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

 

**FORM 10-Q**

 

**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED NOVEMBER 1, 2008**

 

**Commission File Number:  000-50659**

 

**GANDERMOUNTAIN COMPANY**(Exact name ofRegistrant as Specified in its Charter)

 

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

 

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 x No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer,”“accelerated filer” and “smaller reporting company” in Rule 12b-2 of theExchange Act.   Check one:

 
| o large accelerated filer               |   | o accelerated filer         |
|----------------------------------------------|--------|----------------------------------|
| x non-accelerated filer                 |   | o smaller reporting company |
| (Do  not check if smaller reporting company) |

 

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

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practical date: Common Stock, $.01 par value; 24,118,755 shares outstanding as of December 2,2008.

 

 

 

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**GANDER MOUNTAIN COMPANY**

**QUARTERLY PERIOD ENDED NOVEMBER 1, 2008**

**Index**

 
| ** **                          | ** **                                                                                  | **Page** |
|-------------------------------------|---------------------------------------------------------------------------------------------|----------|
| PART I.  FINANCIAL INFORMATION | 2                                                                                           |
| Item 1.                             | Financial Statements                                                                        | 2        |
|                                | Consolidated Statements of Operations                                                       | 2        |
|                                | Consolidated Balance Sheets                                                                 | 3        |
|                                | Consolidated Statements of Cash Flows                                                       | 4        |
|                                | Notes  to Unaudited Consolidated Financial Statements                                       | 5        |
| Item 2.                             | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 12       |
| Item 3.                             | Quantitative  and Qualitative Disclosures About Market Risk                                 | 22       |
| Item 4.                             | Controls and  Procedures                                                                    | 22       |
|                                |                                                                                        |     |
| PART II. OTHER  INFORMATION    | 23                                                                                          |
| Item 1.                             | Legal Proceedings                                                                           | 23       |
| Item 1A.                            | Risk Factors                                                                                | 23       |
| Item 2.                             | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 24       |
| Item 3.                             | Defaults  Upon Senior Securities                                                            | 24       |
| Item 4.                             | Submission  of Matters to a Vote of Security Holders                                        | 24       |
| Item 5.                             | Other Information                                                                           | 24       |
| Item 6.                             | Exhibits                                                                                    | 24       |
| SIGNATURES                          | 25                                                                                          |

 

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**PART I. FINANCIAL INFORMATION**

 

**ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS**

 

**Gander Mountain Company**

**ConsolidatedStatements of Operations - Unaudited**

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

 
| ** **                                        | ** ** | **13 Weeks Ended** | ** ** | **39 Weeks Ended** | ** ** |
|---------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                        | ** ** | **November 1,**         | ** ** | **November 3,**         | ** ** | **November 1,** | ** ** | **November 3,** | ** ** |
| ** **                                        | ** ** | **2008**                     | ** ** | **2007**                     | ** ** | **2008** | ** ** | **2007** | ** ** |
| Sales                                             |       | $                            | 269,920    |                         | $          | 259,539 |   | $ | 730,455 |   | $ | 651,799 |   |
| Cost of goods sold                                |       | 200,160                      |       | 189,445                      |       | 551,183 |   | 496,293 |   |
| Gross profit                                      |       | 69,760                       |       | 70,094                       |       | 179,272 |   | 155,506 |   |
| Operating expenses:                               |       |                         |       |                         |       |   |   |   |   |
| Selling, general and administrative  expenses     |       | 64,975                       |       | 64,946                       |       | 190,871 |   | 171,754 |   |
| Exit costs, impairment and other charges          |       | (1,112                       | )          | 1,582                        |       | (20 | ) | 2,208 |   |
| Pre-opening expenses                              |       | —                       |       | 3,041                        |       | 2,035 |   | 4,753 |   |
| Income (loss) from operations                     |       | 5,897                        |       | 525                          |       | (13,614 | ) | (23,209 | ) |
| Interest expense, net                             |       | 4,950                        |       | 5,543                        |       | 14,301 |   | 14,049 |   |
| Income (loss) before income taxes                 |       | 947                          |       | (5,018                       | )          | (27,915 | ) | (37,258 | ) |
| Income tax provision                              |       | 182                          |       | 125                          |       | 619 |   | 375 |   |
| Net Income (loss)                                 |       | $                            | 765        |                         | $          | (5,143 | ) | $ | (28,534 | ) | $ | (37,633 | ) |
|                                              |       |                         |       |                         |       |   |   |   |   |
| Basic and diluted income (loss) per common  share |       | $                            | 0.03       |                         | $          | (0.25 | ) | $ | (1.18 | ) | $ | (1.86 | ) |
|                                              |       |                         |       |                         |       |   |   |   |   |
| Weighted average common shares outstanding        |       | 24,162                       |       | 20,362                       |       | 24,086 |   | 20,255 |   |

 

See accompanying notes to unaudited consolidated financial statements.

 

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**Gander Mountain Company**

**ConsolidatedBalance Sheets**

**(In thousands)**

 
| ** **                                                                                                             | ** ** | **November 1,** | ** ** | **February 2,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                                                                                             | ** ** | **2008**             | ** ** | **2008**             | ** ** |
| ** **                                                                                                             | ** ** | **(Unaudited)**      | ** ** | ** **           | ** ** |
| **Assets**                                                                                                             | ** ** | ** **           | ** ** | ** **           | ** ** |
| Current assets:                                                                                                        |       |                 |       |                 |       |
| Cash and cash equivalents                                                                                              |       | $                    | 1,651      |                 | $          | 2,622 |   |
| Accounts receivable                                                                                                    |       | 21,408               |       | 10,992               |       |
| Income taxes receivable                                                                                                |       | 450                  |       | 486                  |       |
| Inventories                                                                                                            |       | 441,860              |       | 403,683              |       |
| Prepaids and other current assets                                                                                      |       | 16,554               |       | 15,987               |       |
| Total current assets                                                                                                   |       | 481,923              |       | 433,770              |       |
| Property and equipment, net                                                                                            |       | 167,639              |       | 168,685              |       |
| Goodwill                                                                                                               |       | 54,332               |       | 48,803               |       |
| Acquired intangible assets, net                                                                                        |       | 19,345               |       | 25,098               |       |
| Other assets, net                                                                                                      |       | 1,985                |       | 3,576                |       |
| Total assets                                                                                                           |       | $                    | 725,224    |                 | $          | 679,932 |   |
|                                                                                                                   |       |                 |       |                 |       |
| **Liabilities  and shareholders’ equity**                                                                         |       |                 |       |                 |       |
| Current liabilities:                                                                                                   |       |                 |       |                 |       |
| Borrowings under credit facility                                                                                       |       | $                    | 306,264    |                 | $          | 246,013 |   |
| Accounts payable                                                                                                       |       | 88,327               |       | 72,563               |       |
| Accrued and other current liabilities                                                                                  |       | 48,363               |       | 60,606               |       |
| Notes payable - related parties                                                                                        |       | 10,000               |       | —               |       |
| Current maturities of long term debt                                                                                   |       | 14,077               |       | 8,247                |       |
| Total current liabilities                                                                                              |       | 467,031              |       | 387,429              |       |
|                                                                                                                   |       |                 |       |                 |       |
| Long term debt                                                                                                         |       | 56,801               |       | 64,173               |       |
| Deferred income taxes                                                                                                  |       | 7,406                |       | 7,113                |       |
| Other long term liabilities                                                                                            |       | 27,476               |       | 27,397               |       |
|                                                                                                                   |       |                 |       |                 |       |
| Shareholders’ equity:                                                                                             |       |                 |       |                 |       |
| Preferred stock ($.01 par value, 5,000,000  shares authorized; no shares issued and outstanding)                       |       | —               |       | —               |       |
| Common stock ($.01 par value, 100,000,000  shares authorized; 24,118,755 and 24,049,064 shares issued and outstanding) |       | 241                  |       | 241                  |       |
| Additional paid-in-capital                                                                                             |       | 278,334              |       | 277,110              |       |
| Accumulated deficit                                                                                                    |       | (112,065             | )          | (83,531              | )          |
| Total shareholders’ equity                                                                                        |       | 166,510              |       | 193,820              |       |
| Total liabilities and shareholders’ equity                                                                        |       | $                    | 725,224    |                 | $          | 679,932 |   |

 

See accompanying notes to unaudited consolidated financial statements.

 

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**Gander Mountain Company**

**ConsolidatedStatements of Cash Flows - Unaudited**

**(In thousands)**

 
| ** **                                                                   | ** ** | **39 Weeks Ended** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                   | ** ** | **November 1,**         | ** ** | **November 3,** | ** ** |
| ** **                                                                   | ** ** | **2008**                     | ** ** | **2007** | ** ** |
| **Operating activities**                                                     |       |                         |       |   |   |
| Net loss                                                                     |       | $                            | (28,534    | ) | $ | (37,633 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |       |                         |       |   |   |
| Depreciation and amortization                                                |       | 23,434                       |       | 19,770 |   |
| Exit costs, impairment and other charges                                     |       | (1,205                       | )          | — |   |
| Stock-based compensation expense                                             |       | 989                          |       | 1,278 |   |
| (Gain)/ loss on disposal of assets                                           |       | (62                          | )          | 60 |   |
| Change in operating assets and liabilities:                                  |       |                         |       |   |   |
| Accounts receivable                                                          |       | (10,380                      | )          | (12,108 | ) |
| Inventories                                                                  |       | (38,177                      | )          | (122,435 | ) |
| Prepaids and other current assets                                            |       | (567                         | )          | (2,651 | ) |
| Other assets                                                                 |       | (121                         | )          | (1,483 | ) |
| Accounts payable and other liabilities                                       |       | 4,786                        |       | 50,407 |   |
| Deferred income taxes                                                        |       | 293                          |       | — |   |
| Net cash used in operating activities                                        |       | (49,544                      | )          | (104,795 | ) |
| ** **                                                                   |       |                         |       |   |   |
| **Investing  activities**                                                    |       |                         |       |   |   |
| Purchases of property and equipment                                          |       | (16,195                      | )          | (40,548 | ) |
| Acquisition of business and related  expenses                                |       | (172                         | )          | (7,080 | ) |
| Proceeds from sale of assets                                                 |       | 77                           |       | — |   |
| Net cash used in investing activities                                        |       | (16,290                      | )          | (47,628 | ) |
| ** **                                                                   |       |                         |       |   |   |
| **Financing  activities**                                                    |       |                         |       |   |   |
| Borrowings under credit facility, net of  repayments                         |       | 60,251                       |       | 139,093 |   |
| Proceeds from short term notes payable -  related parties                    |       | 10,000                       |       | — |   |
| Proceeds from long term debt                                                 |       | —                       |       | 13,082 |   |
| Reductions in long term debt                                                 |       | (5,623                       | )          | (2,463 | ) |
| Proceeds from exercise of stock options and  employee stock purchases        |       | 235                          |       | 3,053 |   |
| Net cash provided by financing activities                                    |       | 64,863                       |       | 152,765 |   |
|                                                                         |       |                         |       |   |   |
| Net (decrease) increase in cash                                              |       | (971                         | )          | 342 |   |
| Cash, beginning of period                                                    |       | 2,622                        |       | 1,342 |   |
| Cash, end of period                                                          |       | $                            | 1,651      |   | $ | 1,684 |   |

 

See accompanying notes to unaudited consolidated financial statements.

 

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**Gander Mountain Company**

**Notes toUnaudited Consolidated Financial Statements**

**Quarterly Period Ended November 1, 2008**

 

**Note 1. Basis of Presentation**

 

Theaccompanying unaudited financial statements of Gander Mountain Company (“we” or“us”) have been prepared in accordance with the requirements for Form 10-Qand do 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 November 1, 2008 andfor the 13 and 39 weeks ended November 1, 2008 and November 3, 2007,respectively, is unaudited and has been prepared on the same basis as theaudited annual financial statements. In the opinion of management, thisunaudited information includes all adjustments necessary for a fairpresentation of the interim financial information. All of these adjustments areof a normal recurring nature. These interim financial statements filed on this Form 10-Qand the discussions contained herein should be read in conjunction with theannual financial statements and notes included in our Annual Report on Form 10-Kfor the fiscal year ended February 2, 2008, as filed with the Securitiesand Exchange Commission, which includes audited financial statements for ourthree fiscal years ended February 2, 2008.

 

Ourbusiness is seasonal in nature and interim results may not be indicative ofresults for a full year. Historically, we have realized more of our sales inthe latter half of our fiscal year, which includes the hunting and holidayseasons. Our business is also impacted by the timing of new store openings.Both variation in seasonality and new store openings impact the analysis of theresults of operations and financial condition for comparable periods.

 

Reclassifications- certain prior period amounts have been reclassified to conform to the currentyear presentation. These reclassifications had no impact on previously reportednet income, cash flows or financial position.

 

Withthe acquisition of Overton’s Holding Company (“Overton’s”) in December 2007,our consolidated reporting includes our two reportable segments: Retail andDirect. The Retail segment sells its outdoor lifestyle products and servicesthrough our retail stores. The Direct segment is the internet and catalogoperations under our Overton’s brand name as well as the internet and catalogoperations under our Gander Mountain brand, which launched August 3, 2008.

 

Thefollowing table shows our consolidated sales by product category for thecomparable 13 week periods:

 
| ** **                                   | ** ** | **3nd Quarter** | ** ** | **3nd Quarter** | ** ** |
|----------------------------------------------|------------|----------------------|------------|----------------------|------------|
| **Category**                                 | ** ** | **2008**             | ** ** | **2007**             | ** ** |
| Hunting and Firearms                         |       | 51.9                 | %          | 52.1                 | %          |
| Fishing and Marine (1)                       |       | 14.1                 | %          | 9.7                  | %          |
| Camping, Paddlesports and Backyard Equipment |       | 6.4                  | %          | 6.2                  | %          |
| Apparel and Footwear                         |       | 21.1                 | %          | 23.0                 | %          |
| Powersports                                  |       | 4.3                  | %          | 6.3                  | %          |
| Other                                        |       | 1.1                  | %          | 1.4                  | %          |
| Parts and services                           |       | 1.1                  | %          | 1.3                  | %          |
| Total                                        |       | 100.0                | %          | 100.0                | %          |

 

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(1)                                                    Direct segment sales from our Overton’s brandfor the third quarter of fiscal 2008 have been included in the Fishing andMarine category.

 

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Forcomparative purposes, the table below reflects sales by product category forthe comparable 13 week periods of our Retail segment only and does not includesales of our Direct segment.

 
| **Retail segment only**             | ** ** | **3nd Quarter** | ** ** | **3nd Quarter** | ** ** |
|-----------------------------------------------|------------|----------------------|------------|----------------------|------------|
| **Category**                                  | ** ** | **2008**             | ** ** | **2007**             | ** ** |
| Hunting and Firearms                          |       | 54.4                 | %          | 52.1                 | %          |
| Fishing and Marine                            |       | 9.9                  | %          | 9.7                  | %          |
| Camping, Paddlesports and Backyard  Equipment |       | 6.8                  | %          | 6.2                  | %          |
| Apparel and Footwear                          |       | 22.2                 | %          | 23.0                 | %          |
| Powersports                                   |       | 4.6                  | %          | 6.3                  | %          |
| Other                                         |       | 1.0                  | %          | 1.4                  | %          |
| Parts and services                            |       | 1.1                  | %          | 1.3                  | %          |
| Total                                         |       | 100.0                | %          | 100.0                | %          |

 

**Note 2. Recent Accounting Pronouncements**

 

InSeptember 2006, the FASB issued SFAS No. 157, *Fair Value Measurements.*SFAS No. 157defines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles and expands disclosures about fairvalue measurements. SFAS No. 157 applies to other accountingpronouncements that require or permit fair value measurements, as the FASBpreviously concluded in those accounting pronouncements that fair value is therelevant measurement attribute. Accordingly, SFAS No. 157 does not requireany new fair value measurements. SFAS No. 157 is effective for fiscalyears beginning after November 15, 2007.

 

InFebruary 2008, the FASB issued FASB Staff Position FAS 157-2, which delaysthe effective date for the implementation of SFAS 157 solely for non-financialassets and non-financial liabilities, except those non-financial items that arerecognized at fair value in the financial statements on a recurring basis(i.e., at least annually).  The effectivedate for non-financial assets and liabilities would be the beginning of ourfiscal 2009.

 

Weadopted SFAS No. 157 as of February 3, 2008, except as it applies tothose nonfinancial assets and liabilities affected by the one-year delay.  The adoption of the applicable provisions ofSFAS No. 157 did not have a material impact on our results of operations,cash flows, or financial position.  We donot expect the adoption of the remaining provisions of SFAS No. 157 tohave a material impact on our results of operations, cash flows, or financialposition.

 

InFebruary 2007, the FASB issued SFAS No. 159, *The Fair Value Option for Financial Assets andLiabilities — Including an Amendment of FASB Statement No. 115.*SFASNo. 159 permits us to choose to measure certain financial assets andliabilities at fair value that are not currently required to be measured atfair value (the “Fair Value Option”). Election of the Fair Value Option is madeon an instrument-by-instrument basis and is irrevocable. At the adoption date,unrealized gains and losses on financial assets and liabilities for which theFair Value Option has been elected would be reported as a cumulative adjustmentto beginning retained earnings. If we elect the Fair Value Option for certainfinancial assets and liabilities, we will report unrealized gains and lossesdue to changes in their fair value in earnings at each subsequent reportingdate. We adopted SFAS No. 159 but have elected not to apply the Fair ValueOption of SFAS No. 159.

 

InDecember 2007, the FASB issued FAS No. 141R, *Business Combinations,* which replaces SFASNo. 141. SFAS 141R establishes principles and requirements for howthe acquirer of a business recognizes and measures in its financial statementsthe identifiable assets acquired and the liabilities assumed. In addition, underSFAS 141(R) adjustments associated with changes in tax contingenciesthat occur after the one year measurement period are recorded as adjustments toincome. This statement is effective for all business combinations for which theacquisition date is on or after the beginning of an entity’s first fiscal yearthat begins after December 15, 2008; however, the guidance in thisstandard regarding the treatment of income tax contingencies is retrospectiveto business combinations completed prior to January 1, 2009. We will adoptSFAS 141(R) for any business combinations occurring at or subsequentto February 1, 2009.

 

InMarch 2008, the FASB issued SFAS No. 161, *Disclosures about Derivative Instruments and Hedging Activities*,*an amendment of SFAS No. 133*.SFAS No. 161 is intended to improve financial standards for derivativeinstruments and hedging activities by requiring enhanced disclosures to enableinvestors to better understand the effect these instruments and activities haveon an entity’s financial position, financial performance and cash flows.Entities are required to provide enhanced disclosures about: how and why anentity uses derivative instruments; how derivative instruments and relatedhedged items are accounted for under SFAS No. 133 and its relatedinterpretations; and how derivative instruments and related hedged items affectan entity’s financial position, financial performance and cash flows. SFAS No. 161is effective for financial statements issued for fiscal years and interimperiods beginning after November 15, 2008. We will adopt SFAS No. 161beginning in the first quarter of fiscal 2009. We do not expect SFAS No. 161to have a material impact on our results of operations, cash flows, orfinancial position.

 

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InApril 2008, the FASB issued FASB Staff Position No. FAS 142-3, *Determination of the Useful Life of Intangible**Assets*.  FSP No. FAS142-3 requires companies estimating the useful life of a recognized intangibleasset to consider their historical experience in renewing or extending similararrangements or, in the absence of historical experience, to considerassumptions that market participants would use about renewal or extension asadjusted for entity-specific factors. FSP No. FAS 142-3 is effective as ofthe beginning of our 2009 fiscal year. We are currently evaluating thepotential impact, if any, of the adoption of FSP No. FAS 142-3 on our consolidatedfinancial statements.

 

**Note 3. Credit Facility and Indebtedness**

 

Wehave maintained a revolving credit facility with Bank of America, N.A. since2001. Our credit facility provides us with the capital to fund the operationsand growth of our business. Our revolving credit facility has a limit of $345.0million, with an option to increase this limit up to $400 million subject tocertain terms and conditions. Interest on the outstanding indebtedness underthe revolving portion of the credit facility currently accrues at the lender’sprime commercial lending rate, or, if we elect, at the one, two, three or sixmonth LIBOR plus 1.25% to 1.75%, depending on our EBITDA, as defined in thecredit agreement. Our obligations under the credit facility are secured byinterests in substantially all of the Company’s assets. The credit facilitymatures on June 30, 2012.

 

Inaddition to the revolving credit facility, our credit facility includes a$20.0 million term loan (“Term Loan A”). Term Loan A matures on June 30,2012 and bears interest at either (a) 1.25% over the higher of (i) Bankof America’s prime rate or (ii) the federal funds rate plus 0.5%, or (b) LIBORplus 2.75%.

 

OnDecember 6, 2007, we entered into a Fourth Amended and Restated Loan andSecurity Agreement. The amendment and restatement was effected in order to addan additional $40.0 million term loan (“Term Loan B”) to our securedcredit facility to partially fund the acquisition of Overton’s.  Term Loan B provides for scheduledsemi-annual prepayments, beginning with $2.5 million due December 31,2008, that fully retire the loan on its maturity date of  September 30, 2011.

 

Wewill not have the ability to exercise our option to increase the revolvingcredit facility up to $400 million while our $40.0 million Term Loan B isoutstanding.

 

Outstandingborrowings under the credit facility, including Term Loan A and includingletters of credit, were $315.5 million and $316.2 million as of November 1, 2008 and November 3,2007, respectively.  The actual availabilityunder the credit facility is limited to specific advance rates on eligibleinventory and accounts receivable. Typically, availability will be highest inthe latter half of the fiscal year as inventory levels and advance ratesincrease. These advance rates are seasonal as well, increasing as we approachour hunting and holiday seasons and decreasing during non-peak periods. Basedon eligible inventory and accounts receivable balances as of November 1,2008 and February 2, 2008, our available borrowing capacity under thecredit facility, after subtracting letters of credit, was $35.3 million and$22.3 million, respectively.

 

Financialcovenants under the credit facility require that availability under the line ofcredit not fall below 5% of the lower of the borrowing base, as defined, or thecredit facility limit. This availability test is applied and measured on adaily basis. The 5% requirement increases to 7.5% in August 2009. Thecredit facility also contains other covenants that, among other matters,restrict our ability to incur substantial other indebtedness, create certainliens, engage in certain mergers and acquisitions, sell assets, enter intocertain capital leases or make junior payments, including cash dividends. Wewere in compliance with all covenants as of November 1, 2008.

 

Thevalue of our eligible inventory, and the related advance rates under oursecured credit facility are subject to periodic adjustment based on independentvaluations of our collateral performed on behalf of the banks. Any downwardadjustment in the value of our inventory or in our advance rates, whether basedon an assessment of the nature and quality of our inventory or a perceivedincrease in the difficulty of selling collateral under current economic conditions,will adversely affect our availability.

 

InJune 2008, Bank of America, N.A. adjusted our advance rates downward, onaverage approximately 160 basis points, in response to general retailenvironment conditions. In order to maintain appropriate levels of availabilityunder our secured credit facility, on June 9, 2008, we entered into a $10million term loan with our two major shareholders.  Amounts advanced under the agreement had anoriginal maturity date of December 31, 2008, which was subsequently amendedto March 31, 2009, bear interest at LIBOR plus 1% and may be prepaid andre-borrowed without penalty until the maturity date.  The loans are unsecured and the loanagreement contains no restrictive covenants. Proceeds from the loans were used to reduce outstanding borrowings underour credit facility.  The lenders underthe agreement are Gratco LLC, an affiliate of 

 

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DavidPratt, our chairman and chief executive officer, and Holiday Companies, anaffiliate of Ronald A. Erickson, our vice chairman, and Gerald A. Erickson, adirector of our company.

 

Althoughour current expectations of future financial performance indicate that we willremain in compliance with the covenants under our credit facility, if actualfinancial performance does not meet our current expectations, our ability toremain in compliance with these covenants will be adversely affected. We face anumber of uncertainties that may adversely affect our ability to generate salesand earnings or access any needed capital, including the recent disruption inthe financial and credit markets, declining real estate values, increasingforeclosures in the housing markets, rising unemployment, and decreasedbusiness and consumer confidence that have and may continue to adversely affectdiscretionary spending and the retail environment in the United States.

 

**Indebtedness- a summary of all our indebtedness is asfollows:**

 
| ** **                                              | ** ** | **November 1,** | ** **  | **February 2,** | ** ** |
|---------------------------------------------------------|------------|----------------------|-------------|----------------------|------------|
| **(in thousands)**                                 | ** ** | **2008**             | ** **  | **2008**             | ** ** |
| **Short Term**                                          |       |                 |        |                 |       |
| Borrowings under credit facility including  Term Note A | ** ** | **$**                | **306,264** | ** **           | **$**      | **246,013** | ** ** |
|                                                    |       |                 |        |                 |       |
| Notes payable - related parties                         | ** ** | **$**                | **10,000**  | ** **           | **$**      | **—** | ** ** |
|                                                    |       |                 |        |                 |       |   |   |
| Current portion of Term Note B                          |       | $                    | 5,000       |                 | $          | 2,500 |   |
| Current portion of capitalized lease  obligations       |       | 4,793                |        | 2,512                |       |
| Current portion of equipment notes payable              |       | 3,443                |        | 3,235                |       |
| Current portion of deferred acquisition  obligation     |       | 841                  |        | —               |       |
| Total current maturities of long term debt              | ** ** | **$**                | **14,077**  | ** **           | **$**      | **8,247** | ** ** |
|                                                    |       |                 |        |                 |       |
| **Long Term**                                           |       |                 |        |                 |       |
| Long term portion of Term Note B                        |       | $                    | 35,000      |                 | $          | 37,500 |   |
| Long term portion of capitalized lease  obligations     |       | 10,154               |        | 11,702               |       |
| Long term portion of equipment notes  payable           |       | 10,882               |        | 13,492               |       |
| Long term portion of deferred acquisition  obligation   |       | 765                  |        | 1,479                |       |
| Total long term debt                                    | ** ** | **$**                | **56,801**  | ** **           | **$**      | **64,173** | ** ** |

 

**Note 4. Stock-Based Compensation**

 

Wehave three share-based compensation plans: the 2004 Omnibus Stock Plan, the2002 Stock Option Plan and the Employee Stock Purchase Plan. In addition, wegranted certain stock option awards in fiscal 1998 and fiscal 2002 that werenot under a stock-based compensation plan. We are no longer authorized to grantany awards under the 2002 Stock Option Plan. As of November 1, 2008, there were a total of 3,159,403 options topurchase common stock outstanding under all of our stock option plans andnon-plan option awards, with a weighted average exercise price of $9.92 and aweighted average remaining life of 6.4 years. There were 2,416,375 options that were exercisable as of November 1,2008 with a weighted-average exercise price of $10.62.

 

Stock-basedcompensation expense for the 13 weeks ended November 1, 2008 and November 3,2007,  was $286,000 and $535,000,respectively.  Stock-based compensationexpense for the 39 weeks ended November 1, 2008 and November 3.2007,  was $989,000 and $1,278,000,respectively. As of November 1, 2008, there was approximately $1.8 millionof unrecognized compensation expense related to stock options that is expectedto be recognized over a weighted-average period of 2.3 years.

 

Forthe third quarters of fiscal 2008 and fiscal 2007, and for the 39 weeks ended November 1,2008, options exercised were immaterial. For the 39 weeks ended November 3,2007, there were 323,543 options exercised with an aggregate intrinsic value of$1,238,000, which generated $2,933,000 in net cash proceeds for us.

 

Asof November 1, 2008, there were 1,381,532 shares available for futuregrant under the 2004 Omnibus Stock Plan.

 

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Stockoption activity for the periods presented is as follows:

 
| ** **                                                    | ** ** | **13 weeks - November 1, 2008** | ** ** | **13 weeks - November 3, 2007** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                    | ** ** | **Number of**                                       | ** ** | **Weighted-**                                            | ** ** | **Number of** | ** ** | **Weighted-** | ** ** |
| ** **                                                    | ** ** | **Shares Under**                                    | ** ** | **Average**                                              | ** ** | **Shares Under** | ** ** | **Average** | ** ** |
| ** **                                                    | ** ** | **Option**                                               | ** ** | **Exercise Price**                                  | ** ** | **Option** | ** ** | **Exercise Price** | ** ** |
| Outstanding - Beginning                                       |       | 3,282,815                                                |       | $                                                        | 9.98       |   | 3,949,627 |   | $ | 10.39 |   |
| Granted                                                       |       | 20,300                                                   |       | 3.00                                                     |       | 43,350 |   | 9.49 |   |
| Exercised                                                     |       | —                                                   |       | —                                                   |       | (150 | ) | 5.12 |   |
| Forfeited                                                     |       | (143,712                                                 | )          | 10.30                                                    |       | (77,782 | ) | 9.27 |   |
| Outstanding -Ending                                           |       | 3,159,403                                                |       | $                                                        | 9.92       |   | 3,915,045 |   | $ | 10.40 |   |
|                                                          |       |                                                     |       |                                                     |       |   |   |   |   |
| Weighted-average Black-Scholes fair value  of options granted |       |                                                     |       | $                                                        | 1.74       |   |   |   | $ | 4.60 |   |

 

**Note 5. Earnings Per Share**

 

Basicand diluted income or loss per share is based upon the weighted average numberof shares outstanding.  Diluted earningsper share for the 13 weeks ended November 1, 2008, includes 43,698dilutive shares assumed outstanding related to our employee stock purchaseplan. Diluted loss per share for the 13 weeks ended November 3, 2007 andthe 39 weeks ended November 1, 2008 and November 3, 2007, excludespotentially dilutive stock options from the calculation of weighted averageshares outstanding because including them would have an anti-dilutive effect onloss per share.  As of November 1,2008 and November 3, 2007, there were a total of 3,159,403 and 3,915,045options to purchase common stock outstanding, respectively.

 

**Note 6. Selected Balance Sheet Information (in thousands)**

 
| ** **                                                  | ** ** | **November 1,** | ** ** | **February 2,** | ** ** |
|-------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| **Property and equipment consists of:** | ** ** | **2008**             | ** ** | **2008**             | ** ** |
| Building                                                    |       | $                    | 6,972      |                 | $          | 6,972 |   |
| Furniture and equipment                                     |       | 152,559              |       | 141,827              |       |
| Leasehold improvements                                      |       | 65,966               |       | 66,102               |       |
| Computer software and hardware                              |       | 60,133               |       | 52,179               |       |
|                                                        |       | 285,630              |       | 267,080              |       |
| Less: Accumulated depreciation and  amortization            |       | (117,990             | )          | (98,396              | )          |
| **Property and equipment, net**                             |       | $                    | 167,639    |                 | $          | 168,685 |   |
|                                                        |       |                 |       |                 |       |
| ** **                                                  | ** ** | **November 1,** | ** ** | **February 2,** | ** ** |
| **Other assets consists of:**                               | ** ** | **2008**             | ** ** | **2008**             | ** ** |
| Deferred loan costs                                         |       | $                    | 6,677      |                 | $          | 6,666 |   |
| Other                                                       |       | 165                  |       | 1,295                |       |
|                                                        |       | 6,842                |       | 7,961                |       |
| Less: Accumulated amortization                              |       | (4,857               | )          | (4,385               | )          |
| **Other assets, net**                                       |       | $                    | 1,985      |                 | $          | 3,576 |   |

 

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| ** **                                                                          | ** ** | **November 1,** | ** ** | **February 2,** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| **Accrued and other current liabilities consist of:** | ** ** | **2008**             | ** ** | **2008**             | ** ** |
| Gift cards and gift certificate liabilities                                         |       | $                    | 17,885     |                 | $          | 29,223 |   |
| Payroll and related fringe benefits                                                 |       | 4,909                |       | 8,392                |       |
| Sales, property and use taxes                                                       |       | 9,804                |       | 5,219                |       |
| Reserve for store exit costs                                                        |       | 122                  |       | 3,612                |       |
| Lease related costs                                                                 |       | 1,739                |       | 1,593                |       |
| Insurance reserves and liabilities                                                  |       | 2,176                |       | 1,979                |       |
| Advertising and marketing                                                           |       | 1,008                |       | 1,745                |       |
| Interest                                                                            |       | 1,682                |       | 938                  |       |
| Other accruals and current liabilities                                              |       | 9,038                |       | 7,905                |       |
| **Accrued and other current liabilities**                                           |       | $                    | 48,363     |                 | $          | 60,606 |   |

** **
| ** **                                                      | ** ** | **November 1,** | ** ** | **February 2,** | ** ** |
|-----------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| **Other long-term liabilities consist of:** | ** ** | **2008**             | ** ** | **2008**             | ** ** |
| Deferred rent                                                   |       | $                    | 25,957     |                 | $          | 25,898 |   |
| Insurance reserves and other liabilities                        |       | 1,519                |       | 1,499                |       |
| **Other long-term liabilities**                                 |       | $                    | 27,476     |                 | $          | 27,397 |   |

 

**Note 7. Supplemental Cash Flow Information**

 

Duringthe 39 weeks ended November 1, 2008 and November 3, 2007, we acquiredequipment totaling $4.1 million and $2.6 million, respectively, which wasfinanced through capital leases. Purchases of property and equipment in thestatement of cash flows exclude these amounts. Purchases of property and equipment in the statement of cash flows forthe 39 weeks ended November 1, 2008 and November 3, 2007, alsoexcludes $1.5 and $1.2 million, respectively, in non-cash accruals for propertyand equipment placed in service that did not require the use of cash.

 

**Note 8. Exit Costs, Impairment and Other Charges**

 

Exitcosts, impairment and other charges were a net credit of $1.1 million in thethird quarter of fiscal 2008. During the third quarter of fiscal 2008, in aneffort to improve gross margins in clearance activities, we re-opened onepreviously closed store and are in the process of re-opening two additionalstores as retail outlet centers. We previously recorded charges and liabilitiesfor the estimated present value of cash flows for the remaining lease terms forthese three stores. The utilization of these assets and leases under analternative use such as outlet centers was not considered or contemplated atthe time we recorded the original charges. We believe the outlet centerstrategy will help achieve margin improvement and accordingly, we have reversedthe lease termination liabilities of these three stores based on the expectedcash flows of the stores as outlet centers. The reversal resulted in a credit to exit costs, impairment and othercharges of $1.8 million in the third quarter of fiscal 2008.  Other costs included in exit costs,impairment and other charges for the third quarter of fiscal 2008 includeaccretion expense on liabilities for lease termination charges and otherresidual costs of closed stores. For the third quarter of fiscal 2007, expensesin this line item substantially represented severance charges.

 

Theactivity of our reserve for store exit costs and other charges****during fiscal 2008 is as follows:

** **
| ** **                         | ** ** | **(in thousands)** | ** ** |
|------------------------------------|------------|-------------------------|------------|
| ** **                         | ** ** | **3Q 2008**        | ** ** | **2Q 2008** | ** ** | **1Q 2008** | ** ** |
| Balance - beginning                |       | $                       | 2,259      |   | $ | 3,292 |   | $ | 3,612 |   |
| Charges for three relocated stores |       | (1,810                  | )          | — |   | 604 |   |
| Accretion                          |       | 64                      |       | 77 |   | 68 |   |
| Other expenses                     |       | 193                     |       | 239 |   | 104 |   |
| Payments / reductions              |       | (584                    | )          | (1,349 | ) | (1,096 | ) |
| Balance - ending                   |       | $                       | 122        |   | $ | 2,259 |   | $ | 3,292 |   |

 

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**Note 9. Overton’s Acquisition**

 

OnDecember 6, 2007, we completed the acquisition of all of the outstandingequity securities of Overton’s Holding Company (“Overton’s”). Overton’s resultsof operations are included in our consolidated statements of operations since December 6,2007.  The transaction was accounted forusing the purchase method of accounting in accordance with SFAS No. 141,*  BusinessCombinations* . In accordance with SFAS No. 141, the totalpurchase price was allocated to Overton’s net tangible and intangible assetsand liabilities based upon their fair values. During the 39 weeks ended November 1,2008, we incurred $172,000 of additional direct costs of the acquisition whichwas recorded as additional goodwill. We expect to finalize any purchase priceallocation adjustments in the fourth quarter of fiscal 2008.

 

**Note 10. Income Taxes**

 

Oureffective income tax rate was 19.2% and (2.4)% for the third quarter of fiscal2008 and third quarter of fiscal 2007, respectively. The change in theeffective tax rate between periods is primarily the result of the change inpretax earnings compared to the change in state income taxes and deferred taxliabilities related to differences in the book-tax basis of certain acquiredintangible assets.

 

**Note 11. Contingencies**

 

***Trademark Litigation—***On July 2, 2004, we filed a complaint inthe U.S. District Court for the District of Minnesota seeking declaratoryrelief that the contingent trademark licensing provision of a noncompetitionagreement dated May 16, 1996, made between our predecessor and Cabela’sIncorporated, is invalid and unenforceable. Although the noncompetitionprovisions of the noncompetition agreement expired in June 2003, Cabela’scontended that a contingent trademark licensing provision of the noncompetitionagreement required us to grant Cabela’s a license that would preclude our useof certain of our trademarks for direct marketing purposes.

 

OnJuly 10, 2007, the U.S. District Court issued an order granting our motionfor summary judgment, ruling that the contingent trademark licensing provisionwas unenforceable.  The order provides, in part, that we are free to useour trademarks in all respects including direct marketing to consumers. Cabela’s appealed the ruling to the United States Court of Appeals, EighthCircuit.

 

OnAugust 27, 2008, a panel of the United States Court of Appeals, EighthCircuit, unanimously upheld the earlier district court order granting GanderMountain’s motion for summary judgment that the contingent trademark licensingprovision is unenforceable.   TheEighth Circuit order, which is no longer subject to appeal, affirms our rightto use our trademarks in all respects including direct marketing to consumers.

 

***Termination of Overton’s Non-compete Agreement*****-**We acquired Overton’s in December 2007.Pursuant to a non-compete agreement entered into by Overton’s as part of aprevious transaction in 2002, Overton’s was restricted from selling huntingrelated products until March 2009. In November 2008, this non-competeagreement was terminated. As a result, there are no further restrictions on ourability to utilize the Overton brand in connection with the marketing andselling of hunting related products or the driving of consumer traffic to ourretail stores.

 

***Other Legal Claims—***Various claims and lawsuitsarising in the normal course of business may be pending against us from time totime. The subject matter of these proceedings typically relate to commercialdisputes, employment issues, product liability and othermatters. As of the date of this report, we are not a party to any legalproceedings that are expected, individually or in the aggregate, to have amaterial adverse effect on our financial condition or results of operations.

 

**Note 12.Segment Reporting**

 

For the Retail segment, operatingexpenses primarily consist of distribution center expenses associated with movingproduct from our distribution center to our retail stores, occupancy costs ofthe retail stores, store labor, advertising, depreciation, and all other storeoperating expenses, as well as all expenses associated with the functionalsupport areas such as executive, merchandising/buying, human resources,information technology, and finance/accounting.

 

For the Direct segment, operatingexpenses primarily consist of catalog expenses, e-commerce advertisingexpenses, and order fulfillment expenses such as labor and overhead, as well asall expenses associated with the functional support areas such asmerchandising/buying, information technology, and finance/accounting.

 

Segment assets and liabilities arethose assets and liabilities directly used in the operating segment. For theRetail segment, assets primarily include inventory in the retail stores,fixtures, and leasehold improvements. For the Direct segment, assets primarilyinclude inventory, goodwill and intangible assets, deferred catalog costs andfixed assets.

 

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Prior to the acquisition of Overton’son December 6, 2007, we operated under one segment, Retail. Selected datafrom our statements of operations and balance sheets by business segment arepresented in the table below:  The retailsegment includes all of the credits and charges in the exit costs, impairmentand other charges line of our statement of operations as described in note 8.

 
| ** **                        | ** ** | **13 Weeks Ended  November 1, 2008** | ** ** | **13 Weeks Ended  November 3, 2007** | ** ** |
|-----------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| **Statement of Operations Data:** | ** ** | **Retail**                                               | ** ** | **Direct**                                               | ** ** | **Total** | ** ** | **Retail** | ** ** | **Direct** | ** ** | **Total** | ** ** |
| Sales                             |       | $                                                        | 255,506    |                                                     | $          | 14,414 |   | $ | 269,920 |   | $ | 259,539 |   | $ | — |   | $ | 259,539 |   |
| Depreciation and  amortization    |       | 7,447                                                    |       | 326                                                      |       | 7,773 |   | 7,086 |   | — |   | 7,086 |   |
| Income (loss)  from operations    |       | 8,086                                                    |       | (2,189                                                   | )          | 5,897 |   | 525 |   | — |   | 525 |   |
| Net income (loss)                 |       | 3,705                                                    |       | (2,940                                                   | )          | 765 |   | (5,143 | ) | — |   | (5,143 | ) |
|                                   |            |                                                          |            |                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                     | ** ** | **39 Weeks Ended  November 1, 2008** | ** ** | **39 Weeks Ended  November 3, 2007** | ** ** |
|--------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                     | ** ** | **Retail**                                               | ** ** | **Direct**                                               | ** ** | **Total** | ** ** | **Retail** | ** ** | **Direct** | ** ** | **Total** | ** ** |
| Sales                          |       | $                                                        | 656,644    |                                                     | $          | 73,811 |   | $ | 730,455 |   | $ | 651,799 |   | $ | — |   | $ | 651,799 |   |
| Depreciation and  amortization |       | 22,319                                                   |       | 1,115                                                    |       | 23,434 |   | 19,770 |   | — |   | 19,770 |   |
| Income (loss)  from operations |       | (13,630                                                  | )          | 16                                                       |       | (13,614 | ) | (23,209 | ) | — |   | (23,209 | ) |
| Net loss                       |       | (25,940                                                  | )          | (2,594                                                   | )          | (28,534 | ) | (37,633 | ) | — |   | (37,633 | ) |
|                                |            |                                                          |            |                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                      | ** ** | **As of November 1, 2008** | ** ** | **As of November 3, 2007** | ** ** |
|---------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|
| **Balance sheet data:**         | ** ** | **Retail**                                     | ** ** | **Direct**                                     | ** ** | **Total** | ** ** | **Retail** | ** ** | **Direct** | ** ** | **Total** | ** ** |
| Total assets                    |       | $                                              | 631,448    |                                           | $          | 93,776 |   | $ | 725,224 |   | $ | 691,011 |   | $ | — |   | $ | 691,011 |   |
| Inventories                     |       | 420,780                                        |       | 21,080                                         |       | 441,860 |   | 474,953 |   | — |   | 474,953 |   |
| Goodwill and  intangible assets |       | 7,007                                          |       | 66,670                                         |       | 73,677 |   | 7,204 |   | — |   | 7,204 |   |
| Long term debt                  |       | 21,801                                         |       | 35,000                                         |       | 56,801 |   | 25,901 |   | — |   | 25,901 |   |
|                                 |            |                                                |            |                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

**Forward LookingStatements**

 

The following discussion maycontain forward-looking statements regarding us, our business prospects and ourresults of operations that are subject to certain risks and uncertainties posedby many factors and events that could cause our actual business, prospects andresults of operations to differ materially from those that may be anticipatedby such forward-looking statements. Factors that could cause or contribute tosuch differences include, but are not limited to, those described inItem 1A—“Risk Factors of our Form 10-K for fiscal 2007”. Readers arecautioned not to place undue reliance on these forward-looking statements,which speak only as of the date of this report. We undertake no obligation torevise any forward-looking statements in order to reflect events orcircumstances 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 Commission that advise interested parties ofthe risks and factors that may affect our business.

 

**Overview**

 

Gander Mountain Company operatesthe nation’s largest retail network of stores specializing in hunting, fishing,camping, marine and outdoor lifestyle products and services. As of November 1,2008, we have expanded our store base to 116 conveniently located GanderMountain outdoor lifestyle stores, providing approximately 6.5 million squarefeet of retail space in 23 states: Alabama, Arkansas, Colorado, Florida,Illinois, Indiana, Iowa, Kansas, Kentucky, Maryland, Michigan, Minnesota,Mississippi, New York, North Carolina, North Dakota, Ohio, Pennsylvania,Tennessee, Texas, Virginia, West Virginia and Wisconsin. During the thirdquarter of fiscal 2008, we re-opened one previously closed store as a retailoutlet center.  Prior to this re-opening,we opened five new stores in fiscal 2008.

 

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Our core strategy is to provide ourtarget customers with a unique and broad assortment of outdoor equipment,accessories, related technical apparel and footwear; expert services;convenient locations and value pricing. Our stores feature an extensiveselection of leading national and regional brands as well as our company’sowned brands. In March 2003, we began transforming our market positionfrom a traditional specialty store to a large-format, category-focused store.We did this by opening new stores in a large format and increasing the sellingspace of certain small-format stores. Prior to March 2003, our typicalstore was approximately 31,000 square feet. Our large-format stores range fromapproximately 50,000 to 120,000 square feet, with our current focus primarilyupon stores of 60,000 to 65,000 square feet plus an outside selling area. Ourlarge-format stores are generally located with convenient access to a majorhighway and have an open-style shopping environment characterized by wideaisles, open bar-joist ceilings and high-density racking. To further build uponour brand’s reputation for high quality and exceptional value, we haveoutfitted certain stores with additional features such as brick and stoneaccents, log-wrapped columns, and improved branding, fixture, flooring andsignage elements. As of November 1, 2008, 73 of our 116 stores were in ourlarge format.

 

On December 6, 2007, we acquiredOverton’s, Inc., a leading internet and catalog marketing companytargeting recreational boaters and water sports enthusiasts. Overton’s productline is extensive, ranging from water skis, wakeboards and apparel toelectronics, boat covers, boat seats and other marine accessories. Overton’sproducts are sold under two principal brands, Overton’s and Consumers Marine,through a multi-channel approach that includes catalogs, websites (*www.Overtons.com* and *www.Consumersmarine.com*) and three retailshowrooms. Overton’s is a wholly-owned subsidiary of Gander Mountainheadquartered in Greenville, North Carolina.

 

Since the acquisition of Overton’s,our consolidated reporting includes our two reportable segments: Retail andDirect. The Retail segment sells its outdoor lifestyle products and servicesthrough its 116 retail stores located in 23 states. The Direct segment iscomprised of the internet and catalog operations of Overton’s, offeringprimarily boating and watersports accessory products through numerous directmail catalogs and its e-commerce websites, as well as the newly developede-commerce and catalog efforts of Gander Mountain that focus on many of theoutdoor lifestyle product categories found in our retail stores.  On August 3, 2008,  we launched our new transactional website, *“Gandermtn.com”*whichoffers an initial selection of nearly 12,000 SKU’s.  We will continue to grow the productselections and add additional SKU’s over time. During the third quarter of fiscal 2008, we distributed approximately 2million copies of our first Gander Mountain catalog since 1996.  This component of our Direct segmentcontinues to grow sales.  Refer to Note12 of our consolidated financial statements for certain financial informationon our segments. The continued operation of Overton’s, along with our launch ofGander Mountain’s e-commerce and catalog efforts are important initiativestoward building a multi-channel national retail operation.

 

**Consolidated Results of Operations**

 

Thefollowing table represents our unaudited consolidated statements of operationsreflected as a percentage of sales:

* *
| ** **                                    | ** ** | **13 Weeks Ended** | ** ** | **39 Weeks Ended** | ** ** |
|-----------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                    | ** ** | **November 1,**         | ** ** | **November 3,**         | ** ** | **November 1,** | ** ** | **November 3,** | ** ** |
| ** **                                    | ** ** | **2008**                     | ** ** | **2007**                     | ** ** | **2008** | ** ** | **2007** | ** ** |
| Sales                                         |       | 100.0                        | %          | 100.0                        | %          | 100.0 | % | 100.0 | % |
| Cost of goods sold                            |       | 74.2                         | %          | 73.0                         | %          | 75.5 | % | 76.1 | % |
| Gross profit                                  |       | 25.8                         | %          | 27.0                         | %          | 24.5 | % | 23.9 | % |
| Operating expenses:                           |       |                         |       |                         |       |   |   |   |   |
| Selling, general and administrative  expenses |       | 24.1                         | %          | 25.0                         | %          | 26.1 | % | 26.4 | % |
| Exit costs, impairment and other charges      |       | (0.4                         | )%         | 0.6                          | %          | — |   | 0.3 | % |
| Pre-opening expenses                          |       | —                       |       | 1.2                          | %          | 0.3 | % | 0.7 | % |
| Income (loss) from operations                 |       | 2.2                          | %          | 0.2                          | %          | (1.9 | )% | (3.6 | )% |
| Interest expense, net                         |       | 1.8                          | %          | 2.1                          | %          | 2.0 | % | 2.2 | % |
| Income (loss) before income taxes             |       | 0.4                          | %          | (1.9                         | )%         | (3.8 | )% | (5.7 | )% |
| Income tax provision                          |       | 0.1                          | %          | 0.1                          | %          | 0.1 | % | 0.1 | % |
| Net Income (loss)                             |       | 0.3                          | %          | (2.0                         | )%         | (3.9 | )% | (5.8 | )% |

 

----

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Salesconsist of sales from comparable stores, new stores and non-comparable stores,as well as sales of our Direct segment. A store is included in the comparablestore base in its fifteenth full month of operations. A relocated store returnsto the comparable store base in its fifteenth full month after relocation. Newstore sales include sales from stores we opened during the current period.Non-comparable store sales include sales in the current period from our storesopened during the previous fiscal year before they have begun their fifteenthmonth of operation.

 

Cost ofgoods sold includes the cost of merchandise, freight, distribution, inventoryshrinkage and store occupancy costs. Store occupancy costs include rent, realestate taxes and common area maintenance charges. Cost of goods sold alsoincludes the cost of merchandise and freight expenses of our Direct segment.

 

Selling,general and administrative expenses include store associate payroll, taxes andfringe benefits, advertising, maintenance, utilities, depreciation, insurance,bank and credit card charges and other store level expenses. It also includesall expenses associated with operating our corporate headquarters inSt. Paul, MN as well as the fulfillment, distribution and corporate expensesof our Direct segment.

 

Pre-openingexpenses consist primarily of payroll, rent, recruiting, advertising and othercosts incurred prior to a new store opening.

 

***13Weeks Ended November 1, 2008 Compared to 13 Weeks Ended November 3,  2007***

 

*Sales. *Salesincreased by $10.4 million, or 4.0%, to $269.9 million in the third quarter offiscal 2008 from $259.5 million in the third quarter of fiscal 2007.

 

Theincrease resulted from increased sales of $19.2 million from fiscal 2008 andfiscal 2007 new stores not included in the comparable store sales base, acomparable store sales decrease of $15.3 million and a $7.9 million salesdecrease from stores closed during 2008 but open in 2007, as well as changes inother revenue. The increase in sales also includes sales from our Directbusiness of $14.4 million for the third quarter of fiscal 2008 that were notpresent in the comparable quarter last year.

 

Therewere no new store openings or closings during the third quarter of fiscal 2008.During the third quarter of fiscal 2007, we opened nine new stores includingtwo relocations. Our comparable store sales declined 6.5% for the third quarterof fiscal 2008, versus a comparable store sales decrease of 8.4% for the thirdquarter of fiscal 2007. The comparable store sales decline was impacted by theoverall economic environment, including recent disruption in the financial andcredit markets, declining real estate values, increasing foreclosures in thehousing markets, rising unemployment, and decreased business and consumer confidence,and their effects on discretionary spending and the retail environment.Additionally, continued de-emphasis of our Powersports category and, webelieve, less advertising expenditures in the third quarter of fiscal 2008 ascompared to the third quarter of fiscal 2007, negatively impacted thecomparable store sales decline.

 

*GrossProfit. *Gross profit decreased by $335,000, or 0.5%, to$69.8 million in the third quarter of fiscal 2008 from $70.1 million in thethird quarter of fiscal 2007. As a percentage of sales, gross profit decreased117 basis points to 25.8% in the third quarter of fiscal 2008 from 27.0% in thethird quarter of fiscal 2007.

 

Thesignificant factors affecting our gross profit rate during the quarter were aninitial product margin rate decrease of 58 basis points in the Retail segmentand deleveraging of Retail store occupancy costs by 115 basis points as aresult of lower comparable store sales and lower sales per square foot at ournewer, less mature stores. These declines as a percentage of sales werepartially offset by an increase of 81 basis points from the inclusion of thehigher-margin Direct business in our results this year.  Retail segment initial margin rates wereimpacted negatively by lower margin rates in boats and ATVs and lower sales ofhigher-margin apparel categories, both of which were partially offset byincreased margin contributions from firearms and hunting sales.

 

*Selling, Generaland Administrative Expenses (“SG&A”).*  SG&A expenseswere $65.0 million in the third quarter of fiscal 2008 and were flat comparedto the third quarter of fiscal 2007. As a percentage of sales,SG&A expenses decreased 95 basis points to 24.1% in the third quarter offiscal 2008 from 25.0% in the third quarter of fiscal 2007.

 

The primaryfactor in the 95 basis point decrease were Retail segment cost reductions of$7.9 million in store operations and general and administrative costs thatimproved SG&A by 272 basis points in the Retail segment.  This improvement was offset by 177 basispoints due to the inclusion of $8.0 million of SG&A for the Direct businessin the third quarter of fiscal 2008.

 

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*Exit Costs,Impairment and Other Charges.  *Exit costs, impairment and other charges were a netcredit of $1.1 million in the third quarter of fiscal 2008 compared to expenseof $1.6 million in the third quarter of fiscal 2007.

 

Duringthe third quarter of fiscal 2008, in an effort to improve gross margins inclearance activities, we re-opened one previously closed store and are in theprocess of re-opening two additional stores as retail outlet centers.  We previously recorded charges andliabilities for the estimated present value of cash flows for the remaininglease terms for these three stores. The utilization of these assets and leasesunder an alternative use such as outlet centers was not considered orcontemplated at the time we recorded the original charges. We believe theoutlet center strategy will help achieve margin improvement and accordingly, wehave reversed the lease termination liabilities of these three stores based onthe expected cash flows of the stores as outlet centers.  The reversal resulted in a credit to exitcosts, impairment and other charges of $1.8 million in the third quarter offiscal 2008.  Other costs included inexit costs, impairment and other charges for the third quarter of fiscal 2008include accretion expense on liabilities for lease termination charges andother residual costs of closed stores. For the third quarter of fiscal 2007,expenses in this line item substantially represented severance charges.

 

*Pre-openingExpenses. *We had no pre-opening expenses in the third quarterof fiscal 2008 compared to $3.0 million in the third quarter of fiscal 2007. Weopened no new stores in the current quarter. During the third quarter of fiscal2007, we opened nine new stores.

 

*Interest Expense,net.* Interest expense decreased by $593,000, or10.7%, to $4.9 million in the third quarter of fiscal 2008 from $5.5 million inthe third quarter of fiscal 2007.

 

Averageoutstanding borrowings during the third quarter of fiscal 2008 increasedapproximately $58 million or 19%, as compared to the third quarter of fiscal2007, due primarily to the debt incurred in connection with the Overton’sacquisition in December 2007. Interest expense from higher averageborrowings was offset by an approximately 180 basis points decrease in average interestrates due to general interest rate declines. The average effective interest rate for the third quarter of fiscal 2008on all of our outstanding borrowings was 5.5%.

 

*Income TaxProvision. *Our effective income tax rate was 19.2% and (2.4)%for the third quarter of fiscal 2008 and third quarter of fiscal 2007,respectively. The change in the effective tax rate between periods is primarilythe result of the change in pretax income (loss) compared to the change instate income taxes and deferred tax liabilities related to differences in thebook-tax basis of certain acquired intangible assets.

 

*Net Income. *Ournet income was $765,000 for the third quarter of fiscal 2008, as compared to anet loss of $5.1 million for the third quarter of fiscal 2007, due to thefactors discussed above. This improvement of $5.9 million is the result of animprovement in the Retail segment of $8.8 million and a net loss in the Directsegment of $2.9 million.  The Directsegment was not present last year.

 

***39Weeks Ended November 1, 2008 Compared to 39 Weeks Ended November 3,2007***

 

*Sales.* Salesincreased by $78.7 million, or 12.1%, to $730.5 million in the first ninemonths of fiscal 2008 from $651.8 million in the first nine months of fiscal2007.

 

Theincrease resulted from increased sales of $74.6 million from fiscal 2008 andfiscal 2007 new stores not included in the comparable store sales base, acomparable store sales decrease of $49.3 million and a $20.4 million salesdecrease from stores closed during 2008 but open in 2007, as well as changes inother revenue.  The increase in salesalso includes sales from our Direct business of $73.8 million for the firstnine months of fiscal 2008 that were not present in the comparable period lastyear.

 

Duringthe first nine months of fiscal 2008, we opened five new stores and closedthree stores, including one relocation and the consolidation of two smallerformat stores into one large-format store. We also re-opened one previouslyclosed store as a retail outlet center. On a net basis for the first ninemonths of fiscal 2008, we added 337,000 square feet of retail selling space, a5.5% increase.  During the first ninemonths of fiscal 2007, we opened 13 new stores, including three relocatedstores. Our comparable store sales declined 8.3% for the first nine months offiscal 2008, versus a comparable store sales decrease of 1.9% for the firstnine months of fiscal 2007. The comparable store sales decline was impacted bythe overall economic environment, including recent disruption in the financialand credit markets, declining real estate values, increasing foreclosures inthe housing markets, rising unemployment, and decreased business and consumerconfidence, and their effects on discretionary spending and the retailenvironment.  Additionally, continuedde-emphasis of our Powersports category and, we believe, less advertisingexpenditures in the first nine months of fiscal 2008 as compared to the firstnine months of fiscal 2007, negatively impacted the comparable store sales decline.

 

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*Gross Profit.*  Grossprofit increased by $23.8 million, or 15.3%, to $179.3 million in the firstnine months of fiscal 2008 from $155.5 million in the first nine months offiscal 2007. As a percentage of sales, gross profit increased 68 basis pointsto 24.5% in the first nine months of fiscal 2008 from 23.9% in the first ninemonths of fiscal 2007.

 

The significantfactors affecting our gross profit rate during the first nine months of fiscal2008 were the inclusion of the higher-margin Direct business in our resultsthis year which provided 194 basis points, offset primarily by deleveraging ofRetail store occupancy costs by 140 basis points as a result of lowercomparable store sales and lower sales per square foot at our newer, lessmature stores. Retail segment initial margin rates benefited 24 basis pointsfrom increasing scale, continued inventory rationalization efforts, improvedpricing structure and better management of clearance merchandise.

 

*Selling, Generaland Administrative Expenses.*  SG&A expenses increased by $19.1 million,or 11.1%, to $190.9 million in the first nine months of fiscal 2008 from$171.8 million in the first nine months of fiscal 2007. As a percentage ofsales, SG&A expenses decreased 22 basis points to 26.1% in the first ninemonths of fiscal 2008 from 26.4% in the first nine months of fiscal 2007.

 

Theprimary factors in this decrease were Retail segment cost reductions in storeoperations and general and administrative costs that improved SG&A by 200basis points in the Retail segment. This improvement was offset 178 basispoints due to the inclusion in the first nine months of fiscal 2008 of $30.9million of selling, general and administrative costs of the Direct business.

 

*Exit Costs,Impairment and Other Charges.*   Exit costs, impairment and other chargeswere a credit of $20,000 for the first nine months of fiscal 2008 compared toexpense of $2.2 million in the first nine months of fiscal 2007.  We recorded a $1.8 million credit relating tothe reversal of charges and liabilities for the estimated present value of cashflows for the remaining lease terms related to three previously closed storesthat have been, or are in the process of, re-opening as retail outlet centers.Exit costs, impairment and other charges for the first nine months of fiscal2008 also include lease termination charges, accretion expense on related liabilitiesand other residual costs of closed stores. For the first nine months of fiscal2007, these expenses substantially represented severance charges.

 

*Pre-openingExpenses.* Pre-opening expenses decreased $2.7 million, or 57.2%, to $2.0 millionfor the first nine months of fiscal 2008 from $4.7 million in the first ninemonths of fiscal 2007. During the first nine months of fiscal 2008, we openedfive new stores. During the first nine months of fiscal 2007, we opened 13 newstores.

 

*Interest Expense,net.*  Interest expense increased by$0.3 million, or 1.8%, to $14.3 million for the first nine months offiscal 2008 from $14.0 million for the first nine months of fiscal 2007.

 

Theincrease in interest expense resulted from higher average outstanding borrowings.Average outstanding borrowings during the first nine months of fiscal 2008increased $81.8 million or 32%, as compared to the first nine months of fiscal2007, due primarily to the debt incurred in connection with the Overton’sacquisition in December 2007 and borrowings in the second half of fiscal2007 used for capital expenditures and inventories for nine new stores openedin the second half of fiscal 2007. Interest expense from higher average borrowings was substantially offsetby a decrease of approximately 170 basis points in average interest rates dueto general interest rate declines.  Theaverage effective interest rate for the first nine months of fiscal 2008 on allof our outstanding borrowings was 5.7%.

 

*Income TaxProvision.* Our effective income tax rate was (2.2)% and (1.0)% for the first ninemonths of fiscal 2008 and first nine months of fiscal 2007, respectively. Thechange in the effective tax rate between periods is primarily the result of thechange in pre-tax loss compared to the change in state income taxes anddeferred tax liabilities related to differences in the book-tax basis ofcertain acquired intangible assets.

 

*Net Loss.*  Our netloss was $28.5 million for the first nine months of fiscal 2008, as compared toa net loss of $37.6 million for the first nine months of fiscal 2007, due tothe factors discussed above. This improvement of $9.1 million is the result ofan improvement in the Retail segment of $11.7 million and a net loss in theDirect segment of $2.6 million.  The Directsegment was not present last year.

 

**Liquidity and Capital Resources**

 

Ourprimary capital requirements historically have been for inventory, property andequipment and pre-opening expenses to support our new store growth plans, and,to the extent of the highly seasonal nature of our business, operating losses.The following chart summarizes the principal elements of our consolidated cashflow for the comparable periods of our fiscal years and the number of newstores opened during those periods.

 

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| ** **                                         | ** ** | **Cash Flow Summary** | ** ** |
|----------------------------------------------------|------------|---------------------------------|------------|
| ** **                                         | ** ** | **39 weeks**               | ** ** | **39 weeks** | ** ** | **Change in Cash** | ** ** |
| ** **                                         | ** ** | **November 1,  2008**      | ** ** | **November 3,  2007** | ** ** | **Provided /  (Used)** | ** ** |
| Net cash used in  operating activities             |       | $                               | (49,544    | ) | $ | (104,795 | ) | $ | 55,251 |   |
| Net cash used in  investing activities             |       | (16,290                         | )          | (47,628 | ) | 31,338 |   |
| Net cash provided  by financing activities         |       | 64,863                          |       | 152,765 |   | (87,902 | ) |
| Total net  increase (decrease) in cash             |       | $                               | (971       | ) | $ | 342 |   | $ | (1,313 | ) |
|                                               |       |                            |       |   |   |   |   |
| Details of  financing activities:                  |       |                            |       |   |   |   |   |
| Borrowings under  revolving credit facility        |       | $                               | 60,251     |   | $ | 139,093 |   | $ | (78,842 | ) |
| Proceeds  (reductions) in long-term debt, net      |       | (5,623                          | )          | 10,619 |   | (16,242 | ) |
| Proceeds from notes  payable - related parties     |       | 10,000                          |       | — |   | 10,000 |   |
| Proceeds from  stock sales and exercise of options |       | 235                             |       | 3,053 |   | (2,818 | ) |
| Net cash provided  by financing activities         |       | $                               | 64,863     |   | $ | 152,765 |   | $ | (87,902 | ) |
|                                               |       |                            |       |   |   |   |   |
| New store  openings, including relocated stores    |       | 5                               |       | 13 |   |   |   |

 

*OperatingActivities.* Net cash used in operating activities for the first nine months offiscal 2008 improved by $55.3 million to $49.5 million, as compared to $104.8million for the first nine months of fiscal 2007.

 

Thisimprovement was primarily the result of $9.1 million of reduced net losses,$3.7 million of increased non-cash depreciation and $84.3 million of less cashused for inventory growth,  partiallyoffset by $45.6 million of less cash provided from accounts payable and accruedexpense levels in the first nine months of fiscal 2008 versus the first ninemonths of fiscal 2007.

 

Inventoryincreases in the first nine months of fiscal 2007 consumed more cash than thefirst nine months of fiscal 2008 because of increased inventory levels infiscal 2007 in powersports resulting from the roll-out of the Tracker Marineboat program, increased ATV inventory levels in fiscal 2007 as a result of morelarge-format stores that carried ATVs, and our tactical efforts in fiscal 2007 tomerchandise certain seasonal inventory in our stores earlier.  As a result of a decision made in late fiscal2007 to reduce the number of boat and ATV selling locations, powersportsinventory is down $20.1 million at the end of the third quarter of fiscal 2008as compared to the same period of fiscal 2007. Overall inventory levels were also reduced in fiscal 2008 as a result oftactical efforts to better manage our inventory. Accounts payable funding wasreduced $45.6 million in the first nine months of fiscal 2008 as compared tothe same period of fiscal 2007, due in part, to fiscal 2007 increases inpowersports inventory purchases which are usually executed under longer paymentterms.

 

*InvestingActivities.* Net cash used in investing activities for the first nine months offiscal 2008 decreased by $31.3 million to $16.3 million, as compared to $47.6million for the first nine months of fiscal 2007.

 

Weused cash primarily for equipment to open new stores, for informationtechnology software and equipment at our corporate offices and to upgradeexisting stores. The decrease in net cash used of $31.3 million was primarilydue to $24.4 million in less cash used for purchases of property and equipment –we opened only five new stores during the first nine months of fiscal 2008 ascompared to the opening of 13 new stores during the comparable period of fiscal2007.  There is also a reduced use ofcash in the first nine months of fiscal 2008 of $6.9 million due to cash usedduring the comparable period of fiscal 2007 for the acquisition of a competingretail business.

 

Newcapitalized lease obligations for the acquisition of equipment for the firstnine months of fiscal 2008 were $4.1 million as compared to $2.6 million forthe comparable period of fiscal 2007. These amounts are excluded from purchasesof property and equipment in the statements of cash flows.

 

*FinancingActivities.* Net cash provided by financing activities for the first nine months offiscal 2008 decreased by $87.9 million to $64.9 million, as compared to $152.8million in the first nine months of fiscal 2007.  Cash provided by financing activities isprimarily the net borrowings needed under our credit facility and other sourcesto fund operating and investing activities. These borrowings for the first ninemonths of fiscal 2008 decreased approximately $88 million in correlation withthe approximately $55 million decrease in cash used in operations and theapproximately $31 million decrease in cash used in investing activities, asdescribed above.

 

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**CreditFacility and Indebtedness**

** **

We have maintained a revolving credit facility with Bank of America,N.A. since 2001. Our credit facility provides us with the capital tofund the operations and growth of our business. Our revolving credit facilityhas a limit of $345.0 million, with an option to increase this limit up to $400million subject to certain terms and conditions. Interest on the outstanding indebtedness under the revolving portionof the credit facility currently accrues at the lender’s prime commerciallending rate, or, if we elect, at the one, two, three or six month LIBOR plus1.25% to 1.75%, depending on our EBITDA, as defined in the credit agreement.Our obligations under the credit facility are secured by interests insubstantially all of the Company’s assets. The credit facility matures on June 30,2012.

 

In addition to the revolving credit facility, our credit facilityincludes a $20.0 million term loan (“Term Loan A”). Term Loan A matures onJune 30, 2012 and bears interest at either (a) 1.25% over the higherof (i) Bank of America’s prime rate or (ii) the federal funds rateplus 0.5%, or (b) LIBOR plus 2.75%.

 

On December 6, 2007, we entered into a Fourth Amended and RestatedLoan and Security Agreement. The amendment and restatement was effected inorder to add an additional $40.0 million term loan (“Term Loan B”) to oursecured credit facility to partially fund the acquisition of Overton’s.  Term Loan B provides for semi-annualprepayments, beginning with $2.5 million due December 31, 2008, that fullyretire the loan on its maturity date of September 30, 2011.

 

We will not have the ability to exercise our option to increase therevolving credit facility up to $400 million while our $40.0 million Term LoanB is outstanding.

 

Outstanding borrowings under the credit facility, including Term Loan Aand including letters of credit, were $315.5 and $316.2 as of November 1,2008 and November 3, 2007, respectively. The actual availability under the credit facility is limited tospecific advance rates on eligible inventory and accounts receivable.Typically, availability will be highest in the latter half of the fiscal yearas inventory levels and advance rates increase. These advance rates areseasonal as well, increasing as we approach our hunting and holiday seasons anddecreasing during non-peak periods. Based on eligible inventory andaccounts receivable balances as of November 1, 2008 and February 2,2008, our available borrowing capacity under the credit facility, aftersubtracting letters of credit, was $35.3 million and $22.3 million,respectively.

 

Financial covenants under the credit facility require that availabilityunder the line of credit not fall below 5% of the lower of the borrowing base,as defined, or the credit facility limit. This availability test is applied andmeasured on a daily basis. The 5% requirement increases to 7.5% in August 2009.The credit facility also contains other covenants that, among other matters,restrict our ability to incur substantial other indebtedness, create certainliens, engage in certain mergers and acquisitions, sell assets, enter intocertain capital leases or make junior payments, including cash dividends. Wewere in compliance with all covenants as of November 1, 2008.

 

The value of our eligible inventory, and the related advance ratesunder our secured credit facility are subject to periodic adjustment based onindependent valuations of our collateral performed on behalf of the banks. Anydownward adjustment in the value of our inventory or in our advance rates,whether based on an assessment of the nature and quality of our inventory or aperceived increase in the difficulty of selling collateral under currenteconomic conditions, would adversely affect our availability.

 

In June 2008, Bank of America, N.A. adjusted our advance ratesdownward, on average approximately 160 basis points, in response to generalretail environment conditions. In order to maintain appropriate levels ofavailability under our secured credit facility, on June 9, 2008, weentered into a $10 million term loan agreement with our two major shareholders.Amounts advanced under the agreement had an original maturity date of December 31,2008, which was subsequently amended to March 31, 2009, bear interest atLIBOR plus 1%, and may be prepaid and re-borrowed without penalty until thematurity date.  The loans are unsecured and the loan agreement contains norestrictive covenants. Proceeds from the loans were used to reduceoutstanding borrowings under our credit facility. The lenders under theagreement are Gratco LLC, an affiliate of David C. Pratt, our chairman, andHoliday Companies, an affiliate of Ronald A. Erickson, our vice-chairman, andGerald A. Erickson, a director of our company.

 

Although ourcurrent expectations of future financial performance indicate that we willremain in compliance with the covenants under our credit facility, if actualfinancial performance does not meet our current expectations, our ability toremain in compliance with these covenants will be adversely affected. We face anumber of uncertainties that may adversely

 

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affectour ability to generate sales and earnings or access any needed capital,including the recent disruption in the financial and credit markets, decliningreal estate values, increasing foreclosures in the housing markets, risingunemployment, and decreased business and consumer confidence that have and maycontinue to adversely affect discretionary spending and the retail environmentin the United States.

 

**A summary of all of our short term and long term indebtedness is asfollows:**

** **
| ** **                                              | ** ** | **November 1,** | ** **  | **February 2,** | ** ** |
|---------------------------------------------------------|------------|----------------------|-------------|----------------------|------------|
| **(in thousands)**                                 | ** ** | **2008**             | ** **  | **2008**             | ** ** |
| **Short Term**                                          |       |                 |        |                 |       |
| Borrowings under credit facility including  Term Note A | ** ** | **$**                | **306,264** | ** **           | **$**      | **246,013** | ** ** |
|                                                    |       |                 |        |                 |       |
| Notes payable - related parties                         | ** ** | **$**                | **10,000**  | ** **           | **$**      | **—** | ** ** |
| Current portion of Term Note B                          |       | $                    | 5,000       |                 | $          | 2,500 |   |
| Current portion of capitalized lease  obligations       |       | 4,793                |        | 2,512                |       |
| Current portion of equipment notes payable              |       | 3,443                |        | 3,235                |       |
| Current portion of deferred acquisition  obligation     |       | 841                  |        | —               |       |
| Total current maturities of long term debt              | ** ** | **$**                | **14,077**  | ** **           | **$**      | **8,247** | ** ** |
|                                                    |       |                 |        |                 |       |
| **Long Term**                                           |       |                 |        |                 |       |
| Long term portion of Term Note B                        |       | $                    | 35,000      |                 | $          | 37,500 |   |
| Long term portion of capitalized lease  obligations     |       | 10,154               |        | 11,702               |       |
| Long term portion of equipment notes  payable           |       | 10,882               |        | 13,492               |       |
| Long term portion of deferred acquisition  obligation   |       | 765                  |        | 1,479                |       |
| Total long term debt                                    | ** ** | **$**                | **56,801**  | ** **           | **$**      | **64,173** | ** ** |

 

**Income Taxes / Net Operating Losses**

 

Oureffective income tax rate was 19.2% and (2.4)% for the third quarter of fiscal2008 and third quarter of fiscal 2007, respectively. The change in theeffective tax rate between periods is primarily the result of the change inpretax earnings compared to the change in state income taxes and deferred taxliabilities related to differences in the book-tax basis of certain acquiredintangible assets. Due to the uncertainty of the realization of 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 net deferred tax assets, excluding thedeferred tax liabilities related to acquired indefinite lived intangibleassets. As of November 1, 2008, we have federal and state net operatingloss carryforwards of approximately $83.4 million expiring between 2016 and2027.

 

**Future Capital Requirements**

 

During the next 12 months our focus will be to continue to grow theDirect segment and continue to improve the profitability of our Retail segment.

 

Our capital requirements and cash flows are critically dependent on theavailability and day-to-day use of our credit facility with Bank of America. Ifsales and cash flows from operations do not meet anticipated levels, or, ifthere are disruptions in the credit markets which impact our credit facility,or if conditions in the retail environment cause Bank of America to loweradvance rates further, we will need to seek additional debt or equity financingin the public or private markets.

 

We opened 13, 8 and 19 new stores in each of fiscal years 2007, 2006and 2005, respectively, including one to three relocated/consolidated stores ineach year. Our cash used in investing activities, for property and equipmentpurchases, was approximately $46 million, $28 million and $50 millionin fiscal 2007, 2006 and 2005, respectively. Our estimated capital expenditures,including capital leases, for the full year of fiscal 2008 is approximately $24million and is expected to be substantially less for fiscal

 

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2009as compared to fiscal 2008. We plan on opening only one new store in fiscal2009.  The number of new stores we openbeyond 2009 will depend on the success of our business in fiscal 2009 andbeyond.

 

As of November 1, 2008, in addition toour outstanding balance on our revolving credit facility, we have other debtobligations maturing within one year, including a $10.0 million term loanagreement and $14.1 million in current maturities of long-term capitalizedlease obligations and other term debt.  InDecember 2008, we extended the maturity date of the $10 million term loanagreement with our two major shareholders from December 31, 2008 to March 31,2009. There were no material transaction costs associated with the extension.

 

Beginning with our acquisition of Overton’s, we have undertaken asignificant step toward our strategy of providing multi-channel offerings toour customers. We expect we will continue to make expenditures in the next 12months to further this important business objective and we may need to fund upto $2.0 million over the next 12 months for capital expenditures related to ourDirect business.

 

In 2006, we began a significant effort to upgrade our merchandise andinformation systems that will provide enhanced efficiencies in buying,receiving, payables management and provide better and more detailed operatinginformation for decision making and continued supply chain improvement. Weexpect to continue to evaluate, modify and update our information systems.

 

We intend to satisfy our capital requirements in the next 12 monthswith cash flows from operations and funds available under our credit facility.However, if capital requirements for our business strategy change, or if salesand cash flows from operations do not meet anticipated levels, we may need toseek additional debt or equity financing in the public or private markets.Beyond fiscal 2008, we anticipate needing additional financing to grow ourbusiness. There is no assurance that we will be successful in borrowingadditional funds at reasonable rates of interest or issuing equity at afavorable valuation, or at all.  Thecurrent downturn in the economy as a whole has had a disproportionatelynegative impact on the retail environment. The length and ultimate severity of this downturn are uncertain and mayadversely impact our resuts of operations and ability to obtain financing.

 

**Contractual Obligations and Other Commitments**

 

Our material off-balancesheet arrangements are operating lease obligations for substantially all of ourretail stores, our distribution center and corporate office, as well as lettersof credit.  We excluded these items fromthe balance sheet in accordance with U.S. generally accepted accountingprinciples. As of November 1, 2008, the minimum operating lease paymentsdue within one year were $73.6 million. As of November 1, 2008, totalminimum operating lease payments remaining over all of our operating leaseswere $773.9 million. These leases have an average remaining term ofapproximately ten years and typically provide us with several successiveoptions to extend the term at our election. These obligation amounts includefuture minimum lease payments and exclude direct operating costs such as commonarea costs and real estate taxes.

 

Issued and outstandingletters of credit were $9.2 million and $8.7 million at November 1, 2008and November 3, 2007, respectively, and were related primarily toimporting of merchandise and supporting potential insurance programliabilities.

 

In the ordinary course of business, we enter into arrangements withvendors to purchase merchandise in advance of expected delivery. Because mostof these purchase orders do not contain any termination payments or otherpenalties if canceled, they are not included as outstanding contractualobligations. The merchandise purchases, for which we do have firm commitmentsoutstanding, in addition to letters of credit, were $4.7 million and $5.7million as of November 1, 2008 , 2008 and November 3, 2007,respectively.

 

**Quarterly Results of Operations and Seasonality**

 

Our quarterly operating results may fluctuate significantly because ofseveral factors, including the timing of new store openings and relatedexpenses, profitability of new stores, weather conditions and general economicconditions. Our business is also subject to seasonal fluctuation, with thehighest sales activity normally occurring during the third and fourth quartersof our fiscal year, which are primarily associated with the fall and winterhunting seasons and the holiday season. In recent years, the second half of ourfiscal years have generated approximately 60% to 65% of our annual sales,including new store sales. In addition, our customers’ demand for our productsand therefore our sales can be significantly impacted by unseasonable weatherconditions that affect outdoor activities and the demand for related appareland equipment. Our grand opening activities surrounding our new store openingscan also cause fluctuations in sales when compared to operating

 

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periodsin later months. It is for this reason we include a new store in our comparablestore sales base in its fifteenth full month to minimize the effect of grandopening activities.

 

This seasonality also impacts our inventory levels, which tend to risebeginning approximately in April, reach a peak in November, and decline tolower levels after the December holiday season.

 

The recently acquired Overton’s business is also subject to seasonalfluctuations, with its highest sales activity normally occurring during thefirst and second quarters of our fiscal year, which is the primary season forboating, marine and watersports related products. Historically, Overton’s hasgenerated approximately 65% to 70% of its sales during the first half of ourfiscal year and approximately 50% during the second quarter of our fiscal year.

 

Our pre-opening expenses have and will continue to vary significantlyfrom quarter to quarter, primarily due to the timing of store openings. Wetypically incur most pre-opening expenses for a new store during the threemonths preceding, and the month of, it’s opening. In addition, our labor andoperating costs for a newly opened store can be greater during the first one totwo months of operation than what can be expected after that time, both inaggregate dollars and as a percentage of sales. Accordingly, the volume andtiming of new store openings in any quarter has had, and is expected tocontinue to have, a significant impact on quarterly pre-opening costs and storelabor and operating expenses. Due to these factors, results for any particularquarter may not be indicative of results to be expected for any other quarteror for a full fiscal year.

 

**Critical Accounting Policies and Use of Estimates**

 

Our financial statements are prepared in accordance with U.S. generallyaccepted accounting principles. In connection with the preparation of thefinancial statements, we are required to make assumptions, make estimates andapply judgment that affect the reported amounts of assets, liabilities, revenue,expenses and the related disclosures. We base our assumptions, estimates andjudgments on historical experience, current trends and other factors that webelieve to be relevant at the time the financial statements are prepared. On aregular basis, we review the accounting policies, assumptions, estimates andjudgments to ensure that our financial statements are presented fairly and inaccordance with U.S. generally accepted accounting principles. However, becausefuture events and their effects cannot be determined with certainty, actualresults could differ from our assumptions and estimates, and such differencescould be material.

 

Our critical accounting policies and use of estimates are discussed andshould be read in conjunction with the annual financial statements and notesincluded in our Form 10-K, as filed with the Securities and ExchangeCommission, which includes audited financial statements for our three fiscalyears ended February 2, 2008.

 

**Recent Accounting Pronouncements**

 

In September 2006, the FASB issued SFAS No. 157, *Fair Value Measurements.*SFAS No. 157 defines fairvalue, establishes a framework for measuring fair value in generally acceptedaccounting principles and expands disclosures about fair value measurements.SFAS No. 157 applies to other accounting pronouncements that require orpermit fair value measurements, as the FASB previously concluded in thoseaccounting pronouncements that fair value is the relevant measurementattribute. Accordingly, SFAS No. 157 does not require any new fair valuemeasurements. SFAS No. 157 is effective for fiscal years beginning after November 15,2007.

 

In February 2008, the FASB issued FASB Staff Position FAS 157-2,which delays the effective date for the implementation of SFAS 157 solely fornon-financial assets and non-financial liabilities, except those non-financialitems that are recognized at fair value in the financial statements on arecurring basis (i.e., at least annually). The effective date for non-financial assets and liabilities would be thebeginning of our fiscal year 2009.

 

We adopted SFAS No. 157 as of February 3, 2008, except as itapplies to those nonfinancial assets and liabilities affected by the one-yeardelay.  The adoption of the applicableprovisions of SFAS No. 157 did not have a material impact on our resultsof operations, cash flows, or financial position.  We do not expect the adoption of theremaining provisions of SFAS No. 157 to have a material impact on ourresults of operations, cash flows, or financial position.

 

In February 2007, the FASB issued SFAS No. 159, *The Fair Value Option for Financial Assets and Liabilities — Includingan Amendment of FASB Statement No. 115.*SFAS No. 159permits us to choose to measure certain financial assets and liabilities atfair value that are not currently required to be measured at fair value (the “FairValue Option”). Election of the Fair Value Option is made on aninstrument-by-instrument basis and is irrevocable. At the adoption date,unrealized gains and losses on financial assets and liabilities for which theFair Value Option has been elected would be reported as a cumulative adjustmentto beginning retained earnings. If we elect the Fair Value Option for certainfinancial assets and liabilities, we will report unrealized gains and lossesdue to changes in their fair value in earnings at each subsequent reportingdate. The Company has adopted SFAS No. 159 but has elected not toapply the Fair Value Option of SFAS No. 159.

 

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In December 2007, the FASB issued FAS No. 141R, *Business Combinations,* which replaces SFASNo. 141. SFAS 141R establishes principles and requirements for howthe acquirer of a business recognizes and measures in its financial statementsthe identifiable assets acquired and the liabilities assumed. In addition,under SFAS 141(R) adjustments associated with changes in taxcontingencies that occur after the one year measurement period are recorded asadjustments to income. This statement is effective for all businesscombinations for which the acquisition date is on or after the beginning of anentity’s first fiscal year that begins after December 15, 2008; however,the guidance in this standard regarding the treatment of income taxcontingencies is retrospective to business combinations completed prior to January 1,2009. We will adopt SFAS 141(R) for any business combinationsoccurring at or subsequent to February 1, 2009.

 

InMarch 2008, the FASB issued SFAS No. 161, *Disclosures about Derivative Instruments and Hedging Activities*,*an amendment of SFAS No. 133*.SFAS No. 161 is intended to improve financial standards for derivativeinstruments and hedging activities by requiring enhanced disclosures to enableinvestors to better understand the effect these instruments and activities haveon an entity’s financial position, financial performance and cash flows.Entities are required to provide enhanced disclosures about: how and why anentity uses derivative instruments; how derivative instruments and relatedhedged items are accounted for under SFAS No. 133 and its relatedinterpretations; and how derivative instruments and related hedged items affectan entity’s financial position, financial performance and cash flows. SFAS No. 161is effective for financial statements issued for fiscal years and interimperiods beginning after November 15, 2008. We will adopt SFAS No. 161beginning in the first quarter of fiscal 2009. We do not expect SFAS No. 161to have a material impact on our results of operations, cash flows, orfinancial position.

 

InApril 2008, the FASB issued FASB Staff Position No. FAS 142-3, *Determination of the Useful Life of Intangible*Assets” (“FSPNo. FAS 142-3”)  FSP No. FAS142-3 requires companies estimating the useful life of a recognized intangibleasset to consider their historical experience in renewing or extending similararrangements or, in the absence of historical experience, to considerassumptions that market participants would use about renewal or extension asadjusted for entity-specific factors. FSP No. FAS 142-3 is effective as ofthe beginning of our 2009 fiscal year. We are currently evaluating thepotential impact, if any, of the adoption of FSP No. FAS 142-3 on ourconsolidated financial statements.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We are exposed to market risk from changes ininterest rates on borrowings under our credit facility, Term Loans A and B andcertain other term notes. This floating rate indebtedness was $356.0 million atNovember 1, 2008 and averaged $332.0 million during the third quarter offiscal 2008. Our average interest rate for the third quarter of fiscal 2008under our credit facility, including Term Loans A and B, was approximately 5.2%and was approximately 200 basis points lower than the same period last year dueprimarily to general interest rate reductions and reductions we obtained in thepricing structure relative to the revolving credit facility and term loan. Ifshort-term floating interest rates on our average variable rate debt for thethird quarter of fiscal 2008 had increased by 100 basis points, our interestexpense would have increased by approximately $712,000, assuming comparableborrowing levels. These amounts are determined by considering the impact of thehypothetical interest rates on our average amount of floating rate indebtednessoutstanding and cash equivalents balances.

 

We have no derivative financial instrumentsor derivative commodity instruments.   Wehave no significant international sales, however, we import certain items forsale in our stores.  Substantially all ofour purchases are denominated in U.S. dollars.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

As of the end of the period covered by this report, we conducted anevaluation, under the supervision and with the participation of the principalexecutive officer and principal financial and accounting officer, of ourdisclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934).  Based on this evaluation, the principalexecutive officer and principal financial and accounting officer concluded thatour disclosure controls and procedures are effective to ensure that informationrequired to be disclosed by us in reports that we file or submit under theSecurities Exchange Act of 1934 is recorded, processed, summarized and reportedwithin the time periods specified in Securities and Exchange Commission rules andforms. Our principal executive officer and principal financial and accountingofficer also concluded that our disclosure controls and procedures areeffective to ensure that information required to be disclosed in the reports wefile or submit under the Securities Exchange Act of 1934 is accumulated andcommunicated to our management, including our principal executive officer andprincipal financial and accounting officer, to allow timely decisions regardingrequired disclosure.  There was no changein our internal control over financial reporting identified in connection withthe evaluation required by Rule 13a-15(d) and 15d-15(d) of theSecurities Exchange Act of 1934 that occurred during the period covered by thisreport that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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

####  

**ITEM 1. LEGAL PROCEEDINGS**

 

***TrademarkLitigation—***On July 2, 2004, we filed acomplaint in the U.S. District Court for the District of Minnesota seekingdeclaratory relief that the contingent trademark licensing provision of anoncompetition agreement dated May 16, 1996, made between our predecessorand Cabela’s Incorporated, is invalid and unenforceable. Although thenoncompetition provisions of the noncompetition agreement expired in June 2003,Cabela’s contended that a contingent trademark licensing provision of thenoncompetition agreement required us to grant Cabela’s a license that wouldpreclude our use of certain of our trademarks for direct marketing purposes.

 

On July 10, 2007, the U.S. District Court issued an order grantingour motion for summary judgment, ruling that the contingent trademark licensingprovision was unenforceable.  The order provides, in part, that we arefree to use our trademarks in all respects including direct marketing toconsumers.  Cabela’s appealed the ruling to the United States Court ofAppeals, Eighth Circuit.

 

OnAugust 27, 2008, a panel of the United States Court of Appeals, EighthCircuit, unanimously upheld the earlier district court order granting GanderMountain’s motion for summary judgment that the contingent trademark licensingprovision is unenforceable.   TheEighth Circuit order, which is no longer subject to appeal, affirms our rightto use our trademarks in all respects including direct marketing to consumers.

 

***Termination of Overton’s Non-compete Agreement*****-**We acquired Overton’s in December 2007.Pursuant to a non-compete agreement entered into by Overton’s as part of aprevious transaction in 2002, Overton’s was restricted from selling huntingrelated products until March 2009. In November 2008, this non-competeagreement was terminated. As a result, there are no further restrictions on ourability to utilize the Overton brand in connection with the marketing andselling of hunting related products or the driving of consumer traffic to ourretail stores.

 

***Other Legal Claims—***Variousclaims and lawsuits arising in the normal course of business may be pendingagainst us from time to time. The subject matter of these proceedings typicallyrelate to commercial disputes, employment issues, product liability and other matters. As of the date of thisreport, we are not a party to any legal proceedings that are expected,individually or in the aggregate, to have a material adverse effect on ourfinancial condition or results of operations.

 

**ITEM 1A. RISK FACTORS**

 

**Adverse conditions in the economyand geopolitical environment could have a negative impact on our growth andprofitability.**

 

Retailers are particularlysensitive to adverse global economic and business conditions, in particular tothe extent they result in a loss of consumer confidence and decreases inconsumer spending, particularly discretionary spending. The current world-widecredit market disruptions and economic slowdown have negatively impactedconsumer confidence, consumer spending and, consequently, our business. Thetiming and nature of any recovery in the credit and financial markets remainsuncertain, and there can be no assurance that market conditions will improve inthe near future or that our results will not continue to be adversely affected.If these economic and market conditions persist, spread or deteriorate further,it will have a negative impact on our business, financial condition and resultsof operations. Such conditions may also impact the valuation of certainlong-lived or intangible assets that are subject to impairment testing,potentially resulting in impairment charges which may be material to ourfinancial condition and results of operations.

 

Initiatives that we haveundertaken to reduce costs may not be sufficient to offset the results of aprolonged or more severe downturn, and further cost reductions may be difficultor impossible to implement in the near term, due in part to certain fixed costsassociated with some of our operations. Further, the cost-reduction initiativesundertaken to date could strain our operations.

 

**If the recent worsening of creditmarket conditions continues or increases, it could have a material adverseimpact on our ability to borrow or raise capital.**

 

Recent U.S. mortgage andother credit defaults have had a significant impact across various sectors ofthe financial markets, causing global credit and liquidity issues. Theshort-term funding markets experienced credit issues that have continued,leading to liquidity disruption. Moreover, many lenders have faced significant liquidity concerns andhave faced dissolution or significantly restricted their lending.  If the global credit market does not improveor continues to deteriorate, our ability to borrow or raise funds may beimpacted, which would materially adversely impact our results of operations andfinancial condition.

 

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**ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

Not applicable.

 

**ITEM 3.  DEFAULTS UPON SENIOR SECURITIES**

** **

Not applicable.

 

**ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.**

 

Notapplicable.

 

**ITEM 5. OTHER INFORMATION**

 

Not applicable.

 

**ITEM 6. EXHIBITS**

 

The exhibits filed with this report are set forth on the Exhibit Indexfiled as a part of this report immediately following the signatures to thisreport.

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|                    |   | GANDER  MOUNTAIN COMPANY |
|-------------------------|--------|--------------------------|
|                    |   |                     |   |
|                    |   |                     |   |
| December 16,  2008 |   | By:                      | /s/  David C. Pratt |
|                    |   |                     | David  C. Pratt |
|                    |   |                     | Chief  Executive Officer |
|                    |   |                     | (Principal  Executive Officer) |
|                    |   |                     |   |
|                    |   |                     |   |
| December 16,  2008 |   | By:                      | /s/  Robert J. Vold |
|                    |   |                     | Robert  J. Vold |
|                    |   |                     | Senior  Vice President, Chief Financial Officer and  Treasurer |
|                    |   |                     | (Principal  Financial and Accounting Officer) |

 

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**EXHIBITINDEX**

 
| **Exhibit No.** | ** ** | **Description**                                                                                 | ** ** | **Method  of Filing**          |
|----------------------|------------|-------------------------------------------------------------------------------------------------|------------|--------------------------------|
| 3.1                  |       | Amended  and Restated Articles of Incorporation of the Registrant                               |       | Incorporated  By Reference (1) |
| 3.2                  |       | Amended  and Restated Bylaws of the Registrant                                                  |       | Incorporated  By Reference (2) |
| 31.1                 |       | Rule 13a-14(a)/15d-14(a) Certification  by Principal Executive Officer                |       | Filed  Electronically          |
| 31.2                 |       | Rule 13a-14(a)/15d-14(a) Certification  by Principal Financial and Accounting Officer |       | Filed  Electronically          |
| 32                   |       | Section 1350  Certifications                                                               |       | Filed  Electronically          |

 

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| (1) |   | Incorporated by reference to Exhibit 3.3 to Amendment No. 1  to the Registrant’s Registration Statement on Form S-1 (Registration  No. 333-112494), filed with the Commission on March 15, 2004. |
|-----|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Incorporated by reference to Exhibit 3.4 to Amendment No. 1  to the Registrant’s Registration Statement on Form S-1 (Registration  No. 333-112494), filed with the Commission on March 15, 2004. |

 

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