Table of Contents

** **

 

** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

 

**FORM 10-Q**

 

**QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(D) OF THESECURITIES EXCHANGE ACT OF 1934 FOR THEQUARTERLY PERIOD ENDED OCTOBER 31, 2009**

 

**Commissionfile number: 0-50659**

 

**GANDER MOUNTAIN COMPANY**

(Exact name of Registrant asSpecified in its Charter)

 

| **Minnesota**(State or Other  Jurisdiction of  Incorporation or Organization) | ** ** | **41-1990949**(I.R.S.  Employer  Identification No.) |
|-------------------------------------------------------------------------------|------------|------------------------------------------------------|

 

**180 East Fifth Street, Suite 1300Saint Paul, Minnesota 55101(651) 325-4300**

(Address, including zipcode, and telephone number, including area code,of Registrant’s Principal Executive Offices)

 

Indicate by check mark whether the registrant: (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T during the preceding 12 months (or for such shorterperiod that the registrant was required to submit and post such files).  Yes o  No o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See the definitions of “large accelerated filer,” “accelerated filer,”and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

| Large accelerated filer o       |   | Accelerated filer o              |
|------------------------------------------------|--------|--------------------------------------------|
|                                           |   |                                       |
| Non-accelerated filer x              |   | Smaller reporting company o |
| (Do not check if  a smaller reporting company) |   |                                       |

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of 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; 24,197,733 shares outstanding as of December 4,2009.

 

 

 

----

Table of Contents

 

**GANDERMOUNTAIN COMPANY**

**QUARTERLYPERIOD ENDED OCTOBER 31, 2009**

**Index**

 
| ** **                          | ** **                                                                                  | **Page** |
|-------------------------------------|---------------------------------------------------------------------------------------------|----------|
|                                |                                                                                        |     |
| PART I.  FINANCIAL INFORMATION | 3                                                                                           |
|                                |                                                                                        |     |
| Item 1.                             | Unaudited Financial  Statements                                                             | 3        |
|                                | Consolidated Statements of  Operations                                                      | 3        |
|                                | Consolidated  Balance Sheets                                                                | 4        |
|                                | Consolidated Statements of  Cash Flows                                                      | 5        |
|                                | Notes to Unaudited Consolidated Financial Statements                                        | 6        |
| Item 2.                             | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 13       |
| Item 3.                             | Quantitative  and Qualitative Disclosures About Market Risk                                 | 23       |
| Item 4.                             | Controls and  Procedures                                                                    | 24       |
|                                |                                                                                        |     |
| PART II.  OTHER INFORMATION    | 24                                                                                          |
|                                |                                                                                        |     |
| Item 1.                             | Legal Proceedings                                                                           | 24       |
| Item 1A.                            | Risk Factors                                                                                | 24       |
| 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                                                                                          |
|                                     |                                                                                             |          |  |

 

*Our logos Gander Mountain®, Gander Mtn.®, Gander Mountain GuideSeries®,We Live Outdoors®,**Overton’s®, Gladiator*,*® and Dockmate*;*® *and other trademarks, tradenames andservice marks of Gander Mountain mentioned in this report are our property.This report also contains trademarks and service marks belonging to otherentities.

 

**SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION**

 

This Quarterly Report on Form 10-Q containsforward-looking statements regarding us, our business prospects and our resultsof operations that are subject to certain risks and uncertainties posed by manyfactors and events that could cause our actual business, prospects and resultsof operations to differ materially from those that may be anticipated by suchforward-looking statements. Factors that could cause or contribute to such differencesinclude, but are not limited to, those described in Item 1A—“Risk Factors”of our Annual Report on Form 10-K for fiscal year 2008. 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.

 

2

----

Table ofContents

 

**PART I.  FINANCIALINFORMATION**

 

**ITEM 1.****    ****UNAUDITED CONSOLIDATED FINANCIALSTATEMENTS**

 

**Gander Mountain Company**

**Consolidated Statements of Operations - Unaudited**

**(Inthousands, except per share data)**

 
| ** **                                        | ** ** | **13 Weeks Ended**   | ** **    | **39 Weeks Ended**   | ** ** |
|---------------------------------------------------|------------|----------------------|---------------|----------------------|------------|
| ** **                                        | ** ** | **October 31,** | ** **    | **November 1,** | ** ** | **October 31,** | ** ** | **November 1,** | ** ** |
| ** **                                        | ** ** | **2009**             | ** **    | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| Sales                                             |       | $                    |  276,594 |                 | $          |  269,920 |   | $ |  752,661 |   | $ |  730,455 |   |
| Cost of goods sold                                |       | 201,389              |          | 200,160              |       | 566,185 |   | 551,183 |   |
| Gross profit                                      |       | 75,205               |          | 69,760               |       | 186,476 |   | 179,272 |   |
| Operating expenses:                               |       |                 |          |                 |       |   |   |   |   |
| Selling, general and  administrative expenses     |       | 68,814               |          | 64,975               |       | 199,425 |   | 190,871 |   |
| Exit costs and related  charges                   |       | 492                  |          | (1,112               | )          | 1,165 |   | (20 | ) |
| Pre-opening expenses                              |       | —               |          | —               |       | 299 |   | 2,035 |   |
| Income (loss) from  operations                    |       | 5,899                |          | 5,897                |       | (14,413 | ) | (13,614 | ) |
| Interest expense, net                             |       | 2,579                |          | 4,950                |       | 7,807 |   | 14,301 |   |
| Income (loss) before  income taxes                |       | 3,320                |          | 947                  |       | (22,220 | ) | (27,915 | ) |
| Income tax provision                              |       | 151                  |          | 182                  |       | 591 |   | 619 |   |
| Net income (loss)                                 |       | $                    |  3,169   |                 | $          |  765 |   | $ |  (22,811 | ) | $ |  (28,534 | ) |
|                                              |       |                 |          |                 |       |   |   |   |   |
| Basic and diluted  income (loss) per common share |       | $                    |  0.13    |                 | $          |  0.03 |   | $ |  (0.94 | ) | $ |  (1.18 | ) |
|                                              |       |                 |          |                 |       |   |   |   |   |
| Weighted average common  shares outstanding       |       | 24,200               |          | 24,162               |       | 24,196 |   | 24,086 |   |

 

See accompanying notes to unaudited consolidated financial statements.

 

3

----

Table ofContents

 

**GanderMountain Company**

**ConsolidatedBalance Sheets**

**(In thousands)**

 
| ** **                                                                                                              | ** ** | **October 31,** | ** **    | **January 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|----------------------|---------------|----------------------|------------|
| ** **                                                                                                              | ** ** | **2009**             | ** **    | **2009**             | ** ** |
| ** **                                                                                                              | ** ** | **unaudited**        | ** **    | ** **           | ** ** |
| **Assets**                                                                                                              | ** ** | ** **           | ** **    | ** **           | ** ** |
| Current assets:                                                                                                         |       |                 |          |                 |       |
| Cash and cash  equivalents                                                                                              |       | $                    |  1,680   |                 | $          |  1,655 |   |
| Accounts receivable                                                                                                     |       | 21,736               |          | 10,784               |       |
| Income taxes receivable                                                                                                 |       | —               |          | 62                   |       |
| Inventories                                                                                                             |       | 428,172              |          | 358,127              |       |
| Prepaids and other  current assets                                                                                      |       | 11,214               |          | 12,132               |       |
| Total current assets                                                                                                    |       | 462,802              |          | 382,760              |       |
| Property and equipment,  net                                                                                            |       | 150,134              |          | 162,180              |       |
| Goodwill                                                                                                                |       | 47,114               |          | 47,114               |       |
| Acquired intangible  assets, net                                                                                        |       | 18,365               |          | 19,130               |       |
| Other assets, net                                                                                                       |       | 1,541                |          | 1,936                |       |
| Total assets                                                                                                            |       | $                    |  679,956 |                 | $          |  613,120 |   |
|                                                                                                                    |       |                 |          |                 |       |
| **Liabilities  and shareholders’ equity**                                                                          |       |                 |          |                 |       |
| Current liabilities:                                                                                                    |       |                 |          |                 |       |
| Borrowings under credit  facility                                                                                       |       | $                    |  292,106 |                 | $          |  204,514 |   |
| Accounts payable                                                                                                        |       | 80,245               |          | 63,863               |       |
| Accrued and other  current liabilities                                                                                  |       | 49,511               |          | 55,456               |       |
| Notes payable - related  parties                                                                                        |       | 10,000               |          | 10,000               |       |
| Current maturities of  long term debt                                                                                   |       | 16,676               |          | 15,628               |       |
| Total current  liabilities                                                                                              |       | 448,538              |          | 349,461              |       |
|                                                                                                                    |       |                 |          |                 |       |
| Long term debt                                                                                                          |       | 40,775               |          | 50,402               |       |
| Deferred income taxes                                                                                                   |       | 6,204                |          | 5,954                |       |
| Other long term  liabilities                                                                                            |       | 26,922               |          | 27,398               |       |
|                                                                                                                    |       |                 |          |                 |       |
| 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; 24,197,733 and 24,195,736 shares issued  and outstanding) |       | 242                  |          | 242                  |       |
| Additional paid-in-capital                                                                                              |       | 279,114              |          | 278,691              |       |
| Accumulated deficit                                                                                                     |       | (121,839             | )             | (99,028              | )          |
| Total shareholders’  equity                                                                                        |       | 157,517              |          | 179,905              |       |
| Total liabilities and  shareholders’ equity                                                                        |       | $                    |  679,956 |                 | $          |  613,120 |   |

 

See accompanying notes tounaudited consolidated financial statements.

 

4

----

Table ofContents

 

**Gander Mountain Company**

**Consolidated Statements of Cash Flows- Unaudited**

**(Inthousands)**

 
| ** **                                                                   | ** ** | **39 Weeks Ended**   | ** **    |
|------------------------------------------------------------------------------|------------|----------------------|---------------|
| ** **                                                                   | ** ** | **October 31,** | ** **    | **November 1** | ** ** |
| ** **                                                                   | ** ** | **2009**             | ** **    | **2008** | ** ** |
| **Operating  activities**                                                    | ** ** | ** **           | ** **    | ** ** | ** ** |
| Net loss                                                                     |       | $                    |  (22,811 | ) | $ |  (28,534 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                 |          |   |   |
| Depreciation and  amortization                                               |       | 23,098               |          | 23,434 |   |
| Exit costs and related  charges                                              |       | 1,115                |          | (1,205 | ) |
| Stock-based  compensation expense                                            |       | 411                  |          | 989 |   |
| Loss (gain) on disposal  of assets                                           |       | 10                   |          | (62 | ) |
| Change in operating  assets and liabilities:                                 |       |                 |          |   |   |
| Accounts receivable                                                          |       | (10,891              | )             | (10,380 | ) |
| Inventories                                                                  |       | (70,044              | )             | (38,177 | ) |
| Prepaids and other  current assets                                           |       | 914                  |          | (567 | ) |
| Other assets                                                                 |       | (65                  | )             | (121 | ) |
| Accounts payable and  other liabilities                                      |       | 9,922                |          | 4,786 |   |
| Deferred income taxes                                                        |       | 250                  |          | 293 |   |
| Net cash used in  operating activities                                       |       | (68,091              | )             | (49,544 | ) |
| ** **                                                                   |       |                 |          |   |   |
| **Investing  activities**                                                    |       |                 |          |   |   |
| Purchases of property  and equipment                                         |       | (9,679               | )             | (16,195 | ) |
| Acquisition related  expenses                                                |       | —               |          | (172 | ) |
| Proceeds from sale of  assets                                                |       | 112                  |          | 77 |   |
| Net cash used in  investing activities                                       |       | (9,567               | )             | (16,290 | ) |
| ** **                                                                   |       |                 |          |   |   |
| **Financing  activities**                                                    |       |                 |          |   |   |
| Borrowings under credit  facility, net                                       |       | 87,592               |          | 60,251 |   |
| Proceeds from short  term notes payable - related parties                    |       | —               |          | 10,000 |   |
| Reductions in long term  debt                                                |       | (9,921               | )             | (5,623 | ) |
| Proceeds from exercise  of stock options and employee stock purchases        |       | 12                   |          | 235 |   |
| Net cash provided by  financing activities                                   |       | 77,683               |          | 64,863 |   |
|                                                                         |       |                 |          |   |   |
| Net increase (decrease)  in cash                                             |       | 25                   |          | (971 | ) |
| Cash, beginning of  period                                                   |       | 1,655                |          | 2,622 |   |
| Cash, end of period                                                          |       | $                    |  1,680   |   | $ |  1,651 |   |

 

See accompanying notes tounaudited consolidated financial statements.

 

5

----

Tableof Contents

 

**GanderMountain Company**

**Notes to Unaudited Consolidated Financial Statements**

 

**Note 1. Basis of Presentation**

 

Theaccompanying unaudited financial statements of Gander Mountain Company (“theCompany”) 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 October 31, 2009 andfor the 13 and 39 weeks ended October 31, 2009 and November 1, 2008,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 the Annual Report on Form 10-Kfor the fiscal year ended January 31, 2009, as filed with the Securitiesand Exchange Commission, which includes audited financial statements for theCompany’s three fiscal years ended January 31, 2009.

 

Inpreparing the accompanying financial statements, the Company has evaluatedsubsequent events through December 15, 2009, the issuance date of thisQuarterly Report on Form 10-Q. The Company has determined that no eventsor transactions have occurred subsequent to October 31, 2009 which requirerecognition or disclosure in the financial statements. In December 2009,the Company extended the maturity date on its $10 million unsecured termloan with its two major shareholders from December 31, 2009 to March 31,2010.

 

The Company’s business isseasonal in nature and interim results may not be indicative of results for afull year. Historically, the Company has realized more of its sales in thelatter half of the fiscal year, which includes the hunting and holiday seasons.The Company’s 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.

 

With the acquisition ofOverton’s Holding Company (“Overton’s”) in December 2007, the Company’sconsolidated reporting includes its two reportable segments: Retail and Direct.The Retail segment sells its outdoor lifestyle products and services throughretail stores. The Direct segment is the internet and catalog operations underthe Company’s Overton’s brand name as well as the internet and catalog operationsunder its Gander Mountain brand, which launched August 3, 2008.

 

The following table showsthe Company’s consolidated sales by product category for the comparable 13 weekperiods:

 
| ** **                                    | ** ** | **3rd Quarter** | ** ** | **3rd Quarter** | ** ** |
|-----------------------------------------------|------------|-----------------|------------|-----------------|------------|
| **Category (1)**                              | ** ** | **2009**        | ** ** | **2008**        | ** ** |
| Hunting and Firearms                          |       | 53.8            | %          | 51.9            | %          |
| Fishing and Marine                            |       | 13.9            | %          | 14.1            | %          |
| Camping, Paddlesports  and Backyard Equipment |       | 6.6             | %          | 6.4             | %          |
| Apparel and Footwear                          |       | 22.8            | %          | 21.1            | %          |
| Powersports                                   |       | 1.3             | %          | 4.3             | %          |
| Other                                         |       | 0.9             | %          | 1.1             | %          |
| Parts and services                            |       | 0.7             | %          | 1.1             | %          |
| Total                                         |       | 100.0           | %          | 100.0           | %          |

 

----

(1)          Direct segment sales from Overton’s for the thirdquarters of fiscal 2009 and fiscal 2008 have been included in the Fishing andMarine category.  Direct segment salesfrom Gander Mountain Direct are included in their respective categories.

 

**Supplemental Cash Flow Information -**During the 39 weeks ended October 31,2009 and November 1, 2008, the Company acquired equipment totaling $1.3million and $4.1 million, respectively, which was financed through capitalleases. Purchases of property and equipment in the statement of cash flowsexclude these amounts.

 

**Fair Value of Financial Instruments**  -  Thecarrying amounts of the Company’s financial instruments, primarily debtinstruments, approximate fair value at October 31, 2009 and January 31,2009.

 

6

----

Table ofContents

 

**Note 2. Recent Accounting Pronouncements**

 

In June 2009, theFinancial Accounting Standards Board (“FASB”) issued FASB No. 168, *The FASB Accounting Standards Codification and theHierarchy of Generally Accepted Accounting Principles — a replacement of FASBStatement No. 162* (“SFAS 168”). SFAS 168 establishes the FASBAccounting Standards Codification as the source of authoritative accountingprinciples recognized by the FASB to be applied by non-governmental entities inthe preparation of financial statements in conformity with GAAP in the UnitedStates. SFAS 168 is effective for financial statements issued for interim andannual periods ending after September 15, 2009.

 

In May 2009, theFASB issued ASC Topic 855, *Subsequent Events*which establishes general standards of accounting and disclosure for eventsthat occur after the balance sheet date but before financial statements areissued. The accounting guidance contained in Topic 855 is consistent with theauditing literature widely used for accounting and disclosure of subsequentevents, however, Topic 855 requires an entity to disclose the date throughwhich subsequent events have been evaluated. Topic 855 was effective forinterim and annual periods ending after June 15, 2009. The adoption ofTopic 855 did not have a material impact on the Company’s consolidatedfinancial statements.

 

**Note 3. Proposed Going-Private Transaction**

 

On September 27,2009, a special committee of the Company’s board of directors made arecommendation to the full board of directors to proceed with a reverse stocksplit, followed by a forward stock split, to effect a deregistration of the sharesof the Company’s common stock and delisting from the Nasdaq Global Market.Following this recommendation, on the same date, the board of directorsunanimously approved a 1-for-30,000 reverse stock split of the Company’s commonstock, followed immediately thereafter by a 30,000-for-1 forward stock split ofthe common stock.  When the reverse/forward stock split becomeseffective, holders of fewer than a total of 30,000 shares of common stock, willreceive a cash payment of $5.15 per pre-split share.  On September 27, 2009, the Companyentered into funding agreements with each of Gratco, LLC and HolidayStationstores, Inc.  Theseagreements included an obligation by Gratco LLC and Holiday Stationstores, Inc.to fund the cancellation of the fractional shares from the reverse/forwardstock split, as well as offer to purchase all shares held by the Company’sunaffiliated shareholders following the reverse/forward stock split at a priceof $5.15 per share.  Gratco LLC is an affiliate of David Pratt,the Company’s chairman and interim chief executive officer, and HolidayStationstores, Inc. is an affiliate of Ronald A. Erickson, theCompany’s vice chairman, and Gerald A. Erickson, a director of theCompany.

 

**Note 4. Credit Facility**

 

The Company maintains a $345 million revolving credit facility and a$20 million Term Loan A with Bank of America, N.A., both of which have amaturity date of June 30, 2012. The actual availability under the creditfacility is limited to specific advance rates on eligible inventory andaccounts receivable. Typically, availability will be highest in the latter halfof the fiscal year as inventory levels and advance rates increase. Interest onthe outstanding indebtedness under the revolving portion of the credit facilitycurrently accrues at the lender’s prime commercial lending rate, or, if theCompany elects, at the one, two, three or six month LIBOR plus 1.25% to 1.75%,depending on the Company’s EBITDA, as defined in the credit agreement. TheCompany’s obligations under the credit facility are secured by interests insubstantially all of its assets. The revolving credit facility and Term Loan Aoutstanding balances are reported together as “*Borrowingsunder credit facility”* in the Company’s consolidated balance sheets.

 

Availability under the Company’s credit facility was $44.1 million and$35.3 million as of October 31, 2009 and November 1, 2008, respectively.

 

Current financial covenants under the credit facility require thatavailability under the line of credit not fall below 7.5% of the lower of theborrowing base, as defined, or the credit facility limit. This availabilitytest is applied and measured on a daily basis. The covenants also limit theCompany’s annual capital expenditures. The credit facility also contains othercovenants that, among other matters, restrict the Company’s ability to incursubstantial other indebtedness, create certain liens, engage in certain mergersand acquisitions, sell certain assets, enter into certain capital leases ormake junior payments, including cash dividends. The Company was in compliancewith all covenants as of October 31, 2009 and January 31, 2009.

 

7

----

Table ofContents

 

**Note 5. Long Term Debt**

 

TheCompany’s long term debt consists of the following *(inthousands*):

 
| ** **                         | ** ** | **October 31,** | ** ** | **January 31,** | ** ** |
|------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                         | ** ** | **2009**             | ** ** | **2009**             | ** ** |
| Term loan B                        |       | $                    | 35,000     |                 | $          | 37,500 |   |
| Equipment financing  notes         |       | 10,902               |       | 13,492               |       |
| Capitalized lease  obligations     |       | 10,703               |       | 13,390               |       |
| Term notes - related  parties      |       | 10,000               |       | 10,000               |       |
| Obligation from  acquisition       |       | 846                  |       | 1,648                |       |
| Total debt obligations             |       | 67,452               |       | 76,030               |       |
| Less: amounts due  within one year |       | (26,676              | )          | (25,628              | )          |
| **Long  term debt**                |       | $                    | 40,775     |                 | $          | 50,402 |   |

 

***Term Loan B***—The Companyobtained a $40 million secured term loan with a final maturity date of September 30,2011, in connection with the acquisition of Overton’s.  As of October 31, 2009, the requiredprincipal payments remaining under Term Loan B are reflected below *(in thousands):*

 
| **Due Date**       | ** ** | **Principal Due** | ** ** |
|-------------------------|------------|------------------------|------------|
|                    |       |                   |       |
| December 31, 2009  |       | $                      | 5,000      |   |
| July 31, 2010      |       | 5,000                  |       |
| December 31, 2010  |       | 6,250                  |       |
| March 31, 2011     |       | 6,250                  |       |
| June 30, 2011      |       | 6,250                  |       |
| September 30, 2011 |       | 6,250                  |       |
|                    |       | $                      | 35,000     |   |

 

***Short Term Notes Payable—RelatedParties.***  In December 2009,the Company extended the maturity date on its $10 million unsecured termloan with its two major shareholders from December 31, 2009 to March 31,2010. The lenders under the agreement are Gratco LLC, an affiliate ofDavid Pratt, the Company’s chairman and interim chief executive officer, andHoliday Companies, an affiliate of Ronald A. Erickson, the Company’s vicechairman, and Gerald A. Erickson, a director of the Company.

 

***Capitalized Lease Obligations.***  The Company leases certain technologyequipment and leasehold improvements under leases that have been accounted foras capital leases. During the 39 weeks ended October 31, 2009 and November 1,2008, the Company leased equipment accounted for as capital leases in theamounts of $1.3 million and $4.1 million, respectively. The leases vary fromone to three years in term and require monthly payments of principal andinterest.

 

8

----

Tableof Contents

 

**Note 6. Goodwill and Intangible Assets**

 

TheCompany’s goodwill and intangible assets, (net of amortization whereappropriate), as of October 31, 2009 and the changes in these accountssince the previous fiscal year end are as follows *(inthousands)*:

 
| ** **                       | ** ** | **Retail  segment** | ** ** | **Direct  segment** | ** ** | ** ** | ** ** |
|----------------------------------|------------|---------------------|------------|---------------------|------------|------------|------------|
| ** **                       | ** ** | **Goodwill**        | ** ** | **Intangibles**     | ** ** | **Total**  | ** ** | **Goodwill** | ** ** | **Intangibles** | ** ** | **Total** | ** ** | **Consolidated** | ** ** |
| Balances,  January 31, 2009 |       | $                   | —     |                | $          | 400        |       | $ | 400 |   | $ | 47,114 |   | $ | 18,730 |   | $ | 65,844 |   | $ | 66,244 |   |
| Amortization                     |       | —              |       | (127                | )          | (127       | )          | — |   | (122 | ) | (122 | ) | (249 | ) |
| Balances, May 2,  2009      | ** ** | **—**          |       | 273                 |       | 273        |       | 47,114 |   | 18,608 |   | 65,722 |   | 65,995 |   |
| Amortization                     |       | —              |       | (128                | )          | (128       | )          | — |   | (122 | ) | (122 | ) | (250 | ) |
| Balances,  August 1, 2009   | ** ** | **—**          |       | 145                 |       | 145        |       | 47,114 |   | 18,486 |   | 65,600 |   | 65,745 |   |
| Amortization                     |       | —              |       | (145                | )          | (145       | )          | — |   | (121 | ) | (121 | ) | (266 | ) |
| Balances,  October 31, 2009 | ** ** | **$**               | **—** |                | $          | —     |       | $ | — |   | $ | 47,114 |   | $ | 18,365 |   | $ | 65,479 |   | $ | 65,479 |   |

 

Goodwill is not subject to amortization. Both goodwill and otherintangible assets are tested for impairment annually or more frequently ifevents or changes in circumstances indicate that the asset may be impaired.When tested, the fair value of the Company’s goodwill and intangible assets areestimated and compared to their carrying value.

 

The Company performed its annual assessment in the fourth quarter offiscal 2008.  The Company does notbelieve that any indicators of impairment that would require reassessment haveoccurred since the last assessment was performed.  Circumstances affecting impairment testingand the results of such testing may change in future accounting periods.  Among the factors that could materiallyimpact the results of the Company’s future impairment assessments are theactual sales and operating cash flows from its retail and direct segmentsduring the higher volume third and fourth fiscal quarters of fiscal 2009, aswell as the use of different assumptions, estimates or judgments in the testingprocess, including selection of an appropriate discount rate applicable toestimated future operating cash flows, and estimates of gross margin, selling,general and administrative expenses and capital expenditures.

 

**Note 7. Stock-Based Compensation**

 

The Company has threeshare-based compensation plans: the 2004 Omnibus Stock Plan, the 2002 StockOption Plan and the Employee Stock Purchase Plan. In addition, the Companygranted certain stock option awards in fiscal 1998 and fiscal 2002 that werenot under a stock-based compensation plan (“non-plan” awards). However, as of October 31,  2009, there were no “non-plan” option awardsoutstanding. The Company is not authorized to grant any further awards underthe 2002 Stock Option Plan. The Company’s board of directors has suspended theEmployee Stock Purchase Plan, effective January 1, 2009. The suspensionwill continue until it is lifted by future action of the board.

 

As of October 31,  2009, there were a total of 1,861,195 optionsto purchase common stock outstanding under both of the Company’s stock option plans, with a weighted average exerciseprice of $10.36 and a weighted average remaining life of 5.8 years.  There were 1,519,327  options that were exercisable as of October 31,2009 with a weighted-average exercise price of $11.04.

 

Stock-based compensationexpense for the 13 weeks ended October 31, 2009 and November 1, 2008,was $136,000 and $286,000, respectively. Stock-based compensation expense for the 39 weeks ended October 31,2009 and November 1, 2008, was $411,000 and $989,000, respectively. As of October 31,2009, there was approximately $620,000 of unrecognized compensation expenserelated to stock options that is expected to be recognized over aweighted-average period of 1.7 years.

 

As of October 31,2009, there were 2,048,911 shares available for future grant under the 2004Omnibus Stock Plan.

 

Stock option activity forthe periods presented is as follows:

 

9

----

Table ofContents

 
| ** **                                                    | ** ** | **13 weeks - October 31, 2009** | ** ** | **13 weeks - November 1, 2008** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|
| ** **                                                    | ** ** | **Number of**                        | ** ** | **Weighted-**                        | ** ** | **Number of** | ** ** | **Weighted-** | ** ** |
| ** **                                                    | ** ** | **Shares Under**                     | ** ** | **Average**                          | ** ** | **Shares Under** | ** ** | **Average** | ** ** |
| ** **                                                    | ** ** | **Option**                           | ** ** | **Exercise Price**                   | ** ** | **Option** | ** ** | **Exercise Price** | ** ** |
| Outstanding - Beginning                                       |       | 1,900,717                            |       | $                                    | 10.33      |   | 3,282,815 |   | $ | 9.98 |   |
| Granted                                                       |       | —                               |       | —                               |       | 20,300 |   | 3.00 |   |
| Exercised                                                     |       | (534                                 | )          | 5.12                                 |       | — |   | — |   |
| Forfeited                                                     |       | (38,988                              | )          | 8.91                                 |       | (143,712 | ) | 10.30 |   |
| Outstanding - Ending                                          |       | 1,861,195                            |       | $                                    | 10.36      |   | 3,159,403 |   | $ | 9.92 |   |
| Weighted-average  Black-Scholes fair value of options granted |       |                                 |       |                                 | NA         |   |   |   | $ | 1.74 |   |

 

**Note 8. Selected Balance Sheet Information *(in thousands)***

 
| ** **                                       | ** ** | **October 31,  2009** | ** ** | **January 31,  2009** | ** ** |
|--------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| *Property  and equipment consists of :*          |       |                       |       |                       |       |
| Building                                         |       | $                          | 6,972      |                       | $          | 6,972 |   |
| Furniture and equipment                          |       | 156,567                    |       | 153,612                    |       |
| Leasehold improvements                           |       | 66,376                     |       | 66,329                     |       |
| Computer software and  hardware                  |       | 66,312                     |       | 60,959                     |       |
|                                             |       | 296,227                    |       | 287,873                    |       |
| Less: Accumulated  depreciation and amortization |       | (146,093                   | )          | (125,693                   | )          |
| **Property  and equipment, net**                 |       | $                          | 150,134    |                       | $          | 162,180 |   |

 
| ** **                      | ** ** | **October 31,  2009** | ** ** | **January 31,  2009** | ** ** |
|---------------------------------|------------|----------------------------|------------|----------------------------|------------|
| *Other  assets consists of:*    |       |                       |       |                       |       |
| Deferred loan costs             |       | $                          | 6,764      |                       | $          | 6,790 |   |
| Other                           |       | 258                        |       | 167                        |       |
|                            |       | 7,022                      |       | 6,957                      |       |
| Less: Accumulated  amortization |       | (5,481                     | )          | (5,021                     | )          |
| **Other  assets, net**          |       | $                          | 1,541      |                       | $          | 1,936 |   |

 
| ** **                                           | ** ** | **October 31,  2009** | ** ** | **January 31,  2009** | ** ** |
|------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| *Accrued  and other current liabilities consist of:* |       |                       |       |                       |       |
| Gift cards and gift  certificate liabilities         |       | $                          | 14,697     |                       | $          | 24,853 |   |
| Payroll and related  fringe benefits                 |       | 4,846                      |       | 7,196                      |       |
| Sales, property and use  taxes                       |       | 12,075                     |       | 9,138                      |       |
| Reserve for store exit  costs                        |       | 152                        |       | 210                        |       |
| Lease related costs                                  |       | 2,333                      |       | 1,874                      |       |
| Insurance reserves and  liabilities                  |       | 2,535                      |       | 2,335                      |       |
| Advertising and marketing                            |       | 2,172                      |       | 133                        |       |
| Interest                                             |       | 873                        |       | 742                        |       |
| Other accruals and  current liabilities              |       | 9,828                      |       | 8,975                      |       |
| **Accrued  and other current liabilities**           |       | $                          | 49,511     |                       | $          | 55,456 |   |

 

10

----

Table of Contents

 
| ** **                                 | ** ** | **October 31,  2009** | ** ** | **January 31,  2009** | ** ** |
|--------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| *Other  long-term liabilities consist of:* |       |                       |       |                       |       |
| Deferred rent                              |       | $                          | 25,249     |                       | $          | 25,753 |   |
| Insurance reserves and  other liabilities  |       | 1,674                      |       | 1,645                      |       |
| **Other  long-term liabilities**           |       | $                          | 26,922     |                       | $          | 27,398 |   |

 

**Note 9. Exit Costs and Related Charges**

 

The Company presents this caption in the consolidated statement ofoperations to aggregate various charges related to exiting certain stores,impaired assets or other charges for assets no longer used, as well asseverance charges. The Company believes it is more meaningful to present theseexpenses on a separate line in the consolidated statement of operations. Exitcosts and related charges for each of the 13 and 39 week periods ended October 31,2009 and November 1, 2008 are detailed in the table below *(in thousands)*:

 
| ** **                                              | ** ** | **13 weeks ended**   | ** ** | **39 weeks ended**   | ** ** |
|---------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                              | ** ** | **October 31,** | ** ** | **November 1,** | ** ** | **October 31,** | ** ** | **November 1,** | ** ** |
| **Expense Summary**                                     | ** ** | **2009**             | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                    |       |                 |       |                 |       |   |   |   |   |
| Exit costs for closed  stores                           |       | $                    | —     |                 | $          | (1,648 | ) | $ | — |   | $ | (700 | ) |
| Accretion on  closed-store liabilities                  |       | —               |       | 64                   |       | — |   | 208 |   |
| Accelerated  depreciation on Powersports related assets |       | 492                  |       | —               |       | 968 |   | — |   |
| Powersports lease and  other charges                    |       | —               |       | 472                  |       | 150 |   | 472 |   |
| Severance costs                                         |       | —               |       | —               |       | 47 |   | — |   |
|                                                    |       | $                    | 492        |                 | $          | (1,112 | ) | $ | 1,165 |   | $ | (20 | ) |

 

The Company’s reserve for exit costs and related charges as of October 31,2009 and January 31, 2009, was $152,000 and $210,000, respectively,representing powersports related reserves and accrued severance, respectively.

 

**Note 10. Income Taxes**

 

TheCompany’s effective income tax rate was 4.5% and 19.2% for the third quarter offiscal 2009 and third quarter of fiscal 2008, respectively. The change in theeffective tax rate between periods is primarily the result of the change in pretaxincome compared to the change in state income taxes and deferred taxliabilities related to differences in the book-tax basis of certain acquiredintangible assets. The Company’s tax provision primarily represents minimum ornet worth taxes due in various states. Some states have adopted an adjustedgross receipts tax. The Company has no provision for Federal income tax foreither period presented due to accumulated operating losses. The Companydetermined that realization of the tax benefit related to the net deferred taxassets was uncertain. Accordingly, a valuation allowance is recorded for theentire balance of the net current and non-current deferred tax assets.

 

**Note 11. Earnings Per Share**

 

Basic and diluted loss applicable to common shareholders per share isbased upon the weighted average number of shares outstanding. All potentiallydilutive stock options and convertible securities to purchase shares of theCompany’s common stock have been excluded from the calculation of weightedaverage shares outstanding for all years presented because their inclusionwould have an anti-dilutive effect on loss per share. These shares of commonstock subject to potential issuance as a result of these securities totaled1,861,195 and 3,159,403 as of October 31, 2009 and November 1, 2008,respectively.

 

**Note 12. Contingencies**

 

*Legal Proceeding: Going-PrivateTransaction***-**Since the announcement of the reverse/forward stocksplit, three purported class action complaints have been filed in the RamseyCounty District Court in St. Paul, Minnesota, by four individuals claiming tobe shareholders of the Company.  All of the complaints name as defendantsthe Company and our directors.  One of the complaints names HolidayStationstores, Inc. and Gratco LLC as additional defendants. Plaintiffs allege that the defendants breached their fiduciary duties, and/oraided and abetted alleged breaches of fiduciary duty by other defendants, bycausing the Company to engage in an allegedly unfair transaction, at anallegedly unfair price and in alleged violation of Minnesota law.  One ofthe complaints also

 

11

----

Table ofContents

 

alleges an express causeof action for violation of Section 302A.467 of the Minnesota statutes(Minnesota’s equitable remedies statute).  Plaintiffs sued on behalf of analleged class consisting of all of the Company’s shareholders except defendantsand their affiliates, and seek as relief an order enjoining or rescinding thereverse/forward stock split, rescissory damages, disgorgement of unspecifiedbenefits, imposition of a constructive trust and an award of attorneys’ feesand costs of litigation.  The Company and defendants believe that theclaims made in the complaints are without merit, and intend to vigorouslydefend against them.

 

*Legal Proceeding**:General* - Various claims, lawsuits or other proceedings arising in the normalcourse of business may be pending against the Company from time to time. Thesubject matter of these proceedings typically relate to commercial disputes,employment issues, product liability and other matters. As of the date of thisreport, the Company is not a party to any legal proceedings that are expected, individuallyor in the aggregate, to have a material adverse effect on its financialcondition or results of operations.

 

**Note 13. Segment Reporting**

 

For the Retail segment, operating expenses primarily consist ofdistribution center expenses associated with moving product from the Company’sdistribution center to its retail stores, occupancy costs of the retail stores,store labor, advertising, depreciation, and all other store operating expenses,as well as all expenses associated with the functional support areas such asexecutive, merchandising/buying, human resources, information technology, andfinance/accounting.

 

For the Direct segment, operating expenses primarily consist of catalogexpenses, e-commerce advertising expenses, and order fulfillment expenses, aswell as all expenses associated with the functional support areas of the Directsegment such as merchandising/buying, information technology, andfinance/accounting.

 

Segment assets and liabilities are those assets and liabilitiesdirectly used in the operating segment. For the Retail segment, assetsprimarily include inventory in the retail stores, fixtures, and leaseholdimprovements. For the Direct segment, assets primarily include inventory,goodwill and intangible assets, deferred catalog costs and fixed assets.

 

Results by business segment are presented in the following table *(in thousands)*:

 

12

----

Table ofContents

 
| ** **                         | ** ** | **13 Weeks Ended**              | ** ** | **13 Weeks Ended**              | ** ** |
|------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                         | ** ** | **October 31, 2009**       | ** ** | **November 1, 2008**       | ** ** |
| **Statement of Operations data:**  | ** ** | **Retail**                      | ** ** | **Direct**                      | ** ** | **Total** | ** ** | **Retail** | ** ** | **Direct** | ** ** | **Total** | ** ** |
| Sales                              |       | $                               | 261,030    |                            | $          | 15,564 |   | $ | 276,594 |   | $ | 255,506 |   | $ | 14,414 |   | $ | 269,920 |   |
| Depreciation and  amortization     |       | 7,474                           |       | 268                             |       | 7,742 |   | 7,447 |   | 326 |   | 7,773 |   |
| Exit costs and related  charges    |       | 492                             |       | —                          |       | 492 |   | (1,112 | ) | — |   | (1,112 | ) |
| Income (loss) from  operations     |       | 7,715                           |       | (1,816                          | )          | 5,899 |   | 8,086 |   | (2,189 | ) | 5,897 |   |
| Net income (loss)                  |       | $                               | 5,475      |                            | $          | (2,306 | ) | $ | 3,169 |   | $ | 3,705 |   | $ | (2,940 | ) | $ | 765 |   |
|                               |       |                            |       |                            |       |   |   |   |   |   |   |   |   |
| ** **                         | ** ** | **39 Weeks Ended**              | ** ** | **39 Weeks Ended**              | ** ** |
| ** **                         | ** ** | **October 31, 2009**       | ** ** | **November 1, 2008**       | ** ** |
| ** **                         | ** ** | **Retail**                      | ** ** | **Direct**                      | ** ** | **Total** | ** ** | **Retail** | ** ** | **Direct** | ** ** | **Total** | ** ** |
| Sales                              |       | $                               | 681,736    |                            | $          | 70,925 |   | $ | 752,661 |   | $ | 656,644 |   | $ | 73,811 |   | $ | 730,455 |   |
| Depreciation and  amortization     |       | 22,315                          |       | 783                             |       | 23,098 |   | 22,319 |   | 1,115 |   | 23,434 |   |
| Exit costs and related  charges    |       | 1,165                           |       | —                          |       | 1,165 |   | (20 | ) | — |   | (20 | ) |
| Income (loss) from  operations     |       | (13,231                         | )          | (1,182                          | )          | (14,413 | ) | (13,630 | ) | 16 |   | (13,614 | ) |
| Net Loss                           |       | $                               | (19,954    | )                               | $          | (2,857 | ) | $ | (22,811 | ) | $ | (25,940 | ) | $ | (2,594 | ) | $ | (28,534 | ) |
|                               |       |                            |       |                            |       |   |   |   |   |   |   |   |   |
| ** **                         | ** ** | **As of October 31, 2009** | ** ** | **As of January 31, 2009** | ** ** |
| **Balance Sheet data:**            | ** ** | **Retail**                      | ** ** | **Direct**                      | ** ** | **Total** | ** ** | **Retail** | ** ** | **Direct** | ** ** | **Total** | ** ** |
| Total assets                       |       | $                               | 590,166    |                            | $          | 89,790 |   | $ | 679,956 |   | $ | 517,812 |   | $ | 95,308 |   | $ | 613,120 | ** ** |
| Inventories                        |       | 408,997                         |       | 19,175                          |       | 428,172 |   | 334,868 |   | 23,259 |   | 358,127 |   |
| Goodwill and acquired  intangibles |       | —                          |       | 65,479                          |       | 65,479 |   | 400 |   | 65,844 |   | 66,244 |   |
| Long term debt                     |       | $                               | 15,775     |                            | $          | 25,000 |   | $ | 40,775 |   | $ | 20,402 |   | $ | 30,000 |   | $ | 50,402 |   |

 

**ITEM 2.  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

**OVERVIEW**

 

GanderMountain Company operates the nation’s largest retail network of storesspecializing in hunting, fishing, camping, marine and outdoor lifestyleproducts and services. We have expanded our store base to 119 convenientlylocated Gander Mountain outdoor lifestyle stores (including three outletcenters), providing approximately 6.6 million square feet of retail spacein 23 states. We opened our newest store in March 2009, which weanticipate will be our only new store in fiscal 2009 as we focus on growing ourdirect marketing business and continuing to improve the profitability of ourretail operations. The sales of outdoor lifestyle products and services throughour 119 retail stores constitutes our Retail segment.

 

OnDecember 6, 2007 we acquired Overton’s, Inc., a leading internet andcatalog marketing company targeting recreational boaters and water sportsenthusiasts. Overton’s product line is extensive, ranging from water skis,wakeboards and apparel to electronics, boat covers, boat seats and other marineaccessories. Overton’s products are sold under two principal brands, Overton’sand Consumers Marine, through a multi-channel approach that includes catalogs,websites (*www.Overtons.com* and *www.Consumersmarine.com*) and two retailshowrooms. We acquired Overton’s both for its established position in themarine accessories business and also to provide us a platform from which todevelop and grow the internet and catalog retail channels for the GanderMountain product categories.

 

InAugust 2008, we launched a new internet and catalog operation under ourGander Mountain brand offering an initial assortment of the products availablein our retail stores. We intend to expand our product assortment and continueto grow this component of our direct business as we seek to build market sharein the internet and catalog markets. Together, the Overton’s business and ourcatalog and internet offerings under the Gander Mountain brand comprise ourDirect segment.

 

Our long-term strategic objectives are to:

 

13

----

Table ofContents

 

·                  Continue to develop a multi-channeloffering to our customers by growing our Gander Mountain and Overton’s Directmarketing business through expanded product offerings, additional catalogs andenhanced customer service;

 

·                  Grow retail store revenuesand build upon the Gander Mountain brand by executing strategies centered uponincreasing customer traffic, focusing on well-defined customer segments anddeploying targeted, value-added merchandising and marketing tactics;

 

·                  Offer our customers the bestcombination of a broad assortment of products and services, convenience andvalue in the outdoor lifestyle sector, including new products that meet theneeds of our customer segments; and

 

·                  Continue to improve ourprofitability by leveraging our increasing scale to improve margins and bycontrolling expenses.

 

**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 in our Retail segment normally occurring during thethird and fourth quarters of our fiscal year, which are primarily associatedwith the fall hunting seasons and the holiday season. In recent years, thesecond half of our fiscal years have generated approximately 57% to 63% of ourannual sales. In addition, our customers’ demand for our products and thereforeour sales can be significantly impacted by unseasonable weather conditions thataffect outdoor activities and the demand for related apparel and equipment. Ourgrand opening activities surrounding our new store openings can also cause fluctuationsin sales when compared to operating periods in later months. It is for thisreason we include a new store in our comparable store sales base in itsfifteenth full month to minimize the effect of grand opening activities.

 

Seasonality also impacts inventory levels for our retail stores whichtend to rise beginning approximately in April, reach a peak in November, anddecline to lower levels after the December holiday season.

 

The Overton’s business is also subject to seasonal fluctuations, withits highest sales activity normally occurring during the first and secondquarters of our fiscal year, which is the primary season for boating, marineand watersports related products. Historically, Overton’s has generatedapproximately 65% to 70% of its sales during the first half of our fiscal yearand approximately 50% during the second quarter of our fiscal year. We expectthe Gander Mountain Direct segment business to have similar seasonality as ourretail stores as the product offerings are similar.

 

Our pre-opening expenses will vary significantly from quarter toquarter because they directly correlate with new store openings. We typicallyincur most pre-opening expenses for a new store during the three monthspreceding, and the month of, its opening. In addition, our labor and operatingcosts for a newly opened store can be greater during the first one to twomonths of operation than what can be expected after that time, both inaggregate dollars and as a percentage of sales. Accordingly, the volume and timingof new store openings in any quarter has had, and is expected to continue tohave, a significant impact on quarterly pre-opening costs and store labor andoperating expenses. We do not expect any new store openings in the next 12months.

 

Due to these factors, results for any particular quarter may not beindicative of results to be expected for any other quarter or for a full fiscalyear.

 

14

----

Table of Contents

 

**RESULTS OF OPERATIONS**

 

The following table presents, for the periods indicated, selected itemsin the consolidated statements of operations as a percentage of our sales:

 
| ** **                                    | ** ** | **13 Weeks Ended**   | ** ** | **39 Weeks Ended**   | ** ** |
|-----------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                    | ** ** | **October 31,** | ** ** | **November 1,** | ** ** | **October 31,** | ** ** | **November 1,** | ** ** |
| ** **                                    | ** ** | **2009**             | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| Sales                                         |       | 100.0                | %          | 100.0                | %          | 100.0 | % | 100.0 | % |
| Cost of goods sold                            |       | 72.8                 | %          | 74.2                 | %          | 75.2 | % | 75.5 | % |
| Gross profit                                  |       | 27.2                 | %          | 25.8                 | %          | 24.8 | % | 24.5 | % |
| Operating expenses:                           | ** ** | ** **           | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Selling, general and  administrative expenses |       | 24.9                 | %          | 24.1                 | %          | 26.5 | % | 26.1 | % |
| Exit costs and related  charges               |       | 0.2                  | %          | -0.4                 | %          | 0.2 | % | 0.0 | % |
| Pre-opening expenses                          |       | 0.0                  | %          | 0.0                  | %          | 0.0 | % | 0.3 | % |
| Income (loss) from  operations                |       | 2.1                  | %          | 2.2                  | %          | (1.9 | )% | (1.9 | )% |
| Interest expense, net                         |       | 0.9                  | %          | 1.8                  | %          | 1.0 | % | 2.0 | % |
| Income (loss) before  income taxes            |       | 1.2                  | %          | 0.4                  | %          | (2.9 | )% | (3.8 | )% |
| Income tax provision                          |       | 0.1                  | %          | 0.1                  | %          | 0.1 | % | 0.1 | % |
| Net income (loss)                             |       | 1.1                  | %     | 0.3                  | %     | (3.0 | )%  | (3.9 | )% |

 

In the third quarter of fiscal 2009, the Retail segment represented 94% of our consolidated sales and produced net income of $5.5 million, while theDirect segment represented approximately 6% of our consolidated sales andreported a net loss of $2.3 million. The Direct segment results includeoperating losses due to the immature, early-stage cycle of the Gander Mountainbrand Direct business.

 

The following tableindicates the average percentage of consolidated sales represented by each ofour major product categories during the third quarters of fiscal 2009 and 2008:

 
| ** **                                    | ** ** | **3rd Quarter** | ** ** | **3rd Quarter** | ** ** |
|-----------------------------------------------|------------|-----------------|------------|-----------------|------------|
| **Category (1)**                              | ** ** | **2009**        | ** ** | **2008**        | ** ** |
| Hunting and Firearms                          |       | 53.8            | %          | 51.9            | %          |
| Fishing and Marine                            |       | 13.9            | %          | 14.1            | %          |
| Camping, Paddlesports  and Backyard Equipment |       | 6.6             | %          | 6.4             | %          |
| Apparel and Footwear                          |       | 22.8            | %          | 21.1            | %          |
| Powersports                                   |       | 1.3             | %          | 4.3             | %          |
| Other                                         |       | 0.9             | %          | 1.1             | %          |
| Parts and services                            |       | 0.7             | %          | 1.1             | %          |
| Total                                         |       | 100.0           | %          | 100.0           | %          |

 

----

(1)        Direct segment sales fromOverton’s for the third quarters of fiscal 2009 and fiscal 2008 have beenincluded in the Fishing and Marine category. Direct segment sales from Gander Mountain Direct are included in theirrespective categories.

 

15

----

Table ofContents

 

***Financial Review -******13 Weeks Ended October 31, 2009 Compared to 13 Weeks Ended November 1,  2008***

 

*Sales.*  Consolidatedsales increased by $6.7 million, or 2.5 %, to $276.6 million in the thirdquarter of fiscal 2009 from $269.9 million in the third quarter of fiscal 2008.

 

Retail segment sales were $261.0 million for the third quarter offiscal 2009, an increase of $5.5 million, or 2.2% from $255.5 million for thethird quarter of fiscal 2008. The Retail segment sales increase resulted from acomparable store sales increase of $2.7 million, an increase of $3.0 million insales from new stores not included in the comparable store sales base,partially offset by a $200,000 sales decrease from changes in otherrevenue.  We did not open any new storesin the third quarter of fiscal 2009 or in the third quarter of fiscal 2008.

 

Direct segment sales increased $1.2 million, or 8.0%, in the thirdquarter of fiscal 2009 as compared to the third quarter of fiscal 2008 due tothe Gander Mountain brand direct website and catalog business which launchedearly in the third quarter of fiscal 2008. These sales increases were partiallyoffset by sales declines in the Overton’s Direct brand business as consumerspending in the boating accessory business has been curtailed by the economicenvironment as well as from decreased catalog spending.

 

Our Retail comparable store sales increased 1.0% for the third quarterof fiscal 2009, as compared to a comparable store sales decline of 6.5% for thethird quarter of fiscal 2008. Excluding a negative 2.7% impact of power boatand ATV sales and power sport services, which are categories we havesubstantially exited, comparable store sales were a positive 3.7% for the thirdquarter of fiscal 2009. This increase was attributable to sales increases infirearms, ammunition, fishing, apparel, marine and camping categories.  The powersports product categoriesexperienced a $6.5 million comparable store sales decline.  We believe the positive comparable storessales of 1.0% we believe was also attributable to increased advertisingexpenditures in the third quarter of fiscal 2009.

 

Overall, the Retail sales mix for the third quarter of fiscal 2009 wasrelatively consistent with the third quarter of fiscal 2008. The notableexceptions were: (i) the firearms, ammunition and accessories category,which increased its share of the Retail sales mix by 336 basis points on strongmarket demand, and (ii) lower sales in the powersports category resultingin a 363 basis points lower share of the sales mix as we exited the powerboatand ATV categories.

 

*Gross Profit.*  Consolidated gross profit increased by $5.4million, or 7.8%, to $75.2 million in the third quarter of fiscal 2009 from$69.8 million in the third quarter of fiscal 2008. As a percentage of sales,consolidated gross profit increased 135 basis points to 27.2 % in the thirdquarter of fiscal 2009 from 25.8 % in the third quarter of fiscal 2008. Thesignificant factors affecting our consolidated gross profit rate during thethird quarter of fiscal 2009 were a higher Retail gross profit rate thatimpacted the consolidated rate by 147 basis points. Retail segment gross profitrates benefitted primarily from a more favorable sales mix than the fiscal 2008third quarter, improving due to higher initial margin rates in firearms andammunition, higher sales penetration in the higher-margin apparel products andlower sales of our lower-margin powersports products.  The higher Retail gross profit rate waspartially offset by a decline in the Direct segment gross profit rate thatnegatively impacted the consolidated rate by 12 basis points. Direct segmentgross profit declined due to promotional efforts necessary to grow sales in ourimmature, early-stage Gander Mountain direct business.  Gross profit rates for the Overton’s directbusiness improved slightly due to product sales mix.

 

*Selling, General and Administrative Expenses.*  Consolidated SG&A expenses increased by$3.8 million, or 5.9%, to $68.8 million in the third quarter of fiscal 2009from $65.0 million in the third quarter of fiscal 2008. As a percentage ofsales, consolidated SG&A expenses increased 81 basis points to 24.9% in thethird quarter of fiscal 2009 from 24.1% in the third quarter of fiscal 2008.Retail SG&A as a percentage of consolidated sales increased 109 basispoints primarily due to increased advertising expense in the Retail segment.The Direct segment SG&A improved 28 basis points as a percentage ofconsolidated sales due to decreased catalog expenses in the Direct segment.

 

*Exit Costs and Related Charges.* We continued to incur minimal costs in fiscal2009 which are primarily related to the exit of the powersports categories.These costs (or credits) in the third quarter of fiscal 2008 were primarilyrelated to store closings as well as costs related to the exit of thepowersports categories. Exitcosts and related charges were $500,000 in the third quarter of fiscal 2009compared to a net credit of $1.1 million in the third quarter of fiscal2008.  The net credit last year was theresult of the reversal of certain lease termination liabilities based on therelated assets being redeployed into use as outlet stores and their expectedcash flow projections.

 

*Interest Expense, Net.*  Interest expense decreased by $2.4 million,or 47.9%, to $2.6 million in the third quarter of fiscal 2009 from $5.0 millionin the third quarter of fiscal 2008.

 

16

----

Table ofContents

 

Average outstanding borrowings during the third quarter of fiscal 2009decreased approximately $13 million, or 3.5%, as compared to the third quarterof fiscal 2008.Average interest rates on our outstanding borrowings wereapproximately 250 basis points lower during the third quarter of fiscal 2009than in the third quarter of fiscal 2008, due to general interest ratedeclines. The average effective interest rate on the average of all outstandingborrowings during the third quarter of fiscal 2009 was 3.0% as compared to 5.5%for the third quarter of fiscal 2008.

 

*Income Tax Provision.*  Our tax provisions for the third quarters offiscal 2009 and fiscal 2008 primarily represent minimum or net worth taxes duein various states. Certain states have adopted an adjusted gross receipts tax.We have no provision for Federal income tax in the third quarter of fiscal 2009or fiscal 2008 due to the uncertainty of the realization of our net operatingloss carryforwards. We have determined the realization of the tax benefitrelated to our net deferred tax asset is uncertain at this time and a valuationallowance was recorded for the entire balance of our net deferred tax asset.

 

*Net Income.*  Our net income was $3.2 million for the thirdquarter of fiscal 2009, as compared to net income of $800,000 for the thirdquarter of fiscal 2008, due to the factors discussed above.

 

***Financial Review – 39****** Weeks Ended October 31,  2009 Compared to 39 Weeks Ended November 1,2008***

 

*Sales.*  Consolidatedsales increased by $22.2 million, or 3.0 %, to $752.7 million in the first ninemonths of fiscal 2009 from $730.5 million in the first nine months of fiscal2008.

 

Retail segment sales were $681.7 million for the first nine months offiscal 2009, an increase of $25.1 million, or 3.8% from $656.6 million for thefirst nine months of fiscal 2008. The Retail segment sales increase resultedfrom sales of $18.0 million from new stores not included in the comparablestore sales base, a comparable store sales increase of $11.1 million and a $4.0million sales decrease from stores closed during the first nine months offiscal 2009 but open in fiscal 2008, as well as changes in other revenue.  We opened one new store in the first ninemonths of fiscal 2009. During the first nine months of fiscal 2008, we opened five new stores and closed three stores.

 

Direct segment sales declined $2.9 million, or 3.9%, in the first ninemonths of fiscal 2009 as compared to the first nine months of fiscal 2008 asconsumer spending in the boating accessory business was curtailed by the overall poor economic environment,including credit conditions, housing market foreclosures, rising unemploymentand decreased consumer confidence, and their effects on discretionary spending.A reduction in catalog spending also contributed to lower sales levels. The Directsegment sales decrease includes an increase from the sales of the GanderMountain direct website and catalog business which recorded its first sales in September 2008.

 

Our Retail comparable store sales increased 1.8% for the first ninemonths of fiscal 2009, as compared to a comparable store sales decline of 8.3%for the first nine months of fiscal 2008. Excluding a negative 3.8% impact of power boat and ATV sales and powersport services which are categories we have substantially exited, comparablestore sales were a positive 5.6% for the first nine months of fiscal 2009. Theincrease was attributable to sales increases in the firearms, ammunition,firearm accessories, fishing, apparel, marine and camping categories. Thepowersports product categories experienced a $22.6 million comparable store salesdecline. The comparable store sales increase was also impacted by a significantincrease in advertising expenditures in the first nine months of fiscal 2009 ascompared to fiscal 2008.

 

*Gross Profit.*  Consolidated gross profit increased by $7.2million, or 4.0%, to $186.5 million in the first nine months of fiscal2009 from $179.3 million in the first nine months of fiscal 2008. As apercentage of sales, consolidated gross profit increased 23 basis points to24.8% in the first nine months of fiscal 2009 from 24.5% in the first ninemonths of fiscal 2008. The significant components of our gross profit rateduring the first nine months of fiscal 2009 were an increased Retail segmentgross profit rate that impacted the consolidated rate by 78 basis points. Retailsegment gross profit rates benefitted primarily from a more favorable sales mixthan the fiscal 2008 nine month period, improving due to higher initial marginrates in firearms and ammunition as well as lower sales of our lower-marginpowersports products. Sales of lower-margin powersports products decreased$22.6 million during the first nine months of fiscal 2009 as compared to thesame period last year. The Retail gross profit rate increase was partiallyoffset by sales deleverage of 35 basis points in occupancy costs.  The higher Retail gross profit rate was alsopartially offset by a decline in the Direct segment gross profit rate thatnegatively impacted the consolidated rate by 54 basis points. Direct segmentgross profit declined due to promotional efforts necessary to grow sales in ourimmature, early-stage Gander Mountain direct business.

 

17

----

Table ofContents

 

*Selling, General and Administrative Expenses.*  Consolidated SG&A expenses increased by$8.6 million, or 4.5%, to $199.4 million in the first nine months of fiscal2009 from $190.9 million in the first nine months half of fiscal 2008. As apercentage of sales, consolidated SG&A expenses increased 37 basis pointsto 26.5% in the first nine months of fiscal 2009 from 26.1% in the first ninemonths of fiscal 2008. Retail SG&A as a percentage of consolidated salesincreased 75 basis points due to increased advertising expense in the Retailsegment. The Direct segment SG&A improved 39 basis points as a percentageof consolidated sales due to reduced catalog expenses in the Direct segment.

 

*Exit Costs and Related Charges.* We continued to incur costs in fiscal 2009which are primarily related to the exit of the powersports categories. Thesecosts (or credits) in the first nine months of fiscal 2008 were primarilyrelated to store closings as well as costs related to the exit of thepowersports categories. Exitcosts and related charges were $1.2 million in the first nine months of fiscal2009 compared to a net credit of $20,000 in the same period of fiscal2008.  The net credit in fiscal 2008 wasthe result of the reversal of certain lease termination liabilities based onthe related assets being redeployed into use as outlet stores and theirexpected cash flow projections.

 

*Pre-opening Expenses.*  Pre-opening expenses related to new retailstores decreased by $1.7 million to $300,000 in the first nine months of fiscal2009 from $2.0 million in the first nine months of fiscal 2008. We opened onenew store in the first nine months of fiscal 2009 as compared to five newstores in the same period of fiscal 2008.

 

*Interest Expense, Net.*  Interest expense decreased by $6.5 million,or 45.4%, to $7.8 million in the first nine months of fiscal 2009 from$14.3 million in the first nine months of fiscal 2008.

 

Average outstanding borrowings during the first nine months of fiscal2009 decreased approximately $21 million, or 6.1%, as compared to the firstnine months of fiscal 2008, due to improved cash flows from operations duringthe latter part of fiscal year 2008 and reduced capital expenditures in fiscal2009. Average interest rates on our outstanding borrowings were 235 basispoints lower during the first nine months of fiscal 2009 than in the first ninemonths of fiscal 2008, due to general interest rate declines. The averageeffective interest rate on the average of all outstanding borrowings during thefirst nine months of fiscal 2009 was 3.3% as compared to 5.6% for the firstnine months of fiscal 2008.

 

*Income Tax Provision.*  Our tax provisions for the first nine monthsof fiscal 2009 and fiscal 2008 primarily represent minimum or net worth taxesdue in various states. Certain states have adopted an adjusted gross receiptstax. We have no provision for Federal income tax in the first nine months offiscal 2009 or fiscal 2008 due to the uncertainty of the realization of our netoperating loss carryforwards. We have determined the realization of the taxbenefit related to our net deferred tax asset is uncertain at this time and avaluation allowance was recorded for the entire balance of our net deferred taxasset.

 

*Net Loss.*  Our net loss was $22.8 million for the firstnine months of fiscal 2009, as compared to net loss of $28.5 million for thefirst nine months of fiscal 2008, due to the factors discussed above.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Our primary capital requirements are for seasonal working capitalneeds, particularly when inventories are increasing; capital expenditures; andto the extent of the highly seasonal nature of our business, operating losses.During periods of new store growth, property and equipment and pre-openingexpenses to support the new stores also require significant capital. Sources ofliquidity for providing capital to meet these needs have primarily beenborrowings under our credit facility, operating cash flows, and short andlong-term debt financings from banks and financial institutions as well as our twomajor shareholders.

 

Fiscal 2008 was the first year since we began our large-format storeexpansion in fiscal 2003 that we substantially slowed our new store growth. Weopened five new stores in fiscal 2008, including threerelocations/consolidations of small-format stores. We opened one new storeduring the first nine months of fiscal 2009. We do not expect any new storeopenings in the next 12 months.

 

This change in strategy had a positive impact on our cash flows andliquidity in fiscal 2008, as we substantially reduced cash used for new storeinventories, fixed assets and pre-opening expenses. This result, coupled withimprovements in retail operating results, contributed to a $38 millionreduction in total debt for fiscal 2008. These changes continued to impact uspositively with respect to our financial position and liquidity, as inventoryand total debt levels remained lower through our third quarter of fiscal 2009versus the comparable period of fiscal 2008. In addition, our financial position and working capital was favorablyimpacted during the first nine months of fiscal 2009 because of lower interestrates which resulted in $6.5 million of less interest expense in fiscal 2009 ascompared to fiscal 2008.

 

18

----

Table ofContents

 

The following chart summarizes the principal elements of our cash flowfor the comparable nine month periods of fiscal 2009 and fiscal 2008 *(in thousands),*and the number of stores opened during eachperiod.

 
| ** **                                              | ** ** | **Cash Flow Summary** | ** ** |
|---------------------------------------------------------|------------|-----------------------|------------|
| ** **                                              | ** ** | **39 Weeks Ended**    | ** ** |
| ** **                                              | ** ** | **October 31,**  | ** ** | **November 1,** | ** ** |
| ** **                                              | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Net cash used in  operating activities                  |       | $                     | (68,091    | ) | $ | (49,544 | ) |
| Net cash used in  investing activities                  |       | (9,567                | )          | (16,290 | ) |
| Net cash provided by  financing activities              |       | 77,683                |       | 64,863 |   |
| Total net increase  (decrease) in cash                  |       | $                     | 25         |   | $ | (971 | ) |
|                                                    |       |                  |       |   |   |
| Details of financing  activities:                       |       |                  |       |   |   |
| Borrowings under credit  facility, net                  |       | $                     | 87,592     |   | $ | 60,251 |   |
| Proceeds from short term  notes payable-related parties |       | —                |       | 10,000 |   |
| Proceeds from stock  sales and exercise of options      |       | 12                    |       | 235 |   |
| Reductions in long-term  debt                           |       | (9,921                | )          | (5,623 | ) |
| Net cash provided by  financing activities              |       | $                     | 77,683     |   | $ | 64,863 |   |
|                                                    |       |                  |       |   |   |
| New store openings,  including relocated stores         |       | 1                     |       | 5 |   |

 

*Net cash used in operating activities* was $68.1 million in thefirst nine months of fiscal 2009, compared to net cash used in operatingactivities of $49.5 million in the first nine months of fiscal 2008. Theoverall $18.5 million increase in net cash used by operating activities in thecomparable 39 week periods was primarily due to:

 

·                  an increase in cash used of$31.9 million due to greater inventory increases in the first nine months offiscal 2009 as compared to the first nine months of fiscal 2008. The fiscal2009 increases reflect merchandising our stores earlier for the upcominghunting and holiday seasons as well as building firearms and ammunitioninventory levels to meet anticipated demand.

 

·                  an increase of $5.1 million incash provided from increases in accounts payable and other liabilitiesprimarily attributable to a greater increase in inventories during the firstnine months of fiscal 2009 as compared to the same period last year.

 

·                  a decrease in cash used as aresult of the reduction in the net loss in the first nine months of fiscal 2009as compared to the first nine months of fiscal 2008.

 

*Net cash used in investing activities* was $9.6 million in thefirst nine months of fiscal 2009 and $16.3 million in the first nine months offiscal 2008, a $6.7 million reduction in cash used. Cash invested in the firstnine months of fiscal 2009 and fiscal 2008 each consisted primarily ofpurchases of property and equipment for stores and for information technologyinvestments. We use cash for leasehold improvements and equipment to open newand relocated stores and to remodel and upgrade existing stores. Purchases ofproperty and equipment also include purchases of information technology systemsand expenditures for our distribution facility and our corporate headquarters.

 

*Financing activities* provided $77.7 million ofcash in the first nine months of fiscal 2009 and provided $64.9 million of cashin the first nine months of fiscal 2008. In the comparable periods, theborrowings under our credit facility funded our cash used in operations as wellas capital expenditures. Borrowings under the credit facility were partiallyoffset by reductions in long term debt through scheduled payments of $9.9million in the first nine months of fiscal 2009 and of $5.6 million in thefirst nine months of fiscal 2008. During fiscal 2008, we also borrowed $10.0million from two major shareholders, with repayment now due on March 31,2010, primarily in response to a reduction in advance rates under our revolvingcredit facility.

 

19

----

Tableof Contents

 

***Credit Facility and Term Loans***

 

Wehave maintained a revolving credit facility with Bank of America, N.A. since2001. Currently the revolving credit facility is $345 million and offersan option to increase the revolving facility by another $55 millionsubject to certain terms and conditions. The actual availability under thecredit facility is limited to specific advance rates on eligible inventory andaccounts receivable. Typically, availability will be highest in the latter halfof our fiscal year as inventory levels and advance rates increase. Interest onthe outstanding indebtedness under the revolving portion of the credit facilitycurrently accrues at the lender’s prime commercial lending rate, or, if weelect, at the one, two, three or six month LIBOR plus 1.25% to 1.75%, dependingon our EBITDA, as defined in the credit agreement. Our obligations under thecredit facility are secured by interests in substantially all of our assets.The table below summarizes pertinent information regarding our credit facilityand term loans with Bank of America, N.A.:

 
| ** **                         | ** ** | **October 31,  2009** | ** ** | **January 31,  2009** | ** ** |
|------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                         | ** ** | **(in  thousands)**        | ** ** |
| ** **                         | ** ** | *** ***               | ** ** | ** **                 | ** ** |
| Maximum credit facility  available |       | $                          | 345,000    |                       | $          | 345,000 |   |
| Revolver and Term Loan  A balance  |       | $                          | 292,106    |                       | $          | 204,514 |   |
| Term Loan B balance                |       | $                          | 35,000     |                       | $          | 37,500 |   |
| Outstanding letters of  credit     |       | $                          | 8,497      |                       | $          | 9,735 |   |
| Borrowing availability             |       | $                          | 44,101     |                       | $          | 23,318 |   |
| Interest rate at period  end       |       | 2.4                        | %          | 3.0                        | %          |
| Agreement maturity                 |       | June 2012             |       | June 2012             |       |

 

Borrowing availability under our credit facility as of December 4,2009 was $60.7 million.

 

*Term Loan A.*  In addition to the revolving credit facility,our credit facility includes a $20 million term loan. The amount of theterm loan is not deducted in determining availability under the revolvingcredit facility, except to the extent that the balance of the term loan exceedsapproximately 4% to 5% of the eligible borrowing base. The term loan 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%. This additional financing was obtainedto maintain the liquidity levels necessary to fund continued growth andseasonal cash flow needs.

 

*Term Loan B. *On December 6, 2007, we entered into a Fourth Amended and RestatedLoan and Security Agreement with Bank of America, N.A.  The amendment and restatement was effected inorder to add an additional $40.0 million term loan to our secured creditfacility to partially fund the acquisition of Overton’s and to make certainother amendments, including reducing permitted capital expenditures andreplacing former covenants relating to minimum operating cash flow and EBITDAwith a minimum excess availability reserve covenant.

 

Term Loan B has a four year maturity. As of October 31, 2009, therequired principal payments remaining under Term Note B are reflected inthe table below. Interest on Term Loan B is on a tiered schedule ranging fromLIBOR plus 3.375% to LIBOR plus 3.875%, based on the principal amountoutstanding. Term Loan B may be prepaid at any time without penalty,provided that any such prepayments are subject to specified minimumavailability tests. We will not have the ability to exercise the $55 millionaccordion feature under our revolving credit facility while Term Loan B isoutstanding. The long-term portion of Term Loan B is classified as long termdebt in the consolidated balance sheets.

 
| **Due Date**            | ** ** | **Principal Due**   | ** ** |
|-------------------------|------------|---------------------|------------|
| ** **              | ** ** | **(in  thousands)** | ** ** |
| December 31, 2009  |       | $                   | 5,000      |   |
| July 31, 2010      |       | 5,000               |       |
| December 31, 2010  |       | 6,250               |       |
| March 31, 2011     |       | 6,250               |       |
| June 30, 2011      |       | 6,250               |       |
| September 30, 2011 |       | 6,250               |       |
|                    |       | $                   | 35,000     |   |

 

20

----

Table ofContents

 

***Credit Facility Covenants****.*

 

Effective August 2009, financial covenants under the creditfacility require that availability under the line of credit not fall below 7.5%of the lower of the borrowing base, as defined, or the credit facility limit.This availability test is applied and measured on a daily basis. The financialcovenants also limit our annual capital expenditures. The credit facility alsocontains other covenants that, among other matters, restrict our ability toincur substantial other indebtedness, create certain liens, engage in certainmergers and acquisitions, sell certain assets, enter into certain capitalleases or make junior payments, including cash dividends. We were in compliancewith all covenants as of October 31, 2009 and January 31, 2009.

 

Although our current expectations of future financial performanceindicate that we will remain in compliance with the covenants under our creditfacility, if actual financial performance does not meet our currentexpectations, our ability to remain in compliance with these covenants may beadversely affected. We face a number of uncertainties that may adversely affectour ability to generate sales and earnings, including the possibility ofcontinued weakness in the retail environment in North America, which weaknessmay negatively affect future retail sales.

 

***Other Financings***

 

During the first nine months of fiscal 2009 and fiscal 2008, wepurchased information technology equipment totaling $1.3 million and $4.1million, respectively, financed through capital lease transactions. Thesecapital lease purchases are excluded from the caption “purchases of propertyand equipment” in our statements of cash flows as they did not require the useof cash.

 

***Income Taxes/Net Operating Losses***

 

Our tax provisions for the third quarters of fiscal 2009 and fiscal2008 primarily represent minimum or net worth taxes due in various states.Certain states have adopted an adjusted gross receipts tax. We have noprovision for Federal income tax for the third quarters of fiscal 2009 orfiscal 2008 due to the uncertainty of the realization of our net operating losscarryforwards. We have determined the realization of the tax benefit related toour net deferred tax asset is uncertain at this time and a valuation allowancewas recorded for the entire balance of our net deferred tax asset.

 

We have federal net operating loss carry forwards of approximately$100.1 million expiring between 2021 and 2029. The amount of our netoperating loss carry forwards subject to the Section 382 limitation was$4.4 million at January 31, 2009. Unrestricted net operating lossescarry forwards were $95.7 million at January 31, 2009. We do notexpect this limitation to materially impact our future tax provision forfinancial reporting purposes.

 

**FUTURE CAPITAL REQUIREMENTS**

 

Ourcash flows are highly variable, like most retailers, and are highly dependenton store-level sales. Future cash flows are unpredictable and depend, in part,on consumer confidence, the general strength of the economy and the factorsidentified under “Risk Factors” in our annual report for the fiscal year ended January 31,2009, filed on Form 10-K with the Securities and Exchange Commission.

 

Weexpect to generate cash from operations in the fourth quarter of fiscal 2009,however, if sales do not meet anticipated levels, or if there are disruptionsin the credit markets that impact our credit facility, or if conditions in theretail environment cause Bank of America to lower advance rates further, ourability to generate cash from operations may be materially hampered.

 

Our total capital expenditures for the full year of fiscal 2009 areexpected to be less than $15 million, including investment in our Directbusiness, costs for one new store and refurbishments to existing stores as wellas costs to continue to upgrade certain merchandise and information systems. Wehave started a significant project in fiscal 2009 to replace our point-of-salesystems to enhance our customers’ experience in the store and provide enhanceddata for analysis and reporting.

 

During the next 12 months our focus will be to continue to growthe Direct segment and continue to improve the profitability of our Retailsegment. Beginning with our acquisition of Overton’s, and furthered by thelaunch of our Gander Mountain branded internet and catalog operations, we haveundertaken significant steps toward our strategy of providing multi-channelofferings to our customers. We expect we will continue to make expendituresrelated to our Direct segment of up to $2.0 million in the next12 months to further this important business objective. Given theanticipated growth and the early-stage cycle of the Gander Mountain brand, wealso anticipate a need to fund additional working capital for the Directbusiness in fiscal 2010.

 

21

----

Table of Contents

 

Our capital requirements and cash flows are critically dependent on theavailability and day-to-day use of our credit facility with Bank of America.Current borrowing availability under our facility as of December 4, 2009was $60.7 million. However, if sales and cash flows from operations do not meetanticipated levels, if there are disruptions in the credit markets that impactour credit facility, or if conditions in the retail environment cause Bank ofAmerica to lower advance rates further, borrowing availability under ourfacility may not be sufficient to meet our needs and we will need to seekadditional debt or equity financing in the public or private markets.

 

As of October 31, 2009, we have total debt obligations maturingwithin one year of $26.7 million, including:

 

(i)   the $10.0  million term loan - relatedparty agreement,

(ii) $10.0 million of scheduled principal payment on Term Loan B, and

(iii) $6.7million in current maturities of all other debt.

 

In December 2009, the Company extended the maturity date on its$10 million term loan with its two major shareholders from December 31,2009 to March 31, 2010.

 

We intend to satisfy all of our capital requirements in the next12 months with cash flows from operations, funds available under ourcredit facility, and existing debt. However, if capital requirements for ourbusiness strategy change, or if sales and cash flows from operations do notmeet anticipated levels, we may need to seek additional debt or equityfinancing in the private markets. There is no assurance that we will besuccessful in borrowing additional funds at reasonable rates of interest orissuing equity at a favorable valuation, or at all. The current downturn in theeconomy as a whole has had a significant negative impact on the retail environment.The length and ultimate severity of this downturn are uncertain and mayadversely impact our results of operations and ability to obtain financing.

 

Our long term debt consists of the following (in thousands):

 
| ** **                         | ** ** | **October 31,** | ** ** | **January 31,** | ** ** |
|------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                         | ** ** | **2009**             | ** ** | **2009**             | ** ** |
| Term loan B                        |       | $                    | 35,000     |                 | $          | 37,500 |   |
| Equipment financing  notes         |       | 10,902               |       | 13,492               |       |
| Capitalized lease  obligations     |       | 10,703               |       | 13,390               |       |
| Term notes - related  parties      |       | 10,000               |       | 10,000               |       |
| Obligation from  acquisition       |       | 846                  |       | 1,648                |       |
| Total debt obligations             |       | 67,452               |       | 76,030               |       |
| Less: amounts due  within one year |       | (26,676              | )          | (25,628              | )          |
| **Long  term debt**                |       | $                    | 40,775     |                 | $          | 50,402 |   |

 

**OTHERMATTERS**

 

**Impactof Inflation**

 

Webelieve that inflation has not had a material impact on our results ofoperations for each of the fiscal periods presented.  We cannot assure you that inflation will nothave an adverse impact on our operating results and financial condition infuture periods. Inflation in particular commodities, for example gasoline andfood, that impact the general economic well-being of consumers does impactconsumer confidence and therefore may negatively impact our sales, depending onthe severity of price increases and negative changes in economic conditions.

 

**ContractualObligations and Other Commitments**

 

Ourmaterial off-balance sheet arrangements are operating lease obligations forsubstantially all of our retail stores, our distribution center and corporateoffice, as well as letters of credit.  Weexcluded these items from the balance sheet in accordance with U.S. generallyaccepted accounting principles. As of October 31, 2009, the minimumoperating lease payments due within one year were $75 million. As of October 31,2009, total minimum operating lease payments remaining over all of ouroperating leases were $699 million. These leases have an average remaining termof approximately ten years and typically provide us with several successiveoptions to extend the term at our election. The obligation amounts statedherein include future minimum lease payments only and exclude direct operatingcosts, insurance, taxes and maintenance. These direct operating costs rangefrom approximately 22%

 

22

----

Table of Contents

 

to24% on average of our annual retail rent expense. Issued and outstandingletters of credit were $8.5 million and $9.7 million at October 31, 2009and January 31, 2009, respectively, and were related primarily toimporting of merchandise and supporting potential insurance programliabilities.

 

Inthe ordinary course of business, we enter into arrangements with vendors topurchase merchandise in advance of expected delivery. Because most of thesepurchase orders do not contain any termination payments or other penalties ifcanceled, they are not included as outstanding contractual obligations. Themerchandise purchases, for which we do have firm commitments outstanding, inaddition to letters of credit, were $5.2 million and $5.4 million as of October 31,2009 and January 31, 2009, respectively.

 

**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 and judgments on historical experience, current trends and otherfactors that we believe to be relevant at the time the financial statements areprepared. On a regular basis, we review the accounting policies, assumptions,estimates and judgments to ensure that our financial statements are presentedfairly and in accordance with U.S. generally accepted accounting principles.However, because future events and their effects cannot be determined withcertainty, actual results could differ from our assumptions and estimates, andsuch differences could be material.

 

Ourcritical accounting policies and use of estimates are discussed and should beread in conjunction with the annual financial statements and notes included inour Form 10-K, as filed with the Securities and Exchange Commission, whichincludes audited financial statements for our three fiscal years ended January 31,2009. Significantaccounting policies, including areas of critical management judgments andestimates, have primary impact on the following financial statement areas:

 

·                  Inventory Valuation

·                  Vendor Allowances

·                  Valuation of Long-Lived Assets

·                  Costs Associated with Exit Activities

·                  Goodwill and Intangible Assets

·                  Self-Insurance

 

**Impact of Recent Accounting Pronouncements**

 

In June 2009, theFinancial Accounting Standards Board (“FASB”) issued FASB No. 168, *The FASB Accounting Standards Codification and theHierarchy of Generally Accepted Accounting Principles — a replacement of FASBStatement No. 162* (“SFAS 168”). SFAS 168 establishes the FASBAccounting Standards Codification as the source of authoritative accountingprinciples recognized by the FASB to be applied by non-governmental entities inthe preparation of financial statements in conformity with GAAP in the UnitedStates. SFAS 168 is effective for financial statements issued for interim andannual periods ending after September 15, 2009.

 

In May 2009, theFASB issued ASC Topic 855, *Subsequent Events*which establishes general standards of accounting and disclosure for eventsthat occur after the balance sheet date but before financial statements areissued. The accounting guidance contained in Topic 855 is consistent with theauditing literature widely used for accounting and disclosure of subsequentevents, however, Topic 855 requires an entity to disclose the date throughwhich subsequent events have been evaluated. Topic 855 was effective forinterim and annual periods ending after June 15, 2009. The adoption ofTopic 855 did not have a material impact on our consolidated financialstatements.

 

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

 

Our earnings are affected by changes in interest rates due to theimpact those changes have on our interest expense on borrowings under ourcredit facility. Our floating rate indebtedness was $337.1 million at October 31,2009 and averaged $326.7 million during the third quarter of fiscal 2009. Ourfloating rate indebtedness was $356.0 million at November 1, 2008 andaveraged $332.0 million during the third quarter of fiscal 2008. If short-termfloating interest rates on the average second quarter of fiscal 2009 variablerate debt had increased by 100 basis points, our interest expense would haveincreased by approximately $817,000 assuming comparable borrowing levels. Theseamounts are determined by considering the impact of the hypothetical interestrates on our average amount of floating rate indebtedness outstanding.

 

We have not contracted for any derivative financial instruments. Wehave no significant international sales, but we import certain items for salein our stores. Substantially all of our purchases are denominated in U.S.dollars.

 

23

----

Table of Contents

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

Asof the end of the period covered by this report, we conducted an evaluation,under the supervision and with the participation of the principal executiveofficer and principal financial and accounting officer, of our disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934). Based on this evaluation, the principal executive officer and principalfinancial and accounting officer concluded that our disclosure controls andprocedures are effective to ensure that information required to be disclosed byus in reports that we file or submit under the Securities Exchange Act of 1934is recorded, processed, summarized and reported within the time periodsspecified in Securities and Exchange Commission rules and forms. Ourprincipal executive officer and principal financial and accounting officer alsoconcluded that our disclosure controls and procedures are effective to ensurethat information required to be disclosed in the reports we file or submitunder the Securities Exchange Act of 1934 is accumulated and communicated toour management, including our principal executive officer and principalfinancial and accounting officer, to allow timely decisions regarding requireddisclosure.  There was no change in ourinternal control over financial reporting identified in connection with theevaluation 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.

 

**PART II. OTHER INFORMATION**

 

**ITEM 1.  LEGAL PROCEEDINGS**

 

Since the announcement ofthe reverse/forward stock split, three purported class action complaints havebeen filed in the Ramsey County District Court in St. Paul, Minnesota, by fourindividuals claiming to be shareholders of the Company.  All of thecomplaints name as defendants our company and our directors.  One of thecomplaints names Holiday Stationstores, Inc. and Gratco LLC as additionaldefendants.  Plaintiffs allege that the defendants breached theirfiduciary duties, and/or aided and abetted alleged breaches of fiduciary dutyby other defendants, by causing our company to engage in an allegedly unfairtransaction, at an allegedly unfair price and in alleged violation of Minnesotalaw.  One of the complaints also alleges an express cause of action forviolation of Section 302A.467 of the Minnesota statutes (Minnesota’sequitable remedies statute).  Plaintiffs sued on behalf of an allegedclass consisting of all of our shareholders except defendants and theiraffiliates, and seek as relief an order enjoining or rescinding theReverse/Forward Stock Split, rescissory damages, disgorgement of unspecifiedbenefits, imposition of a constructive trust and an award of attorneys’ feesand costs of litigation.  The defendants believe that the claims made inthe complaints are without merit, and intend to vigorously defend against them.

 

Various claims, lawsuits or other proceedings arising in the normalcourse of business may be pending against us from time to time. The subjectmatter of these proceedings typically relate to commercial disputes, employmentissues, product liability and other matters. As of the date of this report, weare not a party to any legal proceedings that are expected, individually or inthe aggregate, to have a material adverse effect on our financial condition orresults of operations.

 

**ITEM 1A.  RISK FACTORS**

 

Notapplicable.

 

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

 

Notapplicable.

 

**ITEM 3.  DEFAULTS UPON SENIORSECURITIES**

** **

Not applicable.

 

**ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

Not applicable.

 

**ITEM 5.  OTHER INFORMATION**

 

Not applicable.

 

**ITEM 6.  EXHIBITS**

 

Theexhibits filed with this report are set forth on the Exhibit Index filedas a part of this report immediately following the signatures to this report.

 

24

----

Table of Contents

 

**SIGNATURES**

 

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

 
|                          | GANDER MOUNTAIN COMPANY |
|-------------------------------|-------------------------|
|                          |                    |
|                          |                    |
| December  15,  2009 | By:                     | /s/ David C. Pratt |
|                          |                    | David C. Pratt |
|                          |                    | Chairman of the Board  and Interim Chief Executive Officer |
|                          |                    | (Principal Executive  Officer) |
|                          |                    |   |
|                          |                    |   |
| December 15, 2009        | By:                     | /s/ Robert J. Vold |
|                          |                    | Robert J. Vold |
|                          |                    | Senior Vice President,  Chief Financial Officer and Treasurer |
|                          |                    | (Principal Financial  and Accounting Officer) |

 

25

----

Table ofContents

 

**EXHIBIT INDEX**

 
| **Exhibit No.** | ** ** | **Description**                                                                                 | ** ** | **Method of Filing** |
|----------------------|------------|-------------------------------------------------------------------------------------------------|------------|--------------------------------|
| 3.1                  |       | Amended and Restated  Articles of Incorporation of the Registrant                               |       | Incorporated By  Reference (1) |
| 3.2                  |       | Amended and Restated  Bylaws of the Registrant                                                  |       | Incorporated By  Reference (2) |
| 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           |

 

----

| (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. |

 

26

----