.8%, to $116.1 million in the nine months offiscal 2005 from $99.4 million in the nine months of fiscal 2004. As apercentage of sales, gross profit decreased 240 basis points to 22.2% in thenine months of fiscal 2005 from 24.6% in the nine months of fiscal 2004. Majorfactors primarily affecting gross margin during the nine months of fiscal 2005were:

•                  a base product margin increase of approximately 100basis points, offset by,

•                  changes in our product mix, primarily increased salesof lower-margin categories such as firearms and ATVs and less penetration ofhigher-margin apparel and footwear, accounted for a decrease of 50 basispoints,

•                  a negative impact of approximately 80 basis pointsresulting from the absence of a co-branded credit card program for most of thenine months of fiscal 2005,

•                  aggressive seasonal clearance sales of merchandise inthe second and third quarters of fiscal 2005 negatively impacting gross marginby 70 basis points,

•                  a negative impact of approximately 60 basis points fromhigher distribution costs, as a result of higher fuel costs and inefficienciesat our distribution center, and

•                  a negative impact of 80 basis points from increasedstore occupancy costs, as a result of reduced leverage from lower comparablestore sales and lower sales per square foot at our newer, less mature stores.

 

*Store Operating Expenses.*  Store operatingexpenses increased by $29.3 million, or 34.7%, to $113.6 million in the ninemonths of fiscal 2005 from $84.3 million in the nine months of fiscal 2004. Asa percentage of sales, store operating expenses increased 90 basis points to21.7% in the nine months of fiscal 2005 from 20.8% in the nine months of fiscal2004. A 50 basis point reduction in our advertising spending was offset byreduced leverage in labor costs and depreciation due to the comparable storesales decline, and costs related to the relocation or consolidation of threestores.

 

*General and Administrative Expenses.*  General andadministrative expenses increased by $4.6 million, or 23.7%, to $24.2 millionin the nine months of fiscal 2005 from $19.5 million in the nine months offiscal 2004. As a percentage of sales, general and administrative expensesdecreased 20 basis points to 4.6% in the nine months of fiscal 2005 from 4.8%in the nine months of fiscal 2004. The decrease was due to 60 basis points fromthe termination and settlement of our previous contract with the previousprovider of our co-branded credit card in March 2005 that resulted in apayment to us of $2.5 million. Offsetting this decrease, was a 40 basis pointsincrease in expenses due to reduced leverage from the comparable store salesdecline and increased legal fees.

 

*Pre-opening Expenses.*  Pre-opening expenses decreased $1.4million, or 17.2%, to $6.6 million in the nine months of fiscal 2005 from $7.9million in the nine months of fiscal 2004. We opened nineteen new stores in thenine months of fiscal 2005, including three store relocations andconsolidations, compared to the nineteen new stores we opened in the ninemonths of fiscal 2004, including two store relocations. Our pre-opening expensesper store in fiscal 2005 were approximately 20% lower than in fiscal 2004.

 

*Interest Expense, net.*  Interestexpense increased by $3.6 million, or 100.5%, to $7.2 million in the ninemonths of fiscal 2005 from $3.6 million in the nine months of fiscal 2004. Theincrease resulted from higher average 

 

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borrowingsincurred to fund our growth, including the placement of $20 million inconvertible debt in August 2005. We also experienced higher average interestrates of approximately 90 basis points during the nine months of fiscal 2005,as compared to the nine months of fiscal 2004.

 

*Income Tax Provision.* We did not record an income tax benefit for the nine months of fiscal 2005or fiscal 2004 due to the uncertainty of the realization of the net operatingloss carry forwards. We have determined the realization of the tax benefitrelated to our net deferred tax asset is uncertain at this time and a valuationallowance was recorded for the entire balance of our net deferred tax asset.

 

*Net Loss.*As aresult of the factors discussed above, the net loss of $35.5 million for thenine months of fiscal 2005 represented an increase of $19.5 million from thenet loss of $16.0 million for the nine months of fiscal 2004.

 

*Preferred Stock Dividend. *Until the closing of ourinitial public offering in April 2004, we continued to reflect theaccretion of cumulative unpaid dividends on our previously outstanding Class A,B and C convertible preferred stock in accordance with applicable accountingstandards.  No such dividends were paidand any unpaid cumulative dividends were extinguished with the changes incapital structure associated with the closing of our initial public offering.  No such obligation or reduction to net income(loss) is reflected in our quarterly results of operations after May 1,2004.

 

**Liquidity andCapital Resources**

 

Our primary capitalrequirements are for inventory, capital improvements, pre-opening expenses tosupport our new store growth plans, and, to the extent of the highly seasonalnature of our business, operating losses. Until the completion of our initial public offering, our main sources ofliquidity were equity investments by, and advances from, Holiday Companies andits affiliated entities, and borrowings under our credit facility.

 

*OperatingActivities.*  Net cashused in operating activities for the nine months of fiscal 2005 increased by$13.5 million to $85.3 million, as compared to $71.8 million for the ninemonths of fiscal 2004. The increase was primarily due to the higher net lossoffset by higher depreciation expense.

 

The growth in inventories during bothfiscal periods was representative of seasonal inventory levels, particularlythe increase for the upcoming hunting and holiday seasons, and the building ofinventory levels related to new stores. The decrease in cash needed forinventories in the comparable periods was primarily the result of lowerinventory levels in our recently opened stores as well as the success of our effortsto reduce inventory in all of our stores. The reduced use of cash resultingfrom the inventory reductions on a per store basis was also offset by lessfunding through accounts payable balances, partially due to increased sourcingof foreign products.

 

*Investing Activities*.  Net cash used in investingactivities was $47.8 million in the nine months of fiscal 2005 and $38.4million in the nine months of fiscal 2004, consisting of purchases of propertyand equipment. Additionally, there was $2.4 million in non-cash capitalizedlease obligations recorded in the nine months of fiscal 2004, along with thecorresponding leasehold improvement and equipment assets. We used cashprimarily for tenant improvements and equipment to open new stores and toremodel and upgrade existing stores. There were nineteen new stores opened inthe nine months of both fiscal 2005 and fiscal 2004.  Purchases of property and equipment in thefirst half of fiscal 2005 also included an upgrade to our distribution center,information technology equipment and office furniture and equipment at ourcorporate headquarters.

 

*Financing Activities*. * *Netcash provided by financing activities was $133.6 million in the nine months offiscal 2005, as compared to $110.9 million in the nine months of fiscal 2004.The increased cash need was funded primarily by our credit facility but alsofrom the proceeds from our $20 million convertible debt issuance in August 2005.  Such financing activities were utilized tofund our continued store expansion, including inventory, property andequipment, and to fund our operating losses.

 

On August 16, 2005, we completed a privateoffering of $20 million of subordinated unsecured convertible notes (the “Notes”)in a transaction exempt from registration pursuant to Rule 506 promulgatedunder the Securities Act of 1933, as amended. The Notes are held by atrust, the current beneficiary of which is a member of our board of directors.The director was first elected to serve on the board of directors on the dateof the closing of the transaction.  The Notes are convertible into our common stock at anytime by the holder at an initial conversion price of $16.00 per share.  The conversion price has no resetfeature and adjusts only for dividends, stockdivisions 

 

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orcombinations, recapitalizations and similar occurrences.  The Notes mature on August 16, 2010 andbear interest at 7.0% per annum for the first two years, payable semi-annually,after which the rate will float at a fixed spread of 3.50% on the federal fundsrate from a minimum of 6.0% to a maximum of 8.5%. We may prepay the Notes,without penalty, any time after August 16, 2007, and we have the option torequire conversion of the Notes if the volume-weighted average closing price ofour common stock reaches or exceeds $24.00 for any 20 out of 30 consecutivetrading days. Under the note purchase agreement entered into in connection withthe transaction, we granted the holder certain registration rights, as describedtherein. On October 17, 2005, the Securities and ExchangeCommission declared effective our registration statement on Form S-3 underthe Securities Act of 1933 registering the shares of our common stock issuableupon conversion of the Notes. The proceedsfrom the Notes were used to reduce the outstanding borrowings under our creditfacility. Transaction costs associated with the placement were approximately$85,000.

 

On April 26, 2004, we closed theinitial public offering of our common stock, selling 6,583,750 shares of commonstock at a price of $16.00 per share, resulting in net proceeds to us of $96.2million.  Transaction costs were $9.1million and have been reflected as a reduction of paid-in-capital. We appliedthe entire net proceeds from our initial public offering to reduce debt.

 

*CreditFacility. *In February 2005,we amended our credit facility to increase our availability under the facilityfrom $175,000,000 to $225,000,000 and extended the maturity date to June 2009.In September 2005, we exercised our option to increase the facility to$275,000,000. Availability under the facility may be further increased to$300,000,000, subject to certain conditions including the absence of default.Other substantive terms of the agreement were not materially changed in the February orSeptember amendments. In November 2005, we amended our creditfacility to adjust the level of EBITDA and operating cash flow covenants, asdefined. The testing of the EBITDA covenant is required when our availabilityunder the facility is less than 10% of the facility on any given day. Theamendment also specifies quarterly, rather than annual testing of the operatingcash flow covenant beginning January 28, 2006 and continuing each quarterthereafter.

 

The actual availability underour credit facility is limited to 85% of eligible credit card receivables, plusthe lesser of 68.25% to 75.50% of our eligible inventory, or 85% of ourinventory’s liquidation value, in each case net of specified reserves and lessany letters of credit outstanding. Interest on the outstanding indebtednessunder the credit facility currently accrues at the lender’s prime commerciallending rate plus 0% to 0.5% depending on our EBITDA, as defined in the creditagreement, or, if we elect, at the one, two, three or six month LIBOR plus1.25% to 2.25% depending on such EBITDA. Interests in substantially all of ourassets secure our obligations under the credit facility. As of October 29,2005, we were in compliance with all covenants under this facility. Outstandingborrowings under the credit facility, including letters of credit, were $233.7million and $131.4 million, as of October 29, 2005 and October 30,2004, respectively. Our total remaining borrowing capacity under the creditfacility, after subtracting letters of credit, was $41.3 million as of October 29,2005 and $43.6 million as of October 30, 2004. Outstanding letters ofcredit at October 29, 2005 and October 30, 2004, were $6.1 millionand $4.9 million, respectively.

 

*Income Taxes / Net Operating Loss Limitation.* We have determined that a change in ownership, withinthe meaning of Section 382 of the Internal Revenue Code, occurredeffective February 8, 2005.  Thischange in ownership imposes a limitation on the amount of our net operatinglosses that we may deduct for tax purposes in any given year. Our tax netoperating loss carry forward on January 29, 2005 was approximately $35million. The limitation restricts our deduction for net operating losses to$7.1 million in 2005, $17.0 million in 2006, and between $1.0 million and $4.4million each year for four years thereafter. This annual limitation iscumulative. If not fully utilized within the year, it is carried forward forutilization in future years, in addition to the Section 382 limitation forthose years. We do not expect this limitation tomaterially impact our future tax provision for financial reporting purposes.

 

Due tothe uncertainty of the realization of 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.

 

*Future Capital Requirements*.  Our futurecapital requirements will primarily depend on the number of new stores we openand the timing of those openings within a given fiscal year. These requirementswill include costs 

 

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directlyrelated to opening new stores and may also include costs necessary to ensurethat our infrastructure, including technology and distribution capabilities, isable to support a larger store base. We currently plan to open six to eightstores in fiscal 2006, including two relocations. However, business conditions,business strategy or other factors may cause us to adjust such plans.

 

Additional needs for capital includefunding seasonal inventory levels and operating losses due to our seasonality.We expect to continue to increase our direct product sourcing activities, requiringadditional funding possibly through increased letters of credit or tradecredit. We intend to satisfy our capital requirements over the next twelvemonths with cash flows from operations, funds available under our creditfacility, equipment financing leases and/or funds from additional borrowingcapacity. However, if changes in capital requirements occur, including tradecredit, vendor terms or other factors detailed from time to time in our filingswith the Securities and Exchange Commission, we may need to seek additionalfinancing in the public or private capital markets. There is no assurance thatfinancing will be available to us on acceptable terms.

 

**Contractual Obligations and OtherCommitments**

 

Our material off-balance sheet arrangements areoperating lease obligations and letters of credit.  We excluded these items from the balancesheet in accordance with U.S. generally accepted accounting principles. As of October 29,2005, the minimum operating lease payments due within one year were $46.7million. As of October 29, 2005, total minimum operating lease paymentsremaining over the life of the operating leases were $575.1 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 $6.1million and $4.9 million at October 29, 2005 and October 30, 2004,respectively, and were related primarily to importing of merchandise andfunding insurance program liabilities.

 

In theordinary course of business, we enter into arrangements with vendors topurchase merchandise in advance of expected delivery. Because most ofthese purchase orders do not contain any termination payments or otherpenalties if cancelled, they are not included as outstanding contractualobligations. The merchandise purchases for which we do have firm commitmentsoutstanding, in addition to letters-of-credit, was $2.2 million as of October 29,2005.

 

**Quarterly Results of Operationsand Seasonality**

 

Our quarterly operating results may fluctuatesignificantly because of several factors, including the timing of new storeopenings and related expenses, profitability of new stores, weather conditionsand general economic conditions. Our business is also subject to seasonalfluctuation, with approximately 65% of our sales activity normally occurringduring the third and fourth quarters of our fiscal year, which are primarilyassociated with the fall hunting seasons and the holiday season.  The first half of our fiscal years haveaveraged approximately 35% of our annual sales, including new store sales, overthe past two years. However, this factor cannot necessarily be used as anindicator of future results. Our customers’ demand for our products and thereforeour sales, can be significantly impacted by unseasonable weather conditionsthat affect outdoor activities and the demand for related apparel andequipment. This seasonality also impacts our inventory levels, which tend torise beginning approximately in April, reach a peak in November, and decline tolower levels after the December holiday season.

 

Our pre-opening expenses have and willcontinue to vary significantly from quarter to quarter, primarily due to thetiming of store openings.  We typicallyincur most pre-opening expenses for a new store during the three monthspreceding, and the month of, its opening. In addition, our labor and operating costs for a newly opened store canbe greater during the first one to two months of operation than what can beexpected after that time, both in aggregate dollars and as a percentage ofsales.  Accordingly, the volume andtiming of new store openings in any quarter has had and is expected to continueto have a significant impact on quarterly pre-opening costs and store labor andoperating expenses.  Due to thesefactors, results for any particular quarter may not be indicative of results tobe expected for any other quarter or for a full fiscal year.

 

**ITEM 3.****  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

We are exposed to market risk from changes in interestrates on borrowings under our credit facility. This floating rate indebtednesswas $227.6 million at October 29, 2005 and averaged $198.8 million duringthe third quarter of fiscal 2005. If short-term floating interest rates on ouraverage variable rate debt for the third quarter of fiscal 2005 had changed by100 basis points, our interest expense would have increased by approximately$0.5 

 

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million,assuming comparable borrowing levels. These amounts are determined byconsidering the impact of the hypothetical interest rates on our average amountof floating rate indebtedness outstanding and cash equivalents balances foreach of the respective fiscal years.

 

We haveno derivative financial instruments or derivative commodity instruments in ourcash and cash equivalents.  We have nointernational sales, 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 theend of the period covered by this report, we conducted an evaluation, under thesupervision and with the participation of the principal executive officer andprincipal financial officer, of our disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934 (the “Exchange Act”)). Based on this evaluation, the principal executive officer and principalfinancial 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. There was no change in our internal control over financial reportingidentified in connection with the evaluation required by Rule 13a-15(d) and15d-15(d) of the Exchange Act that occurred during the period covered bythis report that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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

#### ** **

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

 

***Cabela’s Incorporated***

* *

As reported in ourAnnual Report on Form 10-K for the fiscal year ended January 29,2005, on July 2, 2004, we filed an Arbitration Demand with the AmericanArbitration Association seeking arbitration of certain issues arising under ourNoncompetition Agreement dated May 16, 1996, with Cabela’sIncorporated.  On July 2, 2004, wealso filed a Complaint in the U.S. District Court for the District of Minnesotaseeking a declaratory judgment that a contingent trademark licensing provisionof the Noncompetition Agreement is unenforceable.  Although the noncompetition provisions of theNoncompetition Agreement expired in June 2003, Cabela’s contends that theNoncompetition Agreement may require us to grant Cabela’s a license that wouldrestrict our ability to use certain of our trademarks that were in existence in1996 in a “direct marketing business” (as defined in the NoncompetitionAgreement).  We filed the ArbitrationDemand and the Complaint to seek clarification as to the interpretation andenforceability of the Noncompetition Agreement. Cabela’s denied the claims in the Complaint and the Arbitration Demand.

 

In May 2005, weterminated the arbitration proceeding as moot and moved forward in the federalcourt action to seek a declaration that the contingent trademark licensingprovision of the Noncompetition Agreement is invalid and unenforceable.  On August 18, 2005, the district courtissued a memorandum opinion and order on the limited question of whether thecontingent trademark licensing provision is legally invalid as a noncompetitionagreement.  The Court ruled that theprovision is not legally invalid as a noncompetition agreement and dismissedthe complaint.  The court alsoacknowledged that it had not been asked to determine, and was not determining,the scope of the contingent trademark license or the parties respective rightsthereunder.  On November 10, 2005,we filed a motion for leave to amend our complaint against Cabela’s and assertadditional defenses to Cabela’s claims regarding the enforceability of the contingenttrademark license.  On December 7,2005, a magistrate judge issued an order denying our motion to amend thecomplaint. The case remains pending because of certain counterclaims filed byCabela’s which raise the issues discussed above, our additional defenses andother issues. We are not able to predict the ultimate outcome of suchproceedings, but they may be costly and disruptive. The total costs may not bereasonably estimated at this time.  Theoutcome of this dispute may impact the manner in which we market our productsin the future.  It is not expected toaffect the marketing of our products through retail stores.

 

**Securities Litigation**

 

Our company and eight ofour present and former directors and executive officers were named asdefendants in a purported class action alleging violations of the federalsecurities laws.  The action is pendingin the U.S. District Court for the District of Minnesota, where it is titled *In re Gander Mountain Company Securities*

 

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*Litigation*.  The action arose from the consolidation ofsix virtually identical actions, which were filed between January 28, 2005and March 4, 2005.  The leadplaintiffs in the consolidated action seek to represent a class of all persons(except defendants) who purchased stock in our initial public offering on April 20,2004, or in the open market between April 21, 2004 and January 14,2005. The Consolidated Class Action Complaint, which was filed on August 9,2005, alleges that the defendants made false and misleading public statementsabout our company, and our business and prospects, in the registrationstatement and prospectus for our initial public offering, and in filings withthe SEC and press releases issued thereafter, and that the market price of ourstock was artificially inflated as a result. The Consolidated Class ActionComplaint alleges claims under Sections 11 and 15 of the Securities Act of1933, and under Sections 10(b) and 20(a) of the Securities andExchange Act of 1934. The lead plaintiffs seek compensatory damages on behalfof the alleged class and an award of attorneys’ fees and costs of litigation.

 

We believe that we, andthe other defendants, have meritorious defenses to the lead plaintiffs’ claimsand we have moved to dismiss the Consolidated Class Action Complaint. TheCourt heard our motion on December 2, 2005, but has not yet issued itsruling. We are not able to predict the ultimate outcome of this litigation, butit may be costly and disruptive. The total costs may not be reasonablyestimated at this time. Securities class action litigation can result insubstantial costs and divert our management’s attention and resources, whichmay have a material adverse effect on our business and results of operations,including our cash flows.

 

**Derivative Litigation**

 

Our company, as a nominaldefendant, and 12 of our present and former directors were named as defendantsin a purported derivative action, *Kurt Haberle v. Mark R.Baker, et al*, thatwas filed on February 11, 2005 in the U.S. District Court for the Districtof Minnesota. In the complaint, the shareholder-plaintiff alleged claims ofbreach of fiduciary duty, abuse of control, gross mismanagement, waste ofcorporate assets and unjust enrichment against the individual defendantsarising out of the same events that are alleged in the federal securitiesactions that are described above. Essentially, the complaint asserted thatwrongful conduct by the individual defendants resulted in our company makingfalse and misleading public statements, which in turn led to our companygetting sued for federal securities fraud, which in turn has caused our companyto lose market capitalization, reputation and goodwill. The complaint soughtcompensatory damages from the individual defendants for the loss allegedlysustained by our company, restitution and disgorgement of all profits, benefitsand other compensation obtained by the individual defendants and an award ofattorneys’ fees and costs of litigation.  On May 6, 2005, we moved to dismiss the case. On August 30,2005, the court issued a memorandum opinion and order dismissing the complainton the grounds that plaintiff was required to make pre-suit demand on our boardof directors and failed to do so. The plaintiff has filed a motion for leave toamend its complaint.  The Court has notissued a ruling on this motion.  We arenot able to predict the ultimate outcome of this litigation, but it may be costlyand disruptive.

 

**ITEM 2.****  UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

 

Notapplicable.

 

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

 

Notapplicable.

 

**ITEM 4.****  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

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) |

 

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| 10.1   |   | Amendment Agreement No. 1,  dated November 14, 2005, to Amended and Restated Loan and Security  Agreement dated February 23, 2005, among the Registrant, Fleet Retail  Group, Inc., 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 collateral 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 byreference to Exhibit 3.3 to Amendment No. 1 to the Registrant’sRegistration Statement on Form S-1 (Registration No. 333-112494),filed with the Commission on March 15, 2004.

(2)          Incorporated byreference to Exhibit 3.4 to Amendment No. 1 to the Registrant’sRegistration Statement on Form S-1 (Registration No. 333-112494),filed with the Commission on March 15, 2004.

(3)          Incorporated byreference to Exhibit 10 to the Registrant’s Current Report on Form 8-K(File No. 0-50659), filed with the Commission on November 16, 2005.

 

**SIGNATURES**

 

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

 

 
|                         | GANDER  MOUNTAIN COMPANY                                                                                                           |
|------------------------------|------------------------------------------------------------------------------------------------------------------------------------|
|                         |                                                                                                                               |
|                         |                                                                                                                               |
| Date: December 9,  2005 | By:                                                                                                                                | /s/  Mark R. Baker |   |
|                         | Mark R.  Baker*President and Chief Executive Officer*  (Principal Executive Officer)                                               |
|                         |                                                                                                                               |
|                         |                                                                                                                               |
| Date: December 9,  2005 | By:                                                                                                                                | /s/  Dennis M. Lindahl |   |
|                         | Dennis  M. Lindahl*Executive Vice President, Chief Financial Officer  and Treasurer*  (Principal Financial and Accounting Officer) |
|                              |                                                                                                                                    |  |  |  |

 

**INDEX TO EXHIBITS**

 
| **Exhibit No.** | ** ** | **Description**                                                   | ** ** | **Method of Filing**           |
|----------------------|------------|-------------------------------------------------------------------|------------|--------------------------------|
| ** **           | ** ** | ** **                                                        | ** ** | ** **                     |
| 3.1                  |       | Amended and Restated  Articles of Incorporation of the Registrant |       | Incorporated By  Reference (1) |

 

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| 3.2    |   | Amended and Restated  Bylaws of the Registrant                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   | Incorporated By  Reference (2) |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                           |
| 10.1   |   | Amendment Agreement No. 1,  dated November 14, 2005, to Amended and Restated Loan and Security  Agreement dated February 23, 2005, among the Registrant, Fleet Retail  Group, Inc., 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 collateral 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           |

 

25

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