Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

 

**FORM 10-Q**

 

**QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(D) OF THE**

**SECURITIES EXCHANGE ACT OF 1934FOR THE**

**QUARTERLY PERIOD ENDED AUGUST 1, 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 PrincipalExecutive 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 past90 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 suchfiles). Yes o  No o

 

Indicate by check mark whether the registrant is a large accelerated filer,an accelerated filer, a non-accelerated filer, or a smaller reporting company.See the definitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting 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 September 8,2009.

 

 

 

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**GANDERMOUNTAIN COMPANY**

**QUARTERLYPERIOD ENDED AUGUST 1, 2009**

**Index**

 
| ** **                         | ** ** | ** **                                                                                  | ** ** | **Page** |
|------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|----------|
|                               |       |                                                                                        |       |     |
| PART I. FINANCIAL INFORMATION |       | 2                                                                                           |
|                               |       |                                                                                        |       |     |
| Item 1.                            |       | Unaudited Financial  Statements                                                             |       | 2        |
|                               |       | Consolidated Statements of  Operations                                                      |       | 2        |
|                               |       | Consolidated Balance Sheets                                                                 |       | 3        |
|                               |       | Consolidated Statements of  Cash Flows                                                      |       | 4        |
|                               |       | Notes to  Unaudited Consolidated Financial Statements                                       |       | 5        |
| Item 2.                            |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |       | 13       |
| Item 3.                            |       | Quantitative  and Qualitative Disclosures About Market Risk                                 |       | 23       |
| Item 4.                            |       | Controls and  Procedures                                                                    |       | 23       |
|                               |       |                                                                                        |       |     |
| PART II. OTHER  INFORMATION   |       | 23                                                                                          |
|                               |       |                                                                                        |       |     |
| Item 1.                            |       | Legal Proceedings                                                                           |       | 23       |
| Item 1A.                           |       | Risk Factors                                                                                |       | 23       |
| Item 2.                            |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                |       | 23       |
| Item 3.                            |       | Defaults  Upon Senior Securities                                                            |       | 23       |
| 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 suchdifferences include, but are not limited to, those described in Item 1A—“RiskFactors” of our Annual Report on Form 10-K for fiscal year 2008. Readersare cautioned 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.

 

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**PART I.  FINANCIALINFORMATION**

 

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

 

**Gander Mountain Company**

**ConsolidatedStatements of Operations - Unaudited**

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

 
| ** **                                   | ** ** | **13 Weeks Ended** | ** ** | **26 Weeks Ended** | ** ** |
|----------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                   | ** ** | **August 1,** | ** ** | **August 2,** | ** ** | **August 1,** | ** ** | **August 2,** | ** ** |
| ** **                                   | ** ** | **2009**           | ** ** | **2008**           | ** ** | **2009** | ** ** | **2008** | ** ** |
| Sales                                        |       | $                  | 248,413    |               | $          | 252,873 |   | $ | 476,067 |   | $ | 460,535 |   |
| Cost of goods sold                           |       | 184,045            |       | 185,390            |       | 364,796 |   | 351,023 |   |
| Gross profit                                 |       | 64,368             |       | 67,483             |       | 111,271 |   | 109,512 |   |
| Operating expenses:                          |       |               |       |               |       |   |   |   |   |
| Selling, general and administrative expenses |       | 68,484             |       | 66,939             |       | 130,611 |   | 125,896 |   |
| Exit costs and related charges               |       | 388                |       | 316                |       | 673 |   | 1,092 |   |
| Pre-opening expenses                         |       | —             |       | 408                |       | 299 |   | 2,035 |   |
| Loss from operations                         |       | (4,504             | )          | (180               | )          | (20,312 | ) | (19,511 | ) |
| Interest expense, net                        |       | 2,611              |       | 4,509              |       | 5,228 |   | 9,351 |   |
| Loss before income taxes                     |       | (7,115             | )          | (4,689             | )          | (25,540 | ) | (28,862 | ) |
| Income tax provision                         |       | 220                |       | 165                |       | 440 |   | 437 |   |
| Net loss                                     |       | $                  | (7,335     | )                  | $          | (4,854 | ) | $ | (25,980 | ) | $ | (29,299 | ) |
|                                         |       |               |       |               |       |   |   |   |   |
| Basic and diluted loss per common share      |       | $                  | (0.30      | )                  | $          | (0.20 | ) | $ | (1.07 | ) | $ | (1.22 | ) |
|                                         |       |               |       |               |       |   |   |   |   |
| Weighted average common shares outstanding   |       | 24,196             |       | 24,087             |       | 24,196 |   | 24,069 |   |

 

See accompanying notes to unaudited consolidated financial statements.

 

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**Gander Mountain Company**

**ConsolidatedBalance Sheets**

**(In thousands)**

** **
| ** **                                                                                                             | ** ** | **August 1,** | ** ** | **January 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|----------------------|------------|
| ** **                                                                                                             | ** ** | **2009**           | ** ** | **2009**             | ** ** |
| ** **                                                                                                             | ** ** | **unaudited**      | ** ** | ** **           | ** ** |
| **Assets**                                                                                                             | ** ** | ** **         | ** ** | ** **           | ** ** |
| Current assets:                                                                                                        |       |               |       |                 |       |
| Cash and cash equivalents                                                                                              |       | $                  | 1,534      |                 | $          | 1,655 |   |
| Accounts receivable                                                                                                    |       | 19,082             |       | 10,784               |       |
| Income taxes receivable                                                                                                |       | —             |       | 62                   |       |
| Inventories                                                                                                            |       | 395,183            |       | 358,127              |       |
| Prepaids and other current assets                                                                                      |       | 12,487             |       | 12,132               |       |
| Total current assets                                                                                                   |       | 428,286            |       | 382,760              |       |
| Property and equipment, net                                                                                            |       | 154,012            |       | 162,180              |       |
| Goodwill                                                                                                               |       | 47,114             |       | 47,114               |       |
| Acquired intangible assets, net                                                                                        |       | 18,631             |       | 19,130               |       |
| Other assets, net                                                                                                      |       | 1,693              |       | 1,936                |       |
| Total assets                                                                                                           |       | $                  | 649,736    |                 | $          | 613,120 |   |
|                                                                                                                   |       |               |       |                 |       |
| **Liabilities and shareholders’  equity**                                                                         |       |               |       |                 |       |
| Current liabilities:                                                                                                   |       |               |       |                 |       |
| Borrowings under credit facility                                                                                       |       | $                  | 259,709    |                 | $          | 204,514 |   |
| Accounts payable                                                                                                       |       | 81,921             |       | 63,863               |       |
| Accrued and other current liabilities                                                                                  |       | 50,538             |       | 55,456               |       |
| Notes payable - related parties                                                                                        |       | 10,000             |       | 10,000               |       |
| Current maturities of long term debt                                                                                   |       | 18,054             |       | 15,628               |       |
| Total current liabilities                                                                                              |       | 420,222            |       | 349,461              |       |
|                                                                                                                   |       |               |       |                 |       |
| Long term debt                                                                                                         |       | 42,099             |       | 50,402               |       |
| Deferred income taxes                                                                                                  |       | 6,121              |       | 5,954                |       |
| Other long term liabilities                                                                                            |       | 27,086             |       | 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; 24,197,199 and 24,195,736 shares issued and outstanding) |       | 242                |       | 242                  |       |
| Additional paid-in-capital                                                                                             |       | 278,974            |       | 278,691              |       |
| Accumulated deficit                                                                                                    |       | (125,008           | )          | (99,028              | )          |
| Total shareholders’ equity                                                                                        |       | 154,208            |       | 179,905              |       |
| Total liabilities and shareholders’ equity                                                                        |       | $                  | 649,736    |                 | $          | 613,120 |   |

 

See accompanying notes tounaudited consolidated financial statements.

 

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**Gander Mountain Company**

**ConsolidatedStatements of Cash Flows - Unaudited**

**(In thousands)**

 
| ** **                                                                   | ** ** | **26 Weeks Ended** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                   | ** ** | **August 1,** | ** ** | **August 2,** | ** ** |
| ** **                                                                   | ** ** | **2009**           | ** ** | **2008** | ** ** |
| **Operating activities**                                                     |       |               |       |   |   |
| Net loss                                                                     |       | $                  | (25,980    | ) | $ | (29,299 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |       |               |       |   |   |
| Depreciation and amortization                                                |       | 15,356             |       | 15,661 |   |
| Exit costs and related charges                                               |       | 622                |       | 605 |   |
| Stock-based compensation expense                                             |       | 275                |       | 703 |   |
| Gain on disposal of assets                                                   |       | (77                | )          | (17 | ) |
| Change in operating assets and liabilities:                                  |       |               |       |   |   |
| Accounts receivable                                                          |       | (8,237             | )          | (6,828 | ) |
| Inventories                                                                  |       | (37,055            | )          | (13,524 | ) |
| Prepaids and other current assets                                            |       | (355               | )          | (3,072 | ) |
| Other assets                                                                 |       | (65                | )          | 1,186 |   |
| Accounts payable and other liabilities                                       |       | 12,677             |       | 25,053 |   |
| Deferred income taxes                                                        |       | 167                |       | 209 |   |
| Net cash used in operating activities                                        |       | (42,672            | )          | (9,323 | ) |
| ** **                                                                   |       |               |       |   |   |
| **Investing activities**                                                     |       |               |       |   |   |
| Purchases of property and equipment                                          |       | (5,510             | )          | (12,299 | ) |
| Acquisition related expenses                                                 |       | —             |       | (164 | ) |
| Proceeds from sale of assets                                                 |       | 77                 |       | 29 |   |
| Net cash used in investing activities                                        |       | (5,433             | )          | (12,434 | ) |
| ** **                                                                   |       |               |       |   |   |
| **Financing activities**                                                     |       |               |       |   |   |
| Borrowings under credit facility, net                                        |       | 55,195             |       | 13,959 |   |
| Proceeds from short term notes payable - related  parties                    |       | —             |       | 10,000 |   |
| Reductions in long term debt                                                 |       | (7,219             | )          | (3,393 | ) |
| Proceeds from exercise of stock options and  employee stock purchases        |       | 8                  |       | 235 |   |
| Net cash provided by financing activities                                    |       | 47,984             |       | 20,801 |   |
|                                                                         |       |               |       |   |   |
| Net decrease in cash                                                         |       | (121               | )          | (956 | ) |
| Cash, beginning of period                                                    |       | 1,655              |       | 2,622 |   |
| Cash, end of period                                                          |       | $                  | 1,534      |   | $ | 1,666 |   |

 

See accompanying notes tounaudited consolidated financial statements.

 

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**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 August 1, 2009 and forthe 13 and 26 weeks ended August 1, 2009 and August 2, 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 ourthree fiscal years ended January 31, 2009.

 

Inpreparing the accompanying financial statements, we have evaluated subsequentevents through September 15, 2009, the issuance date of this QuarterlyReport on Form 10-Q. We have determined that no events or transactionshave occurred subsequent to August 1, 2009 which require recognition ordisclosure in the financial statements.

 

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’s consolidatedreporting includes its two reportable segments: Retail and Direct. The Retailsegment sells its outdoor lifestyle products and services through retailstores. The Direct segment is the internet and catalog operations under theCompany’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:

 
| ** **                                    | ** ** | **2nd Quarter** | ** ** | **2nd Quarter** | ** ** |
|-----------------------------------------------|------------|-----------------|------------|-----------------|------------|
| **Category (1)**                              | ** ** | **2009**        | ** ** | **2008**        | ** ** |
| Hunting  and Firearms                         |       | 30.9            | %          | 27.7            | %          |
| Fishing  and Marine                           |       | 37.9            | %          | 38.3            | %          |
| Camping,  Paddlesports and Backyard Equipment |       | 10.4            | %          | 9.7             | %          |
| Apparel  and Footwear                         |       | 15.4            | %          | 14.9            | %          |
| Powersports                                   |       | 3.4             | %          | 7.2             | %          |
| Other                                         |       | 1.3             | %          | 1.3             | %          |
| Parts  and services                           |       | 0.7             | %          | 0.9             | %          |
| Total                                         |       | 100.0           | %          | 100.0           | %          |

 

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

 

**Supplemental Cash Flow Information -**During the 26 weeks ended August 1,2009 and August 2, 2008, the Company acquired equipment totaling $1.3million and $2.9 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 August 1, 2009 and January 31,2009.

 

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**Note 2. Recent Accounting Pronouncements**

 

In June 2009, the FinancialAccounting 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 FASB No. 165, *SubsequentEvents*(“SFAS 165”), which establishes general standards ofaccounting and disclosure for events that occur after the balance sheet datebut before financial statements are issued. The accounting guidance containedin SFAS 165 is consistent with the auditing literature widely used foraccounting and disclosure of subsequent events, however, SFAS 165 requires anentity to disclose the date through which subsequent events have beenevaluated. SFAS 165 was effective for interim and annual periods ending after June 15,2009. The adoption of SFAS 165 did not have a material impact on ourconsolidated financial statements.

 

In April 2009, theFinancial Accounting Standards Board (“FASB”) issued three FASB StaffPositions:

 

1) FSP No. FAS157-4, *Determining Fair Value When theVolume and Level of Activity for the Asset or Liability Have SignificantlyDecreased and Identifying Transactions That Are Not Orderly*,

2) FSP No. FAS 115-2and FAS 124-2, *Recognition and Presentationof Other-Than-Temporary Impairments*, and

3) FSP No. FSP FAS107-1 and APB 28-1, *Interim Disclosuresabout Fair Value of Financial Instruments.*

 

All three FSPs wereeffective for the Company’s second fiscal quarter ending August 1, 2009.The adoption did not have a material impact on the Company’s financialstatements as the guidance was relevant to financial assets such as debt orequity securities and derivative instruments, which the Company does not hold.

 

In March 2008, theFASB issued SFAS No. 161, *Disclosuresabout Derivative Instruments and Hedging Activities*, *an amendment of SFAS No. 133*. SFAS No. 161is intended to improve financial standards for derivative instruments andhedging activities by requiring enhanced disclosures to enable investors tobetter understand the effect these instruments and activities have on an entity’sfinancial position, financial performance and cash flows. Entities are requiredto provide enhanced disclosures about: how and why an entity uses derivativeinstruments; how derivative instruments and related hedged items are accountedfor under SFAS No. 133 and its related interpretations; and how derivativeinstruments and related hedged items affect an entity’s financial position,financial performance and cash flows. SFAS No. 161 is effective forfinancial statements issued for fiscal years and interim periods beginningafter November 15, 2008. The adoption of SFAS No. 161 in the firstquarter of fiscal 2009 had no impact on the Company’s results of operations,cash flows, or financial position.

 

**Note 3. 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 our consolidated balance sheets.

 

Availability under our credit facility was $39.8 million and $30.5million as of August 1, 2009 and August 2, 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 

 

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acquisitions,sell certain assets, enter into certain capital leases or make junior payments,including cash dividends. The Company was in compliance with all covenants asof August 1, 2009 and January 31, 2009.

 

**Note 4. Long Term Debt**

 

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

 
| ** **                         | ** ** | **August 1,** | ** ** | **January 31,** | ** ** |
|------------------------------------|------------|--------------------|------------|----------------------|------------|
| ** **                         | ** ** | **2009**           | ** ** | **2009**             | ** ** |
| Term  loan B                       |       | $                  | 35,000     |                 | $          | 37,500 |   |
| Equipment  financing notes         |       | 11,769             |       | 13,492               |       |
| Capitalized  lease obligations     |       | 11,658             |       | 13,390               |       |
| Term  notes - related parties      |       | 10,000             |       | 10,000               |       |
| Obligation  from acquisition       |       | 1,726              |       | 1,648                |       |
| Total  debt obligations            |       | 70,153             |       | 76,030               |       |
| Less:  amounts due within one year |       | (28,054            | )          | (25,628              | )          |
| **Long term debt**                 |       | $                  | 42,099     |                 | $          | 50,402 |   |

 

***Term Loan B***—The Companysecured a $40 million term loan with a final maturity date of September 30,2011, in connection with the acquisition of Overton’s. As of August 1,2009, the required principal payments remaining under Term Loan B are reflectedbelow *(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 June 2009,the Company extended the maturity date on its $10 million term loan withits two major shareholders to September 30, 2009. The lenders under theagreement are Gratco LLC, an affiliate of David Pratt, the Company’schairman and interim chief executive officer, and Holiday Companies, anaffiliate of Ronald A. Erickson, the Company’s vice chairman, andGerald 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 26 weeks ended August 1, 2009 and August 2,2008, the Company leased equipment accounted for as capital leases in theamounts of $1.3 million and $2.9 million, respectively. The leases vary fromone to three years in term and require monthly payments of principal and interest.

 

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**Note 5. Goodwill and Intangible Assets**

 

TheCompany accounts for goodwill according to the provisions of Statement ofFinancial Accounting Standards No. 142, *Goodwilland Other Intangible Assets.* The reported goodwill and intangibleassets, (net of amortization where appropriate), as of August 1, 2009 andthe changes in these accounts since the fiscal year end are as follows *(in thousands)*:

 
| ** **                       | ** ** | **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,  Aug 1, 2009           | ** ** | **$**              | **—** |               | $          | 145        |       | $ | 145 |   | $ | 47,114 |   | $ | 18,486 |   | $ | 65,600 |   | $ | 65,745 |   |

 

In accordance with Statement of Financial Accounting Standards No. 142,*Goodwill and Other Intangible Assets*,goodwill is not subject to amortization. Both Goodwill and other IntangibleAssets are tested for impairment annually or more frequently if events orchanges in circumstances indicate that the asset may be impaired. When tested,the fair value of the Company’s goodwill and intangible assets are estimatedand compared to their carrying value.

 

The Company performed its annual assessment in the fourth quarter of fiscal2008.  The Company does not believe thatany indicators of impairment that would require reassessment have occurredsince the last assessment was performed. Circumstances affecting impairment testing and the results of suchtesting may change in future accounting periods.  Among the factors that could materiallyimpact the results of our future impairment assessments are the actual salesand operating cash flows from our retail and direct segments during our highervolume third and fourth fiscal quarters of fiscal 2009, as well as the use ofdifferent assumptions, estimates or judgments in the testing process, includingselection of an appropriate discount rate applicable to estimated futureoperating cash flows, and estimates of gross margin, selling, general andadministrative expenses and capital expenditures.

 

**Note 6. 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 August 1,2009, there were no “non-plan” option awards outstanding. The Company is notauthorized to grant any awards under the 2002 Stock Option Plan. The Company’sboard of directors has suspended the Employee Stock Purchase Plan, effective January 1,2009. The suspension will continue until it is lifted by future action of theboard.

 

As of August 1,2009, there were a total of 1,900,717 options to purchase common stockoutstanding under all of our stock option plans, with a weighted averageexercise price of $10.33 and a weighted average remaining life of 6.1 years.  There were 1,524,202 options that wereexercisable as of August 1, 2009 with a weighted-average exercise price of$11.10.

 

Stock-based compensationexpense for the 13 weeks ended August 1, 2009 and August 2, 2008, was$139,000 and $322,000, respectively.  Stock-based compensationexpense for the 26 weeks ended August 1, 2009 and August 2, 2008, was$275,000 and $703,000, respectively. As of August 1, 2009, there wasapproximately $800,000 of unrecognized compensation expense related to stockoptions that is expected to be recognized over a weighted-average period of 1.9years.

 

As of August 1,2009, there were 2,049,445 shares available for future grant under the 2004Omnibus Stock Plan.

 

Stock option activity forthe periods presented is as follows:

 

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| ** **                                                    | ** ** | **13 weeks - August 1, 2009** | ** ** | **13 weeks - August 2, 2008** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|
| ** **                                                    | ** ** | **Number of**                      | ** ** | **Weighted-**                      | ** ** | **Number of** | ** ** | **Weighted-** | ** ** |
| ** **                                                    | ** ** | **Shares Under**                   | ** ** | **Average**                        | ** ** | **Shares Under** | ** ** | **Average** | ** ** |
| ** **                                                    | ** ** | **Option**                         | ** ** | **Exercise Price**                 | ** ** | **Option** | ** ** | **Exercise Price** | ** ** |
| Outstanding  - Beginning                                      |       | 1,936,366                          |       | $                                  | 10.32      |   | 3,353,043 |   | $ | 10.04 |   |
| Granted                                                       |       | —                             |       | —                             |       | 30,950 |   | 4.65 |   |
| Exercised                                                     |       | (1,463                             | )          | 5.39                               |       | — |   | — |   |
| Forfeited                                                     |       | (34,186                            | )          | 10.09                              |       | (101,178 | ) | 10.57 |   |
| Outstanding  -Ending                                          |       | 1,900,717                          |       | $                                  | 10.33      |   | 3,282,815 |   | $ | 9.98 |   |
|                                                          |       |                               |       |                               |       |   |   |   |   |
| Weighted-average  Black-Scholes fair value of options granted |       |                               |       | $                                  | 0.00       |   |   |   | $ | 2.70 |   |

 

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

 
| **Property and  equipment consists of :**        | ** ** | **August 1,  2009** | ** ** | **January 31,  2009** | ** ** |
|--------------------------------------------------|------------|--------------------------|------------|----------------------------|------------|
| Building                                         |       | $                        | 6,972      |                       | $          | 6,972 |   |
| Furniture  and equipment                         |       | 156,358                  |       | 153,612                    |       |
| Leasehold  improvements                          |       | 66,377                   |       | 66,329                     |       |
| Computer  software and hardware                  |       | 65,017                   |       | 60,959                     |       |
|                                             |       | 294,724                  |       | 287,872                    |       |
| Less:  Accumulated depreciation and amortization |       | (140,712                 | )          | (125,692                   | )          |
| **Property and equipment, net**                  |       | $                        | 154,012    |                       | $          | 162,180 |   |

 
| **Other assets consists  of:**  | ** ** | **August 1,  2009** | ** ** | **January 31,  2009** | ** ** |
|---------------------------------|------------|--------------------------|------------|----------------------------|------------|
| Deferred  loan costs            |       | $                        | 6,790      |                       | $          | 6,790 |   |
| Other                           |       | 232                      |       | 167                        |       |
|                            |       | 7,022                    |       | 6,957                      |       |
| Less:  Accumulated amortization |       | (5,329                   | )          | (5,021                     | )          |
| **Other assets, net**           |       | $                        | 1,693      |                       | $          | 1,936 |   |

 

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| **Accrued and other  current liabilities consist of:** | ** ** | **August 1,  2009** | ** ** | **January 31,  2009** | ** ** |
|--------------------------------------------------------|------------|--------------------------|------------|----------------------------|------------|
| Gift  cards and gift certificate liabilities           |       | $                        | 17,138     |                       | $          | 24,853 |   |
| Payroll  and related fringe benefits                   |       | 6,937                    |       | 7,196                      |       |
| Sales,  property and use taxes                         |       | 10,650                   |       | 9,138                      |       |
| Reserve  for store exit costs                          |       | 203                      |       | 210                        |       |
| Lease  related costs                                   |       | 2,330                    |       | 1,874                      |       |
| Insurance  reserves and liabilities                    |       | 2,505                    |       | 2,335                      |       |
| Advertising  and marketing                             |       | 179                      |       | 133                        |       |
| Interest                                               |       | 641                      |       | 742                        |       |
| Other  accruals and current liabilities                |       | 9,955                    |       | 8,975                      |       |
| **Accrued and other current  liabilities**             |       | $                        | 50,538     |                       | $          | 55,456 |   |

 
| **Other long-term liabilities  consist of:** | ** ** | **August 1,  2009** | ** ** | **January 31,  2009** | ** ** |
|----------------------------------------------|------------|--------------------------|------------|----------------------------|------------|
| Deferred  rent                               |       | $                        | 25,306     |                       | $          | 25,753 |   |
| Insurance  reserves and other liabilities    |       | 1,780                    |       | 1,645                      |       |
| **Other long-term liabilities**              |       | $                        | 27,086     |                       | $          | 27,398 |   |

 

**Note 8. 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 26 week periods ended August 1,2009 and August 2, 2008  aredetailed in the table below *(in thousands)*:

 
| ** **                                              | ** ** | **13 weeks ended** | ** ** | **26 weeks ended** | ** ** |
|---------------------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                              | ** ** | **Aug 1,**         | ** ** | **Aug 2,**         | ** ** | **Aug 1,** | ** ** | **Aug 2,** | ** ** |
| **Expense Summary**                                     | ** ** | **2009**           | ** ** | **2008**           | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                    |       |               |       |               |       |   |   |   |   |
| Exit  costs for closed stores                           |       | $                  | —     |               | $          | 240 |   | $ | — |   | $ | 948 |   |
| Accretion  on closed-store liabilities                  |       | —             |       | 76                 |       | — |   | 144 |   |
| Accelerated  depreciation on Powersports related assets |       | 238                |       | —             |       | 476 |   | — |   |
| Powersports  lease charges                              |       | 150                |       | —             |       | 150 |   | — |   |
| Severance  costs                                        |       | —             |       | —             |       | 47 |   | — |   |
|                                                    |       | $                  |  388  |               | $          | 316 |   | $ | 673 |   | $ | 1,092 |   |

 

The Company’s reserve for exit costs and related charges as of August 1,2009 and January 31, 2009, was $203,000 and $210,000, respectively.

 

**Note 9. Income Taxes**

 

TheCompany’s effective income tax rate was (3.1) % and (3.5) % for the secondquarter of fiscal 2009 and second quarter of fiscal 2008, respectively. Thechange in the effective tax rate between periods is primarily the result of thechange in pretax losses compared to the change in state income taxes anddeferred tax liabilities related to differences in the book-tax basis ofcertain acquired intangible assets.

 

TheCompany’s tax provision primarily represents minimum or net worth taxes due invarious states. Some states have adopted an adjusted gross receipts tax. TheCompany has no provision for Federal income tax for either period presented dueto 

 

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accumulatedoperating losses. The Company determined that realization of the tax benefitrelated to the net deferred tax assets was uncertain. Accordingly, a valuationallowance is recorded for the entire balance of the net current and non-currentdeferred tax assets.

 

**Note 10. 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 totaled1,900,717 and 3,282,815 as of August 1, 2009 and August 2, 2008,respectively.

 

**Note 11. Contingencies**

 

*Legal Proceedings***-**Various claims, lawsuits or other proceedingsarising in the normal course of business may be pending against the Companyfrom time to time. The subject matter of these proceedings typically relate tocommercial disputes, employment issues, product liability and other matters. Asof the date of this report, the Company is not a party to any legal proceedingsthat are expected, individually or in the aggregate, to have a material adverseeffect on its financial condition or results of operations.

 

**Note 12. 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, and finance/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)*:

 
| ** **                        | ** ** | **13 Weeks Ended**      | ** ** | **13 Weeks Ended**      | ** ** |
|-----------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                        | ** ** | **August 1, 2009** | ** ** | **August 2, 2008** | ** ** |
| **Statement of Operations data:** | ** ** | **Retail**              | ** ** | **Direct**              | ** ** | **Total** | ** ** | **Retail** | ** ** | **Direct** | ** ** | **Total** | ** ** |
| Sales                             |       | $                       | 210,837    |                    | $          | 37,576 |   | $ | 248,413 |   | $ | 213,145 |   | $ | 39,728 |   | $ | 252,873 |   |
| Depreciation  and amortization    |       | 7,278                   |       | 260                     |       | 7,538 |   | 7,491 |   | 160 |   | 7,651 |   |
| Exit  costs and related charges   |       | 388                     |       | —                  |       | 388 |   | 316 |   | — |   | 316 |   |
| (Loss)  income from operations    |       | (6,815                  | )          | 2,311                   |       | (4,504 | ) | (2,973 | ) | 2,793 |   | (180 | ) |
| Net  (loss) income                |       | $                       | (9,070     | )                       | $          | 1,735 |   | $ | (7,335 | ) | $ | (6,829 | ) | $ | 1,975 |   | $ | (4,854 | ) |

 

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| ** **                      | ** ** | **26 Weeks Ended**      | ** ** | **26 Weeks Ended**      | ** ** |
|---------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                      | ** ** | **August 1, 2009** | ** ** | **August 2, 2008** | ** ** |
| ** **                      | ** ** | **Retail**              | ** ** | **Direct**              | ** ** | **Total** | ** ** | **Retail** | ** ** | **Direct** | ** ** | **Total** | ** ** |
| Sales                           |       | $                       | 420,707    |                    | $          | 55,360 |   | $ | 476,067 |   | $ | 401,138 |   | $ | 59,397 |   | $ | 460,535 |   |
| Depreciation  and amortization  |       | 14,841                  |       | 515                     |       | 15,356 |   | 14,872 |   | 789 |   | 15,661 |   |
| Exit  costs and related charges |       | 673                     |       | —                  |       | 673 |   | 1,092 |   | — |   | 1,092 |   |
| (Loss)  income from operations  |       | (20,946                 | )          | 634                     |       | (20,312 | ) | (21,716 | ) | 2,205 |   | (19,511 | ) |
| Net  (loss) income              |       | $                       | (25,429    | )                       | $          | (551 | ) | $ | (25,980 | ) | $ | (29,645 | ) | $ | 346 |   | $ | (29,299 | ) |

 
| ** **                         | ** ** | **As of August 1, 2009** | ** ** | **As of January 31, 2009** | ** ** |
|------------------------------------|------------|-------------------------------|------------|---------------------------------|------------|
| **Balance Sheet data:**            | ** ** | **Retail**                    | ** ** | **Direct**                      | ** ** | **Total** | ** ** | **Retail** | ** ** | **Direct** | ** ** | **Total** | ** ** |
| Total  assets                      |       | $                             | 558,963    |                            | $          | 90,773 |   | $ | 649,736 |   | $ | 517,812 |   | $ | 95,308 |   | $ | 613,120 |   |
| Inventories                        |       | 376,679                       |       | 18,504                          |       | 395,183 |   | 334,868 |   | 23,259 |   | 358,127 |   |
| Goodwill  and acquired intangibles |       | 145                           |       | 65,600                          |       | 65,745 |   | 400 |   | 65,844 |   | 66,244 |   |
| Long  term debt                    |       | $                             | 17,099     |                            | $          | 25,000 |   | $ | 42,099 |   | $ | 20,402 |   | $ | 30,000 |   | $ | 50,402 |   |

 

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**ITEM 2.  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 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 for its established position in the marine accessoriesbusiness but also to provide us a platform from which to develop and grow theinternet and catalog retail channels for the Gander Mountain productcategories.

 

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 an internet and catalog market. 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:

 

·                  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 and valuein the outdoor lifestyle sector, including new products that meet the needs ofour 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 causefluctuations in sales when compared to operating periods in later months. It isfor this reason we include a new store in our comparable store sales base inits fifteenth 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 second quartersof our fiscal year, which is the primary season for boating, marine andwatersports related products. Historically, Overton’s has generatedapproximately 65% to 70% of its sales during the first half of our fiscal yearand approximately 

 

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50%during the second quarter of our fiscal year. We expect the Gander MountainDirect segment business to have similar seasonality as our retail stores as theproduct offerings are similar.

 

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

 

**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** | ** ** | **26 Weeks Ended** | ** ** |
|-----------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                    | ** ** | **August 1,** | ** ** | **August 2,** | ** ** | **August 1,** | ** ** | **August 2,** | ** ** |
| ** **                                    | ** ** | **2009**           | ** ** | **2008**           | ** ** | **2009** | ** ** | **2008** | ** ** |
| Sales                                         |       | 100.0              | %          | 100.0              | %          | 100.0 | % | 100.0 | % |
| Cost  of goods sold                           |       | 74.1               | %          | 73.3               | %          | 76.6 | % | 76.2 | % |
| Gross  profit                                 |       | 25.9               | %          | 26.7               | %          | 23.4 | % | 23.8 | % |
| Operating  expenses:                          |       |               |       |               |       |   |   |   |   |
| Selling,  general and administrative expenses |       | 27.6               | %          | 26.5               | %          | 27.4 | % | 27.3 | % |
| Exit  costs and related charges               |       | 0.2                | %          | 0.1                | %          | 0.1 | % | 0.2 | % |
| Pre-opening  expenses                         |       | 0.0                | %          | 0.2                | %          | 0.1 | % | 0.4 | % |
| Loss  from operations                         |       | (1.8               | )%         | (0.1               | )%         | (4.2 | )% | (4.2 | )% |
| Interest  expense, net                        |       | 1.1                | %          | 1.8                | %          | 1.2 | % | 2.0 | % |
| Loss  before income taxes                     |       | (2.9               | )%         | (1.9               | )%         | (5.4 | )% | (6.3 | )% |
| Income  tax provision                         |       | 0.1                | %          | 0.1                | %          | 0.1 | % | 0.1 | % |
| Net  loss                                     |       | (3.0               | )%         | (1.9               | )%         | (5.5 | )% | (6.4 | )% |

 

In the second quarter of fiscal 2009, the Retail segment represented85% of our consolidated sales and produced a net loss of $9.1 million, whilethe Direct segment represented approximately 15% of our consolidated sales andreported net income of $1.7 million. The Direct segment results includeoperating losses due to the start-up nature of the Gander Mountain Directbusiness.

 

The following tableindicates the average percentage of consolidated sales represented by each ofour major product categories during the second quarters of fiscal 2009 and2008:

 
| ** **                                    | ** ** | **2nd Quarter** | ** ** | **2nd Quarter** | ** ** |
|-----------------------------------------------|------------|-----------------|------------|-----------------|------------|
| **Category (1)**                              | ** ** | **2009**        | ** ** | **2008**        | ** ** |
| Hunting  and Firearms                         |       | 30.9            | %          | 27.7            | %          |
| Fishing  and Marine                           |       | 37.9            | %          | 38.3            | %          |
| Camping,  Paddlesports and Backyard Equipment |       | 10.4            | %          | 9.7             | %          |
| Apparel  and Footwear                         |       | 15.4            | %          | 14.9            | %          |
| Powersports                                   |       | 3.4             | %          | 7.2             | %          |
| Other                                         |       | 1.3             | %          | 1.3             | %          |
| Parts  and services                           |       | 0.7             | %          | 0.9             | %          |
| Total                                         |       | 100.0           | %          | 100.0           | %          |

 

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

 

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***Financial Review -******13 Weeks Ended August 1, 2009 Compared to 13 Weeks Ended August 2,2008***

 

*Sales.*  Consolidatedsales decreased by $4.5 million, or 1.8%, to $248.4 million in the secondquarter of fiscal 2009 from $252.9 million in the second quarter of fiscal2008.

 

Retail segment sales were $210.8 million for the second quarter offiscal 2009, a decrease of $2.3 million, or 1.1% from $213.1 million for thesecond quarter of fiscal 2008. The Retail segment sales decrease resulted froma comparable store sales decrease of $4.8 million partially offset by $1.8million in sales from new stores not included in the comparable store salesbase, and a $0.7 million sales increase from changes in other revenue.  We did not open any new stores in the secondquarter of fiscal 2009.   During thesecond quarter of fiscal 2008, we opened two new stores.

 

Direct segment sales declined $2.2 million, or 5.4%, in the secondquarter of fiscal 2009 as compared to the second quarter of fiscal 2008 due toconsumer spending in the boating accessory business being curtailed by theeconomic environment as well as decreased catalog spending. The Direct segmentsales decrease includes sales of the Gander Mountain Direct website and catalogbusiness which was not present in the second quarter of fiscal 2008.

 

Our Retail comparable store sales decreased 2.4% for the second quarterof fiscal 2009, as compared to a comparable store sales decline of 11.7% forthe second quarter of fiscal 2008. Excluding a negative 4.2% impact of powerboat and ATV sales and power sport services which are categories the Companyhas substantially exited, comparable store sales were a positive 1.8% for thesecond quarter of fiscal 2009. This increase was attributable to salesincreases in the firearms, ammunition, firearm accessories, marine and campingcategories and was also attributable to, we believe, increased advertisingexpenditures in the second quarter of fiscal 2009.

 

Overall, the Retail sales mix for the second quarter of fiscal 2009 wasrelatively consistent with the second quarter of fiscal 2008. The notableexceptions were: (i) the firearms, ammunition and accessories category,which increased its share of the Retail sales mix by 395 basis points on strongmarket demand, and (ii) lower sales in the powersports category resultingin a 509 basis points lower share of the sales mix as we exited the powerboatand ATV categories.

 

*Gross Profit.*  Consolidated gross profit decreased by $3.1million, or 4.6%, to $64.4 million in the second quarter of fiscal 2009from $67.5 million in the second quarter of fiscal 2008. As a percentage ofsales, consolidated gross profit decreased 77 basis points to 25.9% in thesecond quarter of fiscal 2009 from 26.7% in the second quarter of fiscal 2008.The significant factors affecting our gross profit rate during the secondquarter of fiscal 2009 were a lower Retail gross profit rate that impacted theconsolidated rate by 16 basis points as well as a decline in the Direct segmentgross profit rate that impacted the consolidated rate by 61 basis points.

 

Retail segment initial margins increased 108 basis points, benefittingfrom higher initial margin rates in firearms, ammunition, firearm accessories,fishing and marine, but were partially offset by lower margin rates inpowersports and apparel-footwear. The increase in Retail segment initialmargins were more than offset by sales de-leverage in occupancy costs anddistribution costs as a result of negative comparable store sales. Directsegment gross profit declined due to promotional start-up efforts related toour Gander Mountain brand direct business as well as promotional effortsrelated to a difficult sales environment for the Overton’s brand.

 

*Selling, General and Administrative Expenses.*  Consolidated SG&A expenses increased by$1.5 million, or 2.3%, to $68.5 million in the second quarter of fiscal 2009from $66.9 million in the second quarter of fiscal 2008. As a percentage ofsales, consolidated SG&A expenses increased 110 basis points to 27.6 % inthe second quarter of fiscal 2009 from 26.5% in the second quarter of fiscal2008. Retail SG&A as a percentage of consolidated sales increased 153 basispoints primarily due to increased advertising expense in the Retail segment.The Direct segment SG&A improved 43 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 in the second quarter of fiscal 2008 were primarily related tocosts associated with store closings.

 

*Pre-opening Expenses.*  As we opened no stores in the second quarterof fiscal 2009, we incurred no pre-opening costs. During the second quarter offiscal 2008, we incurred pre-opening costs of $0.4 million related to new storeopenings in May of 2008.

 

*Interest Expense, Net.*  Interest expense decreased by $1.9 million,or 42.1%, to $2.6 million in the second quarter of fiscal 2009 from$4.5 million in the second quarter of fiscal 2008.

 

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Average outstanding borrowings during the second quarter of fiscal 2009decreased approximately $25 million, or 7.3%, as compared to the second quarterof fiscal 2008, due to improved cash flows from operations during the latterpart of fiscal year 2008 and reduced capital expenditures. Average interestrates on our outstanding borrowings were 200 basis points lower during thesecond quarter of fiscal 2009 than in the second quarter of fiscal 2008, due togeneral interest rate declines. The average effective interest rate on theaverage of all outstanding borrowings during the second quarter of fiscal 2009was 3.31%.

 

*Income Tax Provision.*  Our tax provisions for the second 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 second quarter of fiscal2009 or fiscal 2008 due to the uncertainty of the realization of our netoperating loss 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 Loss.*  Our net loss was $7.3 million for the secondquarter of fiscal 2009, as compared to net loss of $4.9 million for the secondquarter of fiscal 2008, due to the factors discussed above. The net loss forthe second quarter of fiscal 2009 includes losses of approximately $3 millionassociated with the powersports categories which we substantially exited,including sales discounts, inventory markdowns and other operating costs. Thenet loss for the second quarter of fiscal 2008 includes income of approximately$350,000 associated with these powersports categories.

 

***Financial Review – 26****** Weeks Ended August 1, 2009Compared to 26 Weeks Ended August 2, 2008***

 

*Sales.*  Consolidatedsales increased by $15.5 million, or 3.4 %, to $476.1 million in the first halfof fiscal 2009 from $460.5 million in the first half of fiscal 2008.

 

Retail segment sales were $420.7 million for the first half of fiscal2009, an increase of $19.6 million, or 4.9% from $401.1 million for the firsthalf of fiscal 2008. The Retail segment sales increase resulted from sales of$15.0 million from new stores not included in the comparable store sales base,a comparable store sales increase of $8.5 million and a $3.9 million salesdecrease from stores closed during the first half of fiscal 2009 but open infiscal 2008, as well as changes in other revenue.  We opened one new store in the first half offiscal 2009. During the first half of fiscal 2008, we opened five new stores and closed three stores.On a net basis for the first half of fiscal 2009, we added 57,000 square feetof retail selling space as compared to 308,000 square feet added in the firsthalf of fiscal 2008.

 

Direct segment sales declined $4.0 million, or 6.8%, in the first halfof fiscal 2009 as compared to the first half of fiscal 2008 as consumerspending in the boating accessory business was curtailed by the overall economic environment, includingcredit conditions, housing market foreclosures, rising unemployment anddecreased consumer confidence, and their effects on discretionary spending. Areduction in catalog spending also contributed to lower sales levels. The Directsegment sales decrease includes an increase from the sales of the GanderMountain website and catalog business which was not present in the first halfof fiscal 2008.

 

Our Retail comparable store sales increased 2.2% for the first half offiscal 2009, as compared to a comparable store sales decline of 9.4% for thefirst half of fiscal 2008.  Excluding anegative 4.8% impact of power boat and ATV sales and power sport services whichare categories the Company has substantially exited, comparable store saleswere a positive 7.0 % for the first half of fiscal 2009. The increase wasattributable to sales increases in the firearms, ammunition, firearmaccessories, fishing, marine and camping categories and was also attributableto, we believe, increased advertising expenditures in fiscal 2009 as comparedto fiscal 2008.

 

*Gross Profit.*  Consolidated gross profit increased by $1.8million, or 1.6%, to $111.3 million in the first half of fiscal 2009 from$109.5 million in the first half of fiscal 2008. As a percentage of sales,consolidated gross profit decreased 41 basis points to 23.4% in the first halfof fiscal 2009 from 23.8% in the first half of fiscal 2008. The significantcomponents of our gross profit rate during the first half of fiscal 2009 werean increased Retail segment gross profit rate that impacted the consolidatedrate by 39 basis points, offset by a decline in the Direct segment gross profitrate that negatively impacted the consolidated rate by 80 basis points.

 

Retail segment initial margins increased 86 basis points as a result ofhigher initial margin rates in firearms, ammunition, firearm accessories,fishing and marine and which were partially offset by lower margin rates inpowersports and apparel-footwear. Retail initial margin increases werepartially offset by sales de-leverage in occupancy costs.

 

Direct segment gross profit declined due to promotional start-upefforts related to our Gander Mountain brand direct business as well aspromotional efforts related to a difficult sales environment for the Overton’sbrand.

 

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*Selling, General and Administrative Expenses.*  Consolidated SG&A expenses increased by$4.7 million, or 3.7%, to $130.6 million in the first half of fiscal 2009 from$125.9 million in the first half of fiscal 2008. As a percentage of sales,consolidated SG&A expenses increased 10 basis points to 27.4 % in the firsthalf of fiscal 2009 from 27.3% in the first half of fiscal 2008. RetailSG&A as a percentage of consolidated sales increased 55 basis points due toincreased advertising expense in the Retail segment. The Direct segmentSG&A improved 45 basis points as a percentage of consolidated sales due toreduced 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 in the first half of fiscal 2008 were related to costs associatedwith store closings.

 

*Pre-opening Expenses.*  Pre-opening expenses related to new retailstores decreased by $1.7 million to $0.3 million in the first half of fiscal2009 from $2.0 million in the first half of fiscal 2008. We opened one newstore in fiscal 2009 as compared to five new stores in the first half of fiscal2008.

 

*Interest Expense, Net.*  Interest expense decreased by $4.1 million,or 44.1%, to $5.2 million in the first half of fiscal 2009 from$9.4 million in the first half of fiscal 2008.

 

Average outstanding borrowings during the first half of fiscal 2009decreased approximately $29 million, or 8.8%, as compared to the first half offiscal 2008, due to improved cash flows from operations during the latter partof fiscal year 2008 and reduced capital expenditures. Average interest rates onour outstanding borrowings were 217 basis points lower during the first half offiscal 2009 than in the first half of fiscal 2008, due to general interest ratedeclines. The average effective interest rate on the average of all outstandingborrowings during the first half of fiscal 2009 was 3.44%.

 

*Income Tax Provision.*  Our tax provisions for the first half 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 first half 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.

 

*Net Loss.*  Our net loss was $26.0 million for the firsthalf of fiscal 2009, as compared to net loss of $29.3 million for the firsthalf of fiscal 2008, due to the factors discussed above. The net loss for thefirst half of fiscal 2009 includes losses of approximately $5.0 millionassociated with the powersports categories which we substantially exited,including sales discounts, inventory markdowns and other operating costs. Thenet loss for the first half of fiscal 2008 includes losses of approximately$1.2 million associated with these powersports categories.

 

**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 ourtwo major 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 one new store during our second quarter of fiscal 2009 and do not expectany additional new store openings during the remainder of the fiscal year. Weopened five new stores in fiscal 2008, including threerelocations/consolidations of small-format stores. This change in strategy hada positive impact on our cash flows and liquidity in fiscal 2008, as wesubstantially reduced cash used for new store inventories, leaseholdimprovements, equipment 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 debt levels remained lower in the second quarter of fiscal 2009 versus thecomparable period last year. The following chart summarizes the principalelements of our cash flow for the comparable first half periods of fiscal 2009and fiscal 2008 *(in thousands),*and the number ofstores opened during each period.

 

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| ** **                                         | ** ** | **Cash Flow Summary** | ** ** |
|----------------------------------------------------|------------|-----------------------|------------|
| ** **                                         | ** ** | **26 Weeks Ended**    | ** ** |
| ** **                                         | ** ** | **August 1,**    | ** ** | **August 2.** | ** ** |
| ** **                                         | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Net  cash used in operating activities             |       | $                     | (42,672    | ) | $ | (9,323 | ) |
| Net  cash used in investing activities             |       | (5,433                | )          | (12,434 | ) |
| Net  cash provided by financing activities         |       | 47,984                |       | 20,801 |   |
| Total  net (decrease) increase in cash             |       | $                     | (121       | ) | $ | (956 | ) |
|                                               |       |                  |       |   |   |
| Details  of financing activities:                  |       |                  |       |   |   |
| Borrowings  under credit facility                  |       | $                     | 55,195     |   | $ | 13,959 |   |
| Proceeds  from short term notes payable            |       |                  |       | 10,000 |   |
| Proceeds  from stock sales and exercise of options |       | 8                     |       | 235 |   |
| Reductions  in long-term debt                      |       | (7,219                | )          | (3,393 | ) |
| Net  cash provided by financing activities         |       | $                     | 47,984     |   | $ | 20,801 |   |
|                                               |       |                  |       |   |   |
| New  store openings, including relocated stores    |       | 1                     |       | 5 |   |

 

*Net cash used in operating activities* was $42.7 million inthe first half of fiscal 2009, compared to net cash used in operatingactivities of $9.3 million in the first half of fiscal 2008. The overall$33.3 million increase in net cash used by operating activities in thecomparable 26 week periods was primarily due to:

 

·                  an increase in cash used of$23.5 million due to greater inventory increases in the first half of fiscal2009 as compared to the first half of fiscal 2008. The fiscal 2009 increasesreflects merchandising our stores earlier for the upcoming hunting and holidayseasons as well as building firearms inventory levels to meet anticipateddemand.

 

·                  a decrease in cash providedof $12.4 million from decreases in accounts payable and other liabilitiesprimarily attributable to the reductions in floor-plan financed inventory ofboats and ATVs, which carried longer payment terms. Powerboats and ATVinventory and accessory receipts during our first half of fiscal 2009 were $19million lower than during the first half of fiscal 2008 with such purchaseshaving payment terms typically between 90 and 180 days.

 

·                  a decrease in cash used of$3.3 million as a result of the reduction in the net loss in the first half offiscal 2009 as compared to the first half of fiscal 2008.

 

*Net cash used in investing activities* was $5.4 million in thefirst half of fiscal 2009 and $12.4 million in the first half of fiscal 2008.Cash invested in the first half of fiscal 2009 and fiscal 2008 each consistedprimarily of purchases of property and equipment for stores and for informationtechnology investments. We use cash for leasehold improvements and equipment toopen new and relocated stores and to remodel and upgrade existing stores.Purchases of property and equipment also include purchases of informationtechnology systems and expenditures for our distribution facility and our corporateheadquarters.

 

*Financing activities* provided $48.0 millionof cash in the first half of fiscal 2009 and provided $20.8 million of cash inthe first half of fiscal 2008. In the comparable periods, the borrowings underour credit facility funded our cash used in operations as well as capitalexpenditures. Borrowings under the credit facility were partially offset byreductions in long term debt through scheduled payments of $7.2 million in thefirst half of fiscal 2009 and of $3.4 million in the first half of fiscal 2008.During fiscal 2008, we also borrowed $10.0 million from two major shareholders,due on September 30, 2009, primarily in response to a reduction in advancerates under our revolving credit facility.

 

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***Credit Facility and Term Notes***

 

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 facilitywith Bank of America, N.A.:

 

| ** **                         | ** ** | **August 1,  2009** | ** ** | **January 31,  2009** | ** ** |
|------------------------------------|------------|--------------------------|------------|----------------------------|------------|
| ** **                         | ** ** | **(in thousands)**       | ** ** |
| Maximum  credit facility available |       | $                        | 345,000    |                       | $          | 345,000 |   |
| Revolver  and Term Loan A balance  |       | $                        | 259,709    |                       | $          | 204,514 |   |
| Term  Loan B balance               |       | $                        | 35,000     |                       | $          | 37,500 |   |
| Outstanding  letters of credit     |       | $                        | 9,846      |                       | $          | 9,735 |   |
| Borrowing  availability            |       | $                        | 39,873     |                       | $          | 23,318 |   |
| Interest  rate at period end       |       | 2.6                      | %          | 3.0                        | %          |
| Agreement  maturity                |       | June 2012           |       | June 2012             |       |

 

Borrowingavailability under our credit facility as of September 8, 2009 was $41.8million.

 

*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 August 1, 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 from LIBORplus 3.375% to LIBOR plus 3.875%, based on the principal amount outstanding.Term Loan B may be prepaid at any time without penalty, provided that anysuch prepayments are subject to specified minimum availability tests. We willnot have the ability to exercise the $55 million accordion feature under ourrevolving credit facility while Term Loan B is outstanding. The long-termportion of Term Loan B is classified as long term debt in the consolidatedbalance 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     |   |

 

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*** ***

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

 

Effective with the December 6, 2007 amendment, financial covenantsunder the credit facility require that availability under the line of creditnot fall below 5%, effective through July 2009 and 7.5%, starting in August 2009,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 August 1, 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 half of fiscal 2009 and fiscal 2008, we purchasedinformation technology equipment totaling $1.3 million and $2.9 million,respectively, financed through capital lease transactions. These capital leasepurchases are excluded from the caption “purchases of property and equipment”in our statements of cash flows as they did not require the use of cash.

 

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

 

Our tax provisions for the second 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 second 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 second half 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. Cashprovided by operations during the second half of fiscal year 2008 was $68.5million and cash used in operations during the second half of fiscal year 2007was $98.2 million.

 

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 2009.

 

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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 September 8, 2009,was $41.8 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 August 1, 2009, we have total debt obligations maturingwithin one year of $28.1 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) $8.1million in current maturities of all other debt.

 

In June 2009, we extended the maturity date on the$10 million term loan with our two major shareholders to September 30,2009.

 

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 public or private markets. There is no assurance that we willbe successful 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 retailenvironment. The length and ultimate severity of this downturn are uncertainand may adversely impact our results of operations and ability to obtainfinancing.

 

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

 
| ** **                         | ** ** | **August 1,** | ** ** | **January 31,** | ** ** |
|------------------------------------|------------|--------------------|------------|----------------------|------------|
| ** **                         | ** ** | **2009**           | ** ** | **2009**             | ** ** |
| Term  loan B                       |       | $                  | 35,000     |                 | $          | 37,500 |   |
| Equipment  financing notes         |       | 11,769             |       | 13,492               |       |
| Capitalized  lease obligations     |       | 11,658             |       | 13,390               |       |
| Term  notes - related parties      |       | 10,000             |       | 10,000               |       |
| Obligation  from acquisition       |       | 1,726              |       | 1,648                |       |
| Total  debt obligations            |       | 70,153             |       | 76,030               |       |
| Less:  amounts due within one year |       | (28,054            | )          | (25,628              | )          |
| **Long term debt**                 |       | $                  | 42,099     |                 | $          | 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 August 1, 2009, the minimumoperating lease payments due within one year were $75 million. As of August 1,2009, total minimum operating lease payments remaining over all of ouroperating leases were $717 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% 

 

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to24% on average of our annual retail rent expense. Issued and outstandingletters of credit were $9.8 million and $9.7 million at August 1, 2009 andJanuary 31, 2009, respectively, and were related primarily to importing ofmerchandise and supporting potential insurance program liabilities.

 

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 $11.1 million and $5.4 million as of August 1,2009 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 FASB No. 165, *SubsequentEvents*(“SFAS 165”), which establishes general standards ofaccounting and disclosure for events that occur after the balance sheet datebut before financial statements are issued. The accounting guidance containedin SFAS 165 is consistent with the auditing literature widely used foraccounting and disclosure of subsequent events, however, SFAS 165 requires anentity to disclose the date through which subsequent events have been evaluated.SFAS 165 was effective for interim and annual periods ending after June 15,2009. The adoption of SFAS 165 did not have a material impact on ourconsolidated financial statements.

 

In April 2009, theFASB issued three FASB Staff Positions:

 

1) FSP No. FAS157-4, *Determining Fair Value When theVolume and Level of Activity for the Asset or Liability Have SignificantlyDecreased and Identifying Transactions That Are Not Orderly*,

2) FSP No. FAS 115-2and FAS 124-2, *Recognition and Presentationof Other-Than-Temporary Impairments*, and

3) FSP No. FSP FAS107-1 and APB 28-1, *Interim Disclosuresabout Fair Value of Financial Instruments.*

 

All three FSPs wereeffective for our second fiscal quarter ending August 1, 2009. Theadoption did not have a material impact on our financial statements as theguidance was relevant to financial assets such as debt or equity securities andderivative instruments, which we do not hold.

 

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In March 2008,the FASB issued SFAS No. 161, *Disclosuresabout Derivative Instruments and Hedging Activities*, *an amendment of SFAS No. 133*. SFAS No. 161is intended to improve financial standards for derivative instruments andhedging activities by requiring enhanced disclosures to enable investors tobetter understand the effect these instruments and activities have on an entity’sfinancial position, financial performance and cash flows. Entities are requiredto provide enhanced disclosures about: how and why an entity uses derivativeinstruments; how derivative instruments and related hedged items are accountedfor under SFAS No. 133 and its related interpretations; and how derivativeinstruments and related hedged items affect an entity’s financial position,financial performance and cash flows. SFAS No. 161 is effective forfinancial statements issued for fiscal years and interim periods beginningafter November 15, 2008. The adoption of SFAS No. 161 in the secondquarter of fiscal 2009 had no impact on our results of operations, cash flows,or financial position.

 

**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 $277.8 million at August 1,2009 and averaged $290.5 million during the second quarter of fiscal 2009. Ourfloating rate indebtedness was $310.0 million at August 2, 2008 andaveraged $309.7 million during the second 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 $725,000 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.

 

**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**

 

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.

 

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**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.

 

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

 

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**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           |

 

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

 

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