| GANDER MOUNTAIN CO ITEM 1A Risk Factors Risks Related to Our Business Our current business strategy that focuses on large-format retail stores has not been proven successful on a long-term basis and may negatively impact our operating results |
| In fiscal 2003, we began implementing our current business strategy that focuses on large-format retail stores |
| The viability of this business strategy has not been proven on a long-term basis |
| We have transitioned from opening approximately 30cmam000-square-foot stores to predominantly opening stores ranging from 50cmam000 to 100cmam000 square feet |
| The results we achieved at our small-format stores may not be indicative of the results that we may achieve at our new large-format stores |
| The large format increases our operating costs per store, but may not lead to proportionately increased revenues per store |
| Our mix of higher and lower-margin merchandise in our large-format stores differs from the merchandise mix in our small-format stores, and therefore, may negatively impact our gross margins in our large-format stores |
| We cannot assure you that we will be successful in operating our large-format stores on a profitable basis |
| If a large-format store is unprofitable, the impact on our financial results could be greater than the impact of an unprofitable small-format store |
| Our concentration of stores in the Great Lakes region of the United States makes us susceptible to adverse conditions in this region, including atypical weather |
| The majority of our stores are located in the Great Lakes region of the United States |
| Our growth may result in other regional concentrations over time, such as in Texas |
| As a result, our operations are more susceptible to regional factors than the operations of more geographically diversified competitors |
| These factors include regional economic and weather conditions, natural disasters, demographic and population changes and governmental regulations in the states in which we operate |
| Environmental changes and disease epidemics affecting fish or game populations in this region may also affect our sales |
| If the region were to suffer an economic downturn or other adverse event, our operating results could suffer |
| Our results of operations may be harmed by unseasonably warm winter weather conditions |
| Many of our stores are located in areas that traditionally experience seasonably cold weather |
| Abnormally warm weather conditions could reduce our sales of seasonal items and harm our operating results |
| Moreover, significant snowfalls or other adverse weather on peak shopping days, particularly during the holiday season, could impact our sales if potential customers choose not to shop during those days |
| Our operating results are subject to seasonal fluctuations |
| We experience substantial seasonal fluctuations in our sales and operating results |
| We generated approximately 62prca of our net sales in our third and fourth quarters of fiscal 2005, which include the peak hunting and holiday seasons |
| We incur significant additional expenses in the third and fourth fiscal quarters due to higher purchase volumes and increased staffing in our stores |
| If, for any reason, we miscalculate the demand for our products or our product mix during the third or fourth fiscal quarters, our sales in these quarters could decline, resulting in significantly lower margins and excess inventory, which could cause our annual operating results to suffer and our stock price to decline significantly |
| The growth of our business is dependent upon the availability of adequate capital |
| The growth of our business depends on the availability of adequate capital, which in turn depends in large part on cash flow generated by our business and the availability of equity and debt financing |
| We cannot assure you that our operations will generate positive cash flow or that we will be able to obtain equity or debt financing on acceptable terms or at all |
| Our credit facility contains provisions that restrict our ability to incur additional indebtedness or make substantial asset sales that might otherwise be used to finance our expansion |
| Security interests in substantially all of our assets, which may further limit our 17 ______________________________________________________________________ access to certain capital markets or lending sources, secure our obligations under the credit facility |
| Moreover, the actual availability of funds under our credit facility is limited to specified percentages of our eligible inventory and credit card receivables |
| Accordingly, opportunities for increasing our cash on hand through sales of inventory would be partially offset by reduced availability under our credit facility |
| Our expansion into new, unfamiliar markets presents increased risks that may prevent us from being profitable in these new markets |
| In these new markets, we may have less familiarity with local customer preferences, difficulties in attracting customers due to a reduced level of customer familiarity with our brand, difficulties in hiring a sufficient number of qualified store associates and other challenges |
| In addition, entry into new markets may bring us into competition with new, unfamiliar competitors |
| We cannot assure you that we will be successful in operating our stores in new markets on a profitable basis |
| Our expansion strategy includes further penetration of our existing markets, which could cause sales at our existing stores to decline |
| Pursuant to our expansion strategy, we are opening additional stores in our existing markets |
| Because our new, larger stores typically draw customers from a greater area, a new store may draw customers away from any existing stores in the general service area and may cause sales performance and customer counts at those existing stores to decline, which may adversely affect our overall operating results |
| An inability to find suitable new store sites or delays in new store openings could materially affect our financial performance |
| In order to meet our growth objectives, we will need to secure an adequate number of suitable new store sites |
| We require that all proposed store sites satisfy our criteria regarding cost and location |
| In addition, we are experiencing increased competition for store sites as our competitors seek to expand |
| We cannot assure you that we will be able to find a sufficient number of suitable new sites for any planned expansion in any future period |
| Our expected financial performance is based on our new stores opening on expected dates |
| It is possible that events such as problems with our credit, delays in the entitlements process or construction delays caused by permitting or licensing issues, material shortages, labor issues, weather delays or other acts of god, discovery of contaminants, accidents, deaths or injunctions could delay planned new store openings beyond their expected dates or force us to abandon planned openings altogether |
| Any failure on our part to recognize or respond to these issues may adversely affect our sales growth, which in turn may adversely affect our future operating results |
| If we lose key management or are unable to attract and retain the talent required for our business, our operating results and financial condition could suffer |
| Our performance depends largely on the leadership efforts and abilities of our senior management, including our chief executive officer and president, Mark Baker; our executive vice president and chief financial officer, Dennis Lindahl; our executive vice president, merchandising and marketing, Richard Vazquez; our senior vice president, store operations, Andrew Carlin; our senior vice president and general counsel, Eric Jacobsen; and our senior vice president, supply chain and chief administrative officer, Sharon Link |
| None of our employees, except these executive officers, have an employment agreement with us and we do not have key person insurance covering any of our employees |
| If we lose the services of one or more of our key executives, we may not be able to successfully manage our business or achieve our growth 18 ______________________________________________________________________ objectives |
| As our business grows, we will need to attract and retain additional qualified personnel in a timely manner |
| We rely on a single distribution center, and if there is a natural disaster or other serious disruption at the facility, we may be unable to deliver merchandise effectively to our stores |
| We rely on a single distribution center in Lebanon, Indiana |
| Any natural disaster or other serious disruption at this facility due to fire, tornado, flood or any other cause could damage our on-site inventory or impair our ability to use our distribution center as a docking location for merchandise |
| While we maintain business interruption insurance, as well as general property insurance, the amount of insurance coverage may not be sufficient to cover our losses in such an event |
| Any of these occurrences could impair our ability to adequately stock our stores and harm our operating results |
| Our planned growth may strain our business infrastructure, which could adversely affect our operations and financial condition |
| Over time, we expect to significantly expand the size of our retail store network |
| As we grow, we will face the risk that our existing resources and systems, including management resources, accounting and finance personnel and operating systems, may be inadequate to support our growth |
| In addition, the retention of additional personnel and the implementation of changes and enhancements to our systems will require capital expenditures and other increased costs that could also have a material adverse impact on our operating results |
| Our expansion in new and existing markets may also create new distribution and merchandising challenges, including strain on our distribution center, an increase in information to be processed by our management information systems and diversion of management attention from operations towards the opening of new stores and markets |
| Based on our current growth strategy, we will need to increase our distribution capabilities within the next few years, which could disrupt our business operations |
| To the extent that we are not able to meet these additional challenges, our sales could decrease and our operating expenses could increase |
| Through much of our history, we have experienced net losses and negative cash flow from operations |
| As of January 28, 2006, we had an accumulated deficit of dlra38dtta5 million |
| We have increased our expenses significantly to expand our store base |
| We may not generate sufficient revenue to offset these expenditures and may incur losses that we would not incur if we developed our business more slowly |
| If our revenue grows more slowly than we anticipate, or if our cost of goods sold or operating expenses exceed our expectations, our operating results would be harmed and the trading price of our common stock could suffer |
| Our business depends on our ability to meet our labor needs |
| Our success depends in part upon our ability to attract, motivate and retain a sufficient number of qualified employees, including store managers, assistant managers, customer service representatives and store associates, who understand and appreciate our “We Live Outdoors” culture and are able to adequately represent this culture to our customers |
| Qualified individuals of the requisite caliber and number needed to fill these positions may be in short supply in some areas, and the turnover rate in the retail industry is high |
| If we are unable to hire and retain sales associates capable of consistently providing a high level of customer service, as demonstrated by their enthusiasm for our culture and knowledge of our 19 ______________________________________________________________________ merchandise, our business could be materially adversely affected |
| Although none of our employees is currently covered by collective bargaining agreements, we cannot guarantee that our employees will not elect to be represented by labor unions in the future, which could increase our labor costs |
| Additionally, competition for qualified employees could require us to pay higher wages to attract a sufficient number of employees |
| An inability to recruit and retain a sufficient number of qualified individuals in the future may delay the planned openings of new stores |
| Any such delays, any material increases in employee turnover rates at existing stores or any increases in labor costs could have a material adverse effect on our business, financial condition or operating results |
| If we fail to anticipate changes in consumer demands, including regional preferences, in a timely manner, our operating results could suffer |
| Our products appeal to consumers who regularly hunt, fish, camp and boat |
| The preferences of these consumers cannot be predicted with certainty and are subject to change |
| In addition, due to different types of fish and game stocks and different weather conditions found in different markets, it is critical that our stores stock appropriate products for their markets |
| Our success depends on our ability to identify product trends in a variety of markets as well as to anticipate, gauge and react to changing consumer demands in these markets in a timely manner |
| If we misjudge the market for our products, our sales may decline significantly and we may face significant excess inventory of some products and missed opportunities for other products, which could harm our operating results |
| Our ability to use certain of our trademarks in direct marketing activities is uncertain |
| We and one of our competitors, Cabela’s Incorporated, have a dispute regarding the enforceability and scope of a non-competition agreement entered into in 1996 |
| Although the non-competition provisions of the agreement expired in June 2003, our competitor contends that a contingent trademark licensing provision may require us to grant it a license that would restrict our ability to use certain of our trademarks that were in existence in 1996 in a “direct marketing business” (as defined in the agreement) |
| In July 2004, we filed a complaint in the US District Court for the District of Minnesota seeking clarification as to the interpretation and enforceability of the non-competition agreement |
| In August 2005, our complaint was dismissed without resolving our competitor’s counterclaim to enforce the contingent trademark provision |
| In December 2005, the court denied our motion to amend the complaint but granted our motion to amend our reply to the counterclaim, which permits us to raise our issues regarding the enforceability and scope of the contingent trademark provision |
| We are not able to predict the ultimate outcome of this litigation, but it may be costly and disruptive |
| The total costs may not be reasonably estimated at this time |
| The contested agreement with Cabela’s affects only the use of certain trademarks and does not prohibit us from engaging in Internet and catalog sales activities utilizing other trademarks not in dispute |
| Although the outcome of this dispute may impact the manner in which we market our products in certain distribution channels in the future, it is not expected to have any impact on the marketing of our products through our retail stores |
| We may be named in litigation, which may result in substantial costs and divert management’s attention and resources |
| We face legal risks in our business, including claims from disputes with our employees and our former employees and claims associated with product liability |
| Risks associated with legal liability often are difficult to assess or quantify and their existence and magnitude can remain unknown for significant periods of time |
| While we maintain director and officer insurance, as well as general and product liability insurance, the amount of insurance coverage may not be sufficient to cover a claim and the continued availability of this insurance cannot be assured |
| We may in the future be the target of litigation and this litigation may result in substantial costs and divert management’s attention and resources |
| 20 ______________________________________________________________________ Our comparable store sales will fluctuate and may not be a meaningful indicator of future performance |
| Our comparable store sales have fluctuated significantly |
| Changes in our comparable store sales results could adversely affect the price of our common stock |
| Among the factors that have historically affected, and will continue to affect, our comparable store sales are: competition, our new store openings, general and regional economic conditions, consumer trends and preferences, timing and effectiveness of promotional events, loss of key vendors, disruption to our supply chain, seasonality, natural disasters and adverse weather |
| There is no assurance that we will be able to maintain or increase our comparable store sales over time |
| Our computer hardware and software systems are vulnerable to damage that could harm our business |
| Our success, in particular our ability to successfully manage inventory levels, largely depends upon the efficient operation of our computer hardware and software systems |
| We use management information systems to track inventory information at the store level, communicate customer information and aggregate daily sales, margin and promotional information |
| These systems are vulnerable to damage or interruption from: · fire, flood, tornado and other natural disasters; · power loss, computer system failures, internet and telecommunications or data network failures, operator negligence, improper operation by or supervision of employees, physical and electronic loss of data or security breaches, misappropriation and similar events; · computer viruses; and · upgrades, installations of major software releases and integration with new systems |
| Any failure that causes an interruption in our systems processing could disrupt our operations and result in reduced sales |
| We have centralized the majority of our computer systems in our corporate office |
| It is possible that an event or disaster at our corporate office could materially and adversely affect the performance of our company and the ability of each of our stores to operate efficiently |
| If any of our key vendors or manufacturers fails to supply us with merchandise or changes key business terms, we may not be able to meet the demands of our customers and our sales could decline |
| We depend on merchandise purchased from our vendors and sourced from third-party manufacturers to obtain products for our stores |
| Our vendors and manufacturers could discontinue selling products to us at any time |
| The loss of any key vendor or manufacturer for any reason could limit our ability to offer products that our customers want to purchase |
| In addition, we believe many of our vendors obtain their products from China, Taiwan, Korea, Mexico and other foreign countries and we source products from third-party manufacturers in foreign countries |
| A vendor could discontinue selling to us products manufactured in foreign countries at any time for reasons that may or may not be in our control or the vendor’s control, including foreign government regulations, political unrest, war, disruption or delays in shipments, changes in local economic conditions and trade issues |
| In addition, to the extent that any foreign supplier utilizes labor or other practices that vary from those commonly accepted in the US, we could be adversely affected by any resulting negative publicity or otherwise |
| Changes in commercial practices of our key vendors or manufacturers, such as changes in vendor support and incentives or changes in credit or payment terms, could negatively impact our results |
| Our operating results could also suffer if we are unable to promptly replace a vendor or manufacturer who is unwilling or unable to satisfy our requirements with a vendor or manufacturer providing equally appealing products |
| 21 ______________________________________________________________________ We may pursue strategic acquisitions, which could have an adverse impact on our business |
| We have considered acquisitions in the past and we may from time to time acquire complementary businesses in the future |
| Acquisitions may result in difficulties in assimilating acquired companies, and may result in the diversion of our capital and our management’s attention from other business issues and opportunities |
| We may not be able to successfully integrate companies that we acquire, including their personnel, financial systems, distribution, operations and general store-operating procedures |
| If we fail to successfully integrate acquired companies, our business could suffer |
| In addition, the integration of any acquired business, and its financial results, into ours may adversely affect our operating results |
| Risks Related to Our Industry A downturn in the economy may affect consumer purchases of discretionary items, which could harm our operating results |
| In general, our sales represent discretionary spending by our customers |
| Discretionary spending is affected by many factors, including, among others: · general business conditions, · interest rates, · inflation, · the availability of consumer credit and consumer debt levels, · taxation, · energy and fuel prices, · unemployment trends, · natural disasters, · terrorist attacks and acts of war, and · other matters that influence consumer confidence and spending |
| Our customers’ purchases of discretionary items, including our products, could decline during periods when disposable income is lower or periods of actual or perceived unfavorable economic conditions |
| If this occurs, our operating results could suffer |
| Competition in the outdoor products industry could limit our growth and harm our operating results |
| The retail market for outdoor products is highly fragmented and competitive, with competition increasing in recent periods |
| Our current and prospective competitors include many large companies that have substantially greater market presence, name recognition, and financial, marketing and other resources than we do |
| In addition, most of our largest competitors have undertaken accelerated growth strategies |
| We compete directly or indirectly with the following categories of companies: · local specialty stores; · large format entertainment-focused outdoor retailers, such as Cabela’s and Bass Pro; · other outdoor-focused chains, such as Sportsman’s Warehouse; · catalog and Internet-based retailers, such as Cabela’s, Bass Pro and The Sportsman’s Guide; 22 ______________________________________________________________________ · traditional sporting goods chains, such as The Sports Authority, Dick’s Sporting Goods and Academy; · discount chains and mass merchants, such as Wal-Mart, Kmart and Target Corporation; and · marinas and marine supply stores, such as West Marine and Boater’s World |
| Pressure from our competitors could require us to reduce our prices or increase our spending for advertising and promotion, which could erode our margins |
| Increased competition in markets in which we have stores or the adoption by competitors of innovative store formats, aggressive pricing strategies and retail sale methods, such as the Internet, could cause us to lose market share and could have a material adverse effect on our business, financial condition and results of operations |
| We may be subject to product liability claims relating to our sale of outdoor equipment and firearms, and our insurance may not be sufficient to cover damages related to those claims |
| We may incur damages due to lawsuits relating to outdoor equipment that we sell |
| For example, we sell tree stands, which are equipment that hunters attach to trees to allow them to sit above the ground while hunting, and we have been sued in the past and may incur damages in the future due to lawsuits relating to injuries or deaths associated with the tree stands sold by us |
| We may also be subject to lawsuits relating to the design, manufacture or sale of our owned-brand products |
| In addition, we sell and service rifles, shotguns and handguns, along with archery equipment, which are products that are associated with an increased risk of injury and death |
| We may incur damages due to lawsuits relating to the improper use of firearms sold by us, including lawsuits by municipalities or other organizations attempting to recover costs from firearm manufacturers and retailers relating to the misuse of firearms |
| We may be subject to lawsuits relating to our performance of background checks on firearms purchasers as mandated by state and federal law |
| We also sell and service boats and all-terrain vehicles (ATVs), which are motorized vehicles designed for off-road use |
| Lawsuits relating to the products we sell could result in substantial liability, which would adversely affect our business and financial condition |
| There is a risk that claims or liabilities relating to products we sell will exceed our insurance coverage and we may be unable to retain adequate liability insurance in the future |
| In addition, the commencement of lawsuits against us relating to our sale of outdoor equipment or firearms could cause us to reduce our sales of those products |
| Increased regulation of the sale of firearms could cause us to reduce our firearm sales, which could harm our operating results |
| Increased federal, state or local regulation, including taxation, of the sale of firearms in our current markets or in future markets in which we may operate could cause us to reduce our firearm sales or adversely affect our margins on these sales |
| Sales of firearms represent a significant percentage of our net sales and are critical in drawing customers to our stores |
| A substantial reduction in our sales or margins on sales of firearms due to the establishment of new regulations could harm our operating results |
| Some of the products and services we sell are highly regulated, which could lead to high compliance costs |
| We are subject to regulation by the Bureau of Alcohol, Tobacco, Firearms and Explosives, the Consumer Product Safety Commission, the Occupational Safety and Health Administration and similar state regulatory agencies |
| If we fail to comply with government and industry safety standards, we may be subject to claims, lawsuits, fines and adverse publicity that could have a material adverse effect on our business, results of operations and financial condition |
| In addition, regulations issued by the Bureau of Alcohol, Tobacco, Firearms and Explosives may delay our ability to change certain of our officers and prohibit some individuals from serving in certain of our offices |
| 23 ______________________________________________________________________ Risks Related to Our Common Stock Erickson family members and their affiliates own a controlling interest in our company and these individuals and entities may have interests that differ from those of our other shareholders |
| Members of the Erickson family and their affiliates collectively own a controlling interest in us through a combination of their individual stock ownership and their control of our largest shareholder, Holiday Stationstores, Inc |
| Assuming no sales by members of the Erickson family and their affiliates, the Erickson family and their affiliates own approximately 50prca of our outstanding voting stock |
| and members of the Erickson family are able to influence or control matters requiring approval by our shareholders, including the election of directors and the approval of mergers or other extraordinary transactions |
| They may have interests that differ from or otherwise conflict with those of other shareholders and may vote in a way with which you disagree and that may be adverse to your interests |
| The concentration of ownership may have the effect of delaying, preventing or deterring a change in control of our company, could deprive our shareholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately affect the market price of our common stock |
| No members of the Erickson family or the entities they control are subject to any contractual obligations to retain their controlling interest |
| A sale by the Erickson family or their affiliates of a large interest in us, or the perception that such a sale could occur, could cause the market price of our common stock to decline significantly |
| Conflicts of interest may arise as a result of the controlling interest in our company held by the Erickson family |
| Conflicts of interest may arise as a result of the continued collective controlling ownership interest of Holiday Stationstores, Inc |
| Two members of our board of directors are members of the Erickson family, including Ronald Erickson, our chairman, and Gerald Erickson |
| We may face unavoidable conflicts of interest when our board of directors faces decisions that affect both us and Erickson family interests |
| We can issue shares of preferred stock without shareholder approval, which could adversely affect the rights of common shareholders |
| Our articles of incorporation permit us to establish the rights, privileges, preferences and restrictions, including voting rights, of future series of our preferred stock and to issue such stock without approval from our shareholders |
| The rights of holders of our common stock may suffer as a result of the rights granted to holders of preferred stock that may be issued in the future |
| In addition, we could issue preferred stock to prevent a change in control of our company, depriving common shareholders of an opportunity to sell their stock at a price in excess of the prevailing market price |
| Certain provisions of Minnesota law may make a takeover of our company more difficult, depriving shareholders of opportunities to sell shares at above-market prices |
| Certain provisions of Minnesota law may have the effect of discouraging attempts to acquire us without the approval of our board of directors |
| Section 302A671 of the Minnesota statutes, with certain exceptions, requires approval of any acquisition of the beneficial ownership of 20prca or more of our voting stock then outstanding by a majority vote of our shareholders prior to its consummation |
| In general, shares acquired in the absence of such approval are denied voting rights and are redeemable by us at their then-fair market value within 30 days after the acquiring person failed to give a timely information statement to us or the date the shareholders voted not to grant voting rights to the acquiring person’s shares |
| Section 302A673 of the Minnesota statutes generally prohibits any business combination by us, or any of our subsidiaries, with an interested shareholder, which includes any shareholder that purchases 10prca or 24 ______________________________________________________________________ more of our voting shares within four years following such interested shareholder’s share acquisition date, unless the business combination is approved by a committee of all of the disinterested members of our board of directors before the interested shareholder’s share acquisition date |
| Consequently, our common shareholders may lose opportunities to sell their stock for a price in excess of the prevailing market price due to these protective measures |
| The price of our common stock is volatile |
| The trading price of our common stock fluctuates substantially |
| These fluctuations could cause you to lose part or all of your investment in our shares of common stock |
| The factors that could cause fluctuations include, but are not limited to, the following: · price and volume fluctuations in the overall stock market from time to time; · significant volatility in the market price and trading volume of outdoor and sporting goods companies and other retail companies; · relatively few shares available for public trading; · actual or anticipated changes in our sales and earnings, fluctuations in our operating results or the failure to meet the expectations of financial market analysts and investors; · investor perceptions of the outdoor products and sporting goods industry and retail industries in general and our company in particular; · the operating and stock performance of comparable companies; · general economic conditions and trends; · major catastrophic events; · changes in accounting standards, policies, guidance, interpretation or principles; · adverse weather conditions in our markets; · regulatory changes; · loss of external funding sources; · sales of large blocks of our stock or sales by insiders; or · departures of key personnel |
| We do not anticipate paying cash dividends on our shares of common stock in the foreseeable future |
| We have never declared or paid any cash dividends on our shares of common stock |
| We currently intend to retain all future earnings for the operation and expansion of our business and do not anticipate paying cash dividends on our shares of common stock in the foreseeable future |
| Any payment of cash dividends in the future will be at the discretion of our board of directors and will depend upon our results of operations, earnings, capital requirements, contractual restrictions, outstanding indebtedness and other factors deemed relevant by our board of directors |
| In addition, our credit facility restricts our ability to pay cash dividends or other non-stock distributions on any shares of our capital stock |