**UNITEDSTATES**SECURITIES ANDEXCHANGE COMMISSIONWASHINGTON, D.C. 20549

**FORM 10-Q**

**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE QUARTERLY PERIOD ENDED OCTOBER 28, 2006.**

**Commission FileNumber:  000-50659**

**GANDER MOUNTAIN COMPANY**

(Exact name of Registrant as Specified in its Charter)

 

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

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes x No o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act. check one o largeaccelerated filer  x acceleratedfiler  o non-acceleratedfiler

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-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 practicable date: Common Stock, $.01 par value; 14,308,274 shares outstanding as ofDecember 6, 2006.

 

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**GANDER MOUNTAIN COMPANY****QUARTERLY PERIOD ENDED OCTOBER 28, 2006****Index**

 
|                                | **Page**  |
|--------------------------------|-----------|
| PART I. FINANCIAL  INFORMATION |      |
|                           | Item 1.   | Unaudited Financial  Statements | 2 |
|                           |      |   | Statements  of Operations | 2 |
|                           |      |   | Balance  Sheets | 3 |
|                           |      |   | Statements  of Cash Flows | 4 |
|                           |      |   | Notes to  Unaudited Financial Statements | 5 |
|                           | Item 2.   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 12 |
|                           | Item 3.   | Quantitative  and Qualitative Disclosures About Market Risk | 21 |
|                           | Item 4.   | Controls and  Procedures | 21 |
|                           |      |
| PART II. OTHER  INFORMATION    |      |
|                           | Item 1.   | Legal Proceedings | 21 |
|                           | Item  1A. | Risk  Factors | 22 |
|                           | Item 2.   | Unregistered  Sales of Equity Securities and Use of Proceeds | 22 |
|                           | Item 3.   | Defaults  Upon Senior Securities | 22 |
|                           | Item 4.   | Submission  of Matters to a Vote of Security Holders | 22 |
|                           | Item 5.   | Other Information | 22 |
|                           | Item  6.  | Exhibits | 22 |
| SIGNATURES                     | 23        |

 

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**PART I.  FINANCIAL INFORMATION**

 

**ITEM 1.  FINANCIAL STATEMENTS**

**Gander Mountain CompanyStatements of Operations - Unaudited**

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

 
| ** **                                  | ** ** | **13 Weeks Ended** | ** ** | **39 Weeks Ended** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                  | ** ** | **October 28,**         | ** ** | **October 29,**         | ** ** | **October 28,** | ** ** | **October 29,** | ** ** |
| ** **                                  | ** ** | **2006**                     | ** ** | **2005**                     | ** ** | **2006** | ** ** | **2005** | ** ** |
| Sales                                       |       | $                            | 246,491    |                         | $          | 214,606 |   | $ | 584,553 |   | $ | 523,652 |   |
| Cost of goods sold                          |       | 183,594                      |       | 164,201                      |       | 450,590 |   | 407,081 |   |
| Gross profit                                |       | 62,897                       |       | 50,405                       |       | 133,963 |   | 116,571 |   |
|                                        |       |                         |       |                         |       |   |   |   |   |
| Operating expenses:                         |       |                         |       |                         |       |   |   |   |   |
| Store operating  expenses                   |       | 44,553                       |       | 42,889                       |       | 116,880 |   | 113,591 |   |
| General and  administrative expenses        |       | 10,490                       |       | 9,041                        |       | 29,449 |   | 27,165 |   |
| Pre-opening  expenses                       |       | 1,772                        |       | 2,779                        |       | 3,245 |   | 6,555 |   |
| Gain on  insurance settlement               |       | (1,400                       | )          | —                       |       | (1,400 | ) | — |   |
| Gain on contract  settlement                |       | —                       |       | —                       |       | — |   | (2,500 | ) |
| Income (loss) from  operations              |       | 7,482                        |       | (4,304                       | )          | (14,211 | ) | (28,240 | ) |
| Interest expense, net                       |       | 5,456                        |       | 3,236                        |       | 14,289 |   | 7,249 |   |
| Income (loss) before  income taxes          |       | 2,026                        |       | (7,540                       | )          | (28,500 | ) | (35,489 | ) |
| Income tax provision                        |       | —                       |       | —                       |       | — |   | — |   |
| Net income (loss)                           |       | $                            | 2,026      |                         | $          | (7,540 | ) | $ | (28,500 | ) | $ | (35,489 | ) |
|                                        |       |                         |       |                         |       |   |   |   |   |
| Income (loss) per  common share             |       |                         |       |                         |       |   |   |   |   |
| Basic                                       |       | $                            | 0.14       |                         | $          | (0.53 | ) | $ | (1.99 | ) | $ | (2.49 | ) |
| Diluted                                     |       | $                            | 0.14       |                         | $          | (0.53 | ) | $ | (1.99 | ) | $ | (2.49 | ) |
|                                        |       |                         |       |                         |       |   |   |   |   |
| Weighted average common  shares outstanding |       |                         |       |                         |       |   |   |   |   |
| Basic                                       |       | 14,308                       |       | 14,264                       |       | 14,295 |   | 14,252 |   |
| Diluted                                     |       | 14,325                       |       | 14,264                       |       | 14,295 |   | 14,252 |   |

 

Seeaccompanying notes to unaudited financial statements.

2

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**Gander Mountain CompanyBalance Sheets**

**(Inthousands)**

 
| ** **                                                                                                             | ** ** | **October 28,** | ** ** | **January 28,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                                                                                             | ** ** | **2006**             | ** ** | **2006**             | ** ** |
| ** **                                                                                                             | ** ** | **(Unaudited)**      | ** ** | ** **           | ** ** |
| **Assets**                                                                                                             |       |                 |       |                 |       |
| Current assets:                                                                                                        |       |                 |       |                 |       |
| Cash and cash equivalents                                                                                              |       | $                    | 1,443      |                 | $          | 1,580 |   |
| Accounts receivable                                                                                                    |       | 20,216               |       | 7,215                |       |
| Inventories                                                                                                            |       | 399,623              |       | 308,395              |       |
| Prepaids and other current assets                                                                                      |       | 10,331               |       | 4,557                |       |
| Total current  assets                                                                                                  |       | 431,613              |       | 321,747              |       |
| Property and  equipment, net                                                                                           |       | 144,459              |       | 132,447              |       |
| Other assets,  net                                                                                                     |       | 5,824                |       | 4,736                |       |
| Total assets                                                                                                           |       | $                    | 581,896    |                 | $          | 458,930 |   |
|                                                                                                                   |       |                 |       |                 |       |
| **Liabilities  and shareholders’ equity**                                                                         | ** ** | ** **           | ** ** | ** **           | ** ** |
| Current  liabilities:                                                                                                  |       |                 |       |                 |       |
| Borrowings under credit facility                                                                                       |       | $                    | 259,901    |                 | $          | 174,936 |   |
| Accounts payable                                                                                                       |       | 87,907               |       | 35,465               |       |
| Accrued and other current liabilities                                                                                  |       | 47,099               |       | 41,082               |       |
| Current maturities of long term debt                                                                                   |       | 1,335                |       | 697                  |       |
| Total current  liabilities                                                                                             |       | 396,242              |       | 252,180              |       |
|                                                                                                                   |       |                 |       |                 |       |
| Unsecured  convertible note payable                                                                                    |       | 20,000               |       | 20,000               |       |
| Long term debt                                                                                                         |       | 16,092               |       | 10,953               |       |
| Other long term  liabilities                                                                                           |       | 27,200               |       | 25,972               |       |
|                                                                                                                   |       |                 |       |                 |       |
| 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; 14,308,274 and 14,285,287 shares issued and outstanding) |       | 143                  |       | 143                  |       |
| Additional paid-in-capital                                                                                             |       | 193,294              |       | 192,257              |       |
| Notes receivable from shareholders                                                                                     |       | (4,100               | )          | (4,100               | )          |
| Accumulated deficit                                                                                                    |       | (66,975              | )          | (38,475              | )          |
| Total  shareholders’ equity                                                                                       |       | 122,362              |       | 149,825              |       |
| Total liabilities and  shareholders’ equity                                                                       |       | $                    | 581,896    |                 | $          | 458,930 |   |

 

Seeaccompanying notes to unaudited financial statements.

 

3

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**Gander Mountain CompanyStatements of Cash Flows - Unaudited**

**(Inthousands)**

 
| ** **                                                                   | ** ** | **39 Weeks Ended** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                   | ** ** | **October 28,**         | ** ** | **October 29,** | ** ** |
| ** **                                                                   | ** ** | **2006**                     | ** ** | **2005** | ** ** |
| **Operating  activities**                                                    | ** ** | ** **                   | ** ** | ** ** | ** ** |
| Net loss                                                                     |       | $                            | (28,500    | ) | $ | (35,489 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                         |       |   |   |
| Depreciation and amortization                                                |       | 16,618                       |       | 12,756 |   |
| Stock-based compensation expense                                             |       | 904                          |       | 299 |   |
| (Gain) loss on disposal of assets                                            |       | (782                         | )          | 812 |   |
| Change in operating assets and liabilities:                                  |       |                         |       |   |   |
| Accounts receivable                                                          |       | (15,262                      | )          | (10,152 | ) |
| Inventories                                                                  |       | (91,228                      | )          | (128,102 | ) |
| Prepaid expenses and other assets                                            |       | (7,465                       | )          | (4,207 | ) |
| Accounts payable and other liabilities                                       |       | 59,687                       |       | 79,397 |   |
| Net cash used in  operating activities                                       |       | (66,028                      | )          | (84,686 | ) |
|                                                                         |       |                         |       |   |   |
| **Investing  activities**                                                    | ** ** | ** **                   | ** ** | ** ** | ** ** |
| Purchase of  property and equipment, net                                     |       | (31,105                      | )          | (47,759 | ) |
| Proceeds from  insurance settlement                                          |       | 5,197                        |       | — |   |
| Proceeds from  sale of assets                                                |       | 2,100                        |       | — |   |
| Net cash used in  investing activities                                       |       | (23,808                      | )          | (47,759 | ) |
|                                                                         |       |                         |       |   |   |
| **Financing  activities**                                                    | ** ** | ** **                   | ** ** | ** ** | ** ** |
| Borrowings under  credit facility, net                                       |       | 84,965                       |       | 113,198 |   |
| Proceeds from  long term debt                                                |       | 5,300                        |       | 20,000 |   |
| Reductions in  long term debt                                                |       | (699                         | )          | (577 | ) |
| Proceeds from exercise  of stock options and stock sales                     |       | 133                          |       | 380 |   |
| Net cash  provided by financing activities                                   |       | 89,699                       |       | 133,001 |   |
|                                                                         |       |                         |       |   |   |
| Net (decrease) /  increase in cash                                           |       | (137                         | )          | 556 |   |
| Cash, beginning  of period                                                   |       | 1,580                        |       | 1,033 |   |
| Cash, end of period                                                          |       | $                            | 1,443      |   | $ | 1,589 |   |

 

See accompanying notes tounaudited financial statements.

4

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**Gander Mountain Company**

**Notes toUnaudited Financial Statements**

**Quarterly Period Ended October28, 2006**

 

**1.Basis of Presentation**

The accompanying unaudited financialstatements of Gander Mountain Company (“we” or “us”) have been prepared inaccordance with the requirements for Form 10-Q and do not include all thedisclosures normally required in annual financial statements prepared inaccordance with U.S. generally accepted accounting principles. The interimfinancial information as of October 28, 2006 and for the 13 and 39 weeks endedOctober 28, 2006 and October 29, 2005, is unaudited and has been prepared onthe same basis as the audited annual financial statements. In the opinion ofmanagement, this unaudited information includes all adjustments necessary for afair presentation of the interim financial information. All of theseadjustments are of a normal recurring nature. These interim financialstatements filed on this Form 10-Q and the discussions contained herein shouldbe read in conjunction with the annual financial statements and notes includedin our Annual Report on Form 10-K for the fiscal year ended January 28, 2006,as filed with the Securities and Exchange Commission, which includes auditedfinancial statements for our three fiscal years ended January 28, 2006.

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

**2.Stock-Based Compensation**

Effective January 29, 2006, we adopted thefair-value recognition provisions of the Financial Accounting Standards Board’sStatement No. 123 (revised 2004), *Share-BasedPayment* (“SFAS 123R”), which requires the measurement andrecognition of compensation expense for all stock-based payment awards made toemployees and directors including employee stock option awards and employeestock purchases made under our employee stock purchase plan. We adopted theprovisions of SFAS 123R, using the modified-prospective transition method.Under this transition method, stock-based compensation expense was recognizedin the financial statements for the 13 and 39 weeks ended October 28, 2006, forgranted, modified or settled stock options and for expense related to theemployee stock purchase plan. The provisions of SFAS 123R apply to new stockoptions and stock options outstanding, but not yet vested, on the effectivedate of January 29, 2006. Results for prior periods have not beenrestated, in accordance with the modified-prospective transition method.

We previously applied the provisions ofAccounting Principles Board Opinion No. 25, *Accountingfor Stock Issued to Employees* (“APB No. 25”) and relatedinterpretations and provided the required pro forma disclosures in the notes tothe financial statements pursuant to Statement No. 123, *Accounting for Stock-Based Compensation.*Prior to fiscal 2006, generally no stock-based compensation expense wasrecognized in our statements of operations for employee stock options, as theexercise price was equal to the market price of our stock on the date of grant.

***Share******-basedawards***- InFebruary 2004, we adopted the 2004 Omnibus Stock Plan, which currentlyauthorizes the granting of stock-based awards covering up to 4,000,000 sharesof common stock. Under this plan, awards may be made to employees, directors,and consultants.  The types of awardsthat may be granted under the plan include restricted and unrestricted stock,incentive and nonstatutory stock options, stock appreciation rights and otherstock awards. Under this plan, as of October 28, 2006, there were 3,045,131options to purchase common stock outstanding, of which 1,843,115 areexercisable.  These vested options have aweighted-average exercise price of $13.73 per share, a weighted-averageremaining life of 8.0 years and an intrinsic value of approximately $25,100 atOctober 28, 2006. The options granted under this plan, for which vesting wasnot accelerated in fiscal year 2005, primarily vest in three equal annualincrements from the date of grant.

5

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In February 2002, we implemented the2002 Stock Option Plan, a compensatory nonqualified stock option plan forcertain store and office management personnel. As of October 28, 2006, therewere 150,345 options outstanding under this plan to purchase common stock withthe ability to exercise being contingent upon the attainment of a $32.06 pershare price for our common stock as of the end of a fiscal year based upon thehigher of the closing price on the last day of the fiscal year or a five-daytrailing average stock price taken at that time.  These options have a 10-year life withvesting subject to our meeting the targeted stock price of $32.06 per share ata fiscal year end.  The exercise price is$4.47 per share. We are no longer authorized to grant any awards under the 2002Stock Option Plan.

Wehave also granted other options to certain members of our management team onseveral dates prior to fiscal year 2005. The exercise price in all cases wasthe fair value of the underlying common stock on the date of grant, withexercise periods of up to ten years. As of October 28, 2006, there were 897,352options to purchase common stock outstanding under these grants, all of whichare fully vested and exercisable. These vested options have a weighted-averageexercise price of $9.33 per share, a weighted-average remaining life of 5.1years and no intrinsic value at October 28, 2006.

Asof October 28, 2006, there were a total of 4,092,828 options to purchase commonstock outstanding, under all of our stock option plans and non-plan stockoptions, with a weighted average exercise price of $10.19 and a weightedaverage remaining life of 7.7 years. These options vest in equal increments primarily over periods of threeyears from the date of grant, although certain grants have been made withshorter vesting schedules and the vesting of certain stock options wasaccelerated in fiscal 2005. The following table summarizes stock-based paymentaward activity for the 39 weeks ended October 28, 2006:
|                                                                                                          | ** ** | **Number of** | ** ** | **Weighted-** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|--------------------|------------|---------------|------------|
| ** **                                                                                               | ** ** | **Shares**         | ** ** | **Average**   | ** ** |
| ** **                                                                                               | ** ** | **Under**          | ** ** | **Exercise**  | ** ** |
| ** **                                                                                               | ** ** | **Option**         | ** ** | **Price**     | ** ** |
| Outstanding -  January 28, 2006                                                                          |       | 3,680,804          |       | $             | 10.84      |   |
| Granted                                                                                                  |       | 395,767            |       | 6.45          |       |
| Exercised                                                                                                |       | —             |       | —        |       |
| Forfeited                                                                                                |       | (118,909           | )          | 10.89         |       |
| Outstanding  -April 29, 2006                                                                             |       | 3,957,662          |       | $             | 10.40      |   |
| Granted                                                                                                  |       | 138,100            |       | 7.82          |       |
| Exercised                                                                                                |       | —             |       | —        |       |
| Forfeited                                                                                                |       | (52,106            | )          | 12.09         |       |
| Outstanding  -July 29, 2006                                                                              |       | 4,043,656          |       | $             | 10.29      |   |
| Granted                                                                                                  |       | 74,000             |       | 5.79          |       |
| Exercised                                                                                                |       | —             |       | —        |       |
| Forfeited                                                                                                |       | (24,828            | )          | 10.01         |       |
| Outstanding  -October 28, 2006                                                                           |       | 4,092,828          |       | $             | 10.19      |   |
|                                                                                                     |       |               |       |          |       |
| Weighted-average  Black-Scholes fair value of options granted during the quarter ended October  28, 2006 |       |               |       | $             | 2.84       |   |

 

In February 2005, our board ofdirectors approved the establishment of an employee stock purchase plan (“ESPP”)that enables substantially all fulltime employees to purchase common stock bycontributions through payroll deductions. Purchases of common stock are madefrom accumulated employee contributions at the end of designated six-monthpurchase periods. Pursuant to the terms of the ESPP, we have currentlyestablished a 10% discount from the stock price on the designated purchasedate. Since the purchase discount exceeds the amount allowed under SFAS 123Rfor non-compensatory treatment, we recorded expense of $8,000 and $21,000 forthe ESPP in the 13 weeks and 39 weeks ended October 28, 2006. As of October 28,2006, 51,349 shares had been issued under the ESPP and 448,651 shares wereavailable for issuance.

6

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**The stock options outstanding andexercisable for share-based payment awards as of October 28, 2006 were in thefollowing exercise price ranges:**
|                          | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|--------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **               | ** ** | ** **                   | ** ** | **Weighted-**                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **               | ** ** | ** **                   | ** ** | **Average**                  | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
| ** **               | ** ** | ** **                   | ** ** | **Remaining**                | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| **Range of**        | ** ** | **Number**                   | ** ** | **Contractual**              | ** ** | **Exercise** | ** ** | **Number** | ** ** | **Exercise** | ** ** |
| **Exercise Prices** | ** ** | **Outstanding**              | ** ** | **Life**                     | ** ** | **Price** | ** ** | **Outstanding** | ** ** | **Price** | ** ** |
| $ 4.47 -  7.99      |       | 1,288,795                    |       | 8.8  Years                   |       | $ | 5.84 |   | 10,000 |   | $ | 5.00 |   |
| 8.00 - 11.99             |       | 1,820,005                    |       | 6.9  Years                   |       | 9.74 |   | 1,746,439 |   | 9.77 |   |
| 12.00 - 15.99            |       | 77,100                       |       | 8.1  Years                   |       | 12.90 |   | 77,100 |   | 12.90 |   |
| 16.00 - 19.99            |       | 735,178                      |       | 7.5  Years                   |       | 16.00 |   | 735,178 |   | 16.00 |   |
| 20.00 - 23.99            |       | 131,750                      |       | 7.8  Years                   |       | 21.45 |   | 131,750 |   | 21.45 |   |
| 24.00 - 24.40            |       | 40,000                       |       | 7.5  Years                   |       | 24.40 |   | 40,000 |   | 24.40 |   |
| $ 4.47 - 24.40      |       | 4,092,828                    |       | 7.7 Years                    |       | $ | 10.21 |   | 2,740,467 |   | $ | 12.29 |   |

 

***Impact of the adoption of Statement 123R*** - Theamount of compensation expense for stock-based awards to be recognized during aperiod is based on the portion of the awards that are ultimately expected tovest. We estimate option forfeitures at the time of grant and revise thoseestimates in subsequent periods if actual forfeitures differ significantly fromthose estimates. Cost is recognized using a straight-line amortization methodover the requisite service period**,**whichtypically is the vesting period. As a result of adopting SFAS 123R, our incomefrom operations for the 13 weeks ending October 28, 2006 is $296,000 lower, andour loss from operations for the 39 weeks ended October 28, 2006 is $834,000higher, than if we had continued to account for share-based compensation underAPB No. 25. Basic and diluted income per share for the 13 weeks ended October28, 2006 is $0.02 lower, and basic and diluted loss per share for the 39 weeksended October 28, 2006 is $0.06 higher, than under APB No. 25.  There was no impact on cash flows.

AtOctober 28, 2006, there was approximately $2,750,000 of total unrecognizedstock-based compensation expense related to unvested option awards.Unrecognized stock-based compensation is expected to be recognized over aweighted-average period of 2.2 years.

 We also recorded expense of $13,000 and$91,000 for the 13 and 39 week periods ended October 28, 2006, respectively,for options to purchase stock issued to non-employees prior to fiscal year2006.

***ValuationAssumptions***– We have estimated the fair value of allstock option awards as of the date of the grant by applying the Black-ScholesMerton option pricing valuation model. The application of this valuation modelinvolves assumptions that are judgmental and sensitive in the determination ofthe resulting compensation expense. The key assumptions used in determining thefair value of options granted in the 39 week period ended October 28, 2006, anda summary of the methodology applied to develop each assumption are as follows:

 
|                                      | ** ** | **39 Weeks Ended** | ** ** |
|--------------------------------------|------------|------------------------------|------------|
| ** **                           | ** ** | **October 28,**         | ** ** | **October 29,** | ** ** |
| ** **                           | ** ** | **2006**                     | ** ** | **2005** | ** ** |
| Average  risk-free interest rate (1) |       | 4.7                          | %          | 4.2 | % |
| Expected stock  price volatility (2) |       | 50                           | %          | 50 | % |
| Expected term  (years) (3)           |       | 5                            |       | 5 |   |
| Expected dividend yield  (4)         |       | 0.0                          | %          | 0.0 | % |

 

7

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*(1)Risk-Free Interest Rate*: This is the U.S. Treasuryzero-coupon rate, as of the grant date, for issues having a term equal to theexpected term of the stock option. An increase in the risk-free interest ratewill increase compensation expense.

*(2)Expected Stock Price Volatility*: This is a measure of theamount by which a stock’s price is expected to fluctuate during the estimatedexpected life for an award. Due to lack of historical data because of our shortlife as a public company, the volatility factor was derived from consideringvolatility factors used by peers in our market sector. An increase in theexpected stock price volatility will increase compensation expense.

*(3)Expected Term*: This is the period of time over which grantedstock options are expected to remain outstanding. Our estimate is based onmanagement’s consideration of expected exercise behavior, past accelerations ofvesting provisions, life cycle of the company and the expected term factorsused by peers in our market sector.  Anincrease in the expected term will increase compensation expense.

*(4)Expected Dividend Yield*: We historically have not made anydividend payments, nor do we expect to pay dividends in the foreseeable future.An increase in the dividend yield will decrease compensation expense.

***Pro forma Information for Period Prior to the Adoption of Statement123R* -**All options granted prior to 2004 were accountedfor in accordance with APB No. 25 as the company was not publicly traded atthat time.  Our ESPP was deemednon-compensatory under the provisions of APB No. 25.  Stock-based compensation costs were reflectedin net earnings when the options granted under those plans had an exerciseprice that was less than the fair value of the underlying common stock on thedate of grant. Previously reported amounts have not been restated. The proforma information for the 13 and 39 weeks ended October 29, 2005 is as follows:

 
|                                                                                            | ** ** | **13 Weeks**    | ** ** | **39 Weeks**    | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                                                                 | ** ** | **Ended**            | ** ** | **Ended**            | ** ** |
| ** **                                                                                 | ** ** | **October 29,** | ** ** | **October 29,** | ** ** |
| ** **                                                                                 | ** ** | **2005**             | ** ** | **2005**             | ** ** |
| Net loss, as  reported                                                                     |       | $                    | (7,540     | )                    | $          | (35,489 | ) |
| Add: Stock-based  employee compensation expense  in reported net loss                      |       | —               |       | 242                  |       |
| Deduct:  Stock-based employee compensation expense  determined under the fair value method |       | (561                 | )          | (8,425               | )          |
| Pro forma net  loss                                                                        |       | $                    | (8,101     | )                    | $          | (43,672 | ) |
| Loss per common  share:                                                                    |       |                 |       |                 |       |
| Basic and diluted - as reported                                                            |       | $                    | (0.53      | )                    | $          | (2.49 | ) |
| Basic and  diluted - pro forma                                                             |       | $                    | (0.57      | )                    | $          | (3.06 | ) |

 

During fiscal 2005, thecompensation committee of our board of directors accelerated the vesting forcertain outstanding options to purchase common stock that had exercise pricesgreater than the closing price of our common stock on the dates of approval. Weaccelerated the vesting of options to purchase a total of approximately2,696,000 shares of common stock, on March 2, 2005 and November 30, 2005. As aresult of the accelerations, all of these options became fully exercisable andremain exercisable through their respective termination dates, which vary, butdo not extend past 2015. The pro-forma expense of $8,425,000 reflected abovefor the 39 weeks ended October 29, 2005 is primarily a result of the March 2,2005 vesting acceleration.

**3.****New Accounting Pronouncement**

InSeptember 2006, the Securities and Exchange Commission (SEC) issued StaffAccounting Bulletin (SAB) No. 108, *Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements*(“SAB No. 108”), which provides interpretive guidance on theconsideration of the effects of prior year misstatements in quantifying currentyear misstatements for the purpose of a materiality assessment. SAB No. 108 iseffective for fiscal years ending after November 15, 2006. We are requiredto adopt SAB No. 108 for our fiscal year ending February 3, 2007. We arecurrently assessing the impact, if any, the adoption of SAB No. 108 will haveon our financial position and results of operations.

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InSeptember 2006, the Financial Accounting Standards Board (“FASB”), issued SFASNo. 157, *Fair Value Measurements* (“SFAS No. 157”). SFAS No. 157defines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles and expands disclosures about fairvalue measurements. SFAS 157 applies to other accounting pronouncements thatrequire or permit fair value measurements, as the FASB previously concluded inthose accounting pronouncements that fair value is the relevant measurementattribute. Accordingly, SFAS 157 does not require any new fair value measurements.SFAS No. 157 is effective for fiscal years beginning after November 15, 2007.We plan to adopt SFAS No. 157 beginning in the first quarter of fiscal 2008. Weare currently evaluating the impact, if any, the adoption of SFAS No. 157 willhave on our financial position and results of operations.

InJune 2006, the FASB issued FASB Interpretation No. 48, *Accounting for Uncertainty in Income Taxes* (“FIN 48”), aninterpretation of Statement of Financial Accounting Standards No. 109, *Accounting for Income Taxes*. FIN 48 clarifies the accounting for uncertainty in income taxes byprescribing a recognition threshold for tax positions taken or expected to betaken in a tax return. FIN 48 is effective for fiscal years beginning afterDecember 15, 2006. We do not believe the adoption of FIN 48 will have amaterial impact on net earnings, cash flows or financial position.

In March2006, the FASB’s Emerging Issues Task Force released Issue 06-3, *How Sales Taxes Collected From Customers and Remitted to GovernmentalAuthorities Should Be Presented in the Income Statement* (“EITF 06-3”).A consensus was reached that entities may adopt a policy of presenting salestaxes in the statement of operations on either a gross or net basis. If taxesare significant, an entity should disclose its policy of presenting taxes andthe amount of taxes if reflected on a gross basis in the income statement. EITF06-3 is effective for periods beginning after December 15, 2006. We presentsales net of sales taxes in our statement of operations and do not anticipatechanging our policy as a result of EITF 06-3.

**4.Capital Stock**

Since the completion of our initial publicoffering on April 26, 2004, and the filing of our amended and restated articlesof incorporation in connection therewith, the authorized capital stock of ourcompany consists of 100,000,000 shares of common stock, par value $.01 pershare, and 5,000,000 shares of preferred stock, par value $.01 per share. As ofOctober 28, 2006, there were 14,308,274 shares of common stock and no shares ofpreferred stock outstanding.

**5.Credit Facility**

Our credit facility provides us with thecapital to fund the operations of our business. Currently, the revolving creditfacility provides availability of $275,000,000, which may be further increased to$300,000,000 subject to certain conditions including the absence of default. Inaddition to the existing $275,000,000 revolving credit facilty, in March 2006we added a $20,000,000 term loan for a total credit facility of $295,000,000.The credit facility has a maturity date of June 30, 2009.

Effective May 25, 2006, we amended our creditfacility to adjust the level of the EBITDA covenants for the months of April2006 through July 2006. As amended, testing of the EBITDA covenant is requiredwhen our availability is less than 10% of the lesser of (a) the revolvingcredit facility maximum on any given day or (b) the borrowing base, as definedand adjusted for certain reserves.  Thecredit facility also specifies quarterly testing of the operating cash flow covenant.Other substantive terms of the agreement were not materially changed in the May25, 2006 amendment. We are in compliance with all covenants of the creditfacility.

Outstanding borrowings under the creditfacility, including letters of credit, were $267.6 million and $233.7 millionas of October 28, 2006 and October 29, 2005, respectively.  Actual availability under the amended creditfacility is limited to specific advance rates on eligible inventory and accountsreceivable up to the $295,000,000 facility limit. Typically, availability willbe highest in the latter half of our fiscal year as inventory levels andadvance rates increase. Based on eligible inventory and accounts receivablebalances as of October 28, 2006 and October 29, 2005, our available borrowingcapacity under the credit facility, after subtracting letters of credit, was$27.4 million and $41.3 million, respectively. This available borrowingcapacity was $45.2 million as of December 1, 2006.

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**6.Earnings Per Share**

Basic and diluted income or loss pershare is based upon the weighted average number of shares outstanding.  Diluted income per share for the 13 weeksended October 28, 2006 includes potentially dilutive stock options determinedby applying the treasury stock method. For all other periods presented, we have excluded all potentiallydilutive stock options from the calculation of weighted average sharesoutstanding because including them would have an anti-dilutive effect on lossper share.

In addition, we have excluded any potentiallydilutive shares related to the outstanding convertible debt from thecalculation of weighted average shares outstanding because their inclusionwould have an anti-dilutive effect on income or loss per share. If theconvertible debt instrument was converted to common stock, these shares wouldamount to at least 1,250,000 shares of stock, with additional shares issueddepending on the amount of accrued interest at the time of conversion.

As of October 28, 2006 and October29, 2005, there were a total of 4,092,828 and 3,181,706 options to purchasecommon stock outstanding, respectively.

**7. Gain on Insurance Settlement**

In June 2006, we incurred significant flood damageto our Binghamton, New York store. The building was damaged and its contentswere essentially declared a total loss. We were adequately insured to enable usto recover the retail value of our merchandise inventory and replace all of ourproperty and equipment that was destroyed. For the third quarter ended October28, 2006, we recorded a gain from this involuntary conversion of assets of$1,400,000. As of October 28, 2006, we have received cash proceeds of$5,200,000 and have recorded in accounts receivable approximately $1,900,000 incosts remaining to be reimbursed by our insurance company.  Proceeds were reinvested in the store whichre-opened on September 29, 2006.

**8.Contract Settlement - 2005**

In March 2005, we received $2,500,000relating to the termination of our contract with the former provider of ourco-branded credit card services in consideration of the lost opportunity. Wehave reclassified this item in our fiscal 2005 statement of operations from areduction of general and administrative expenses to a gain on contractsettlement in the 39 weeks ended October 29, 2005.

**9. Selected Balance Sheet Information(in thousands)**

 
| ** **                                                                          | ** ** | **October 28,** | ** ** | **January 28,** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| **Accrued and other current liabilities consist of:** | ** ** | **2006**             | ** ** | **2006**             | ** ** |
| Gift cards and  gift certificate liabilities                                        |       | $                    | 13,649     |                 | $          | 23,413 |   |
| Payroll and  related fringe benefits                                                |       | 5,320                |       | 4,183                |       |
| Sales, property  and use taxes                                                      |       | 8,438                |       | 3,436                |       |
| Lease related  costs                                                                |       | 1,309                |       | 1,232                |       |
| Insurance  reserves and liabilities                                                 |       | 1,720                |       | 1,453                |       |
| Interest                                                                            |       | 1,487                |       | 1,235                |       |
| Other accruals  and current liabilities                                             |       | 15,176               |       | 6,130                |       |
| **Accrued  and other current liabilities**                                          |       | $                    | 47,099     |                 | $          | 41,082 |   |

 

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| ** **                                          | ** ** | **October 28,** | ** ** | **January 28,** | ** ** |
|-----------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| **Long term debt consists of:** | ** ** | **2006**             | ** ** | **2006**             | ** ** |
| Capitalized  lease obligations (1)                  |       | 11,047               |       | 10,953               |       |
| Term note (2)                                       |       | 5,045                |       | —               |       |
| **Long  term debt**                                 |       | $                    | 16,092     |                 | $          | 10,953 |   |
|                                                     |            |                      |            |                      |            |  |  |

 
| ** **                                  | ** ** | **October 28,** | ** ** | **January 28,** | ** ** |
|---------------------------------------------|------------|----------------------|------------|----------------------|------------|
| **Other long term liabilities consist of:** | ** ** | **2006**             | ** ** | **2006**             | ** ** |
| Deferred rent                               |       | $                    | 25,208     |                 | $          | 24,288 |   |
| Insurance  reserves and other liabilities   |       | 1,992                |       | 1,684                |       |
| **Other  long term liabilities**            |       | $                    | 27,200     |                 | $          | 25,972 |   |

 

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**(1)****                 **During thefirst nine months of fiscal 2006, we purchased equipment totaling $1.2 millionfinanced through capital lease transactions, which are non-cash investingactivities.

**(2)****                 **Representslong term portion of aircraft financing completed in July 2006. The notematures in 7 years and has a 7.26% fixed annual interest rate. The note iscollateralized by the aircraft.

**10. Contingencies**

***Trademark Litigation* -**OnJuly 2, 2004, we filed a complaint in the U.S. District Court for the Districtof Minnesota seeking declaratory relief that the contingent trademark licensingprovision of a noncompetition agreement dated May 16, 1996, made between ourpredecessor and Cabela’s Incorporated, is invalid and unenforceable. Althoughthe noncompetition provisions of the noncompetition agreement expired in June2003, Cabela’s contends that a contingent trademark licensing provision of thenoncompetition agreement now requires us to grant Cabela’s a license that wouldpreclude the use by us or Cabela’s of certain of our trademarks for directmarketing purposes.

OnAugust 18, 2005, the court ruled that the contingent trademark licensingprovision is not legally invalid as a noncompetition agreement and dismissedour complaint.  The court also acknowledged that it had not been asked atthat point to determine, and was not determining, the scope of the contingenttrademark license or the parties’ respective rights thereunder.  InDecember 2005, the court granted our motion to file an amended reply to Cabela’scounterclaim, in which we raised multiple additional issues regarding thevalidity, enforceability, and interpretation of any trademark rights allegedlypossessed by Cabela’s, and any limitations upon our rights to engage in certainmarketing activities under the trademarks at issue.  These issues remainbefore the court.  Discovery is currently underway and the court hasestablished a trial-ready date of May 1, 2007.

Weare not able to predict the ultimate outcome of such proceedings, but they maybe costly and disruptive. The total costs may not be reasonably estimated atthis time. The outcome of this dispute may impact the manner in which wemarket our products in certain distribution channels in the future. It isnot expected to have any affect on the marketing of our products through ourretail stores.

*****Other Legal Claims*-****Various claims and lawsuits arising in the normal course ofbusiness may be pending against us from time to time. The subject matter ofthese proceedings typically relate to commercial disputes and employmentissues. As of the date of this report, we are not a party to any legalproceedings that are expected, individually or in the aggregate, to have amaterial adverse effect on our financial condition or results of operations.

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**ITEM 2.  MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**Forward Looking Statements**

Thefollowing discussion may contain forward-looking statements regarding us, ourbusiness prospects and our results of operations that are subject to certainrisks and uncertainties posed by many factors and events that could cause ouractual business, prospects and results of operations to differ materially fromthose that may be anticipated by such forward-looking statements.  Factors that could cause or contribute tosuch differences include, but are not limited to, those described in the “RiskFactors” section of our Form 10-K and other reports, as filed with theSecurities and Exchange Commission. We caution you not to place undue relianceon these forward-looking statements, which speak only as of the date of thisreport.  We undertake no obligation torevise any forward-looking statements in order to reflect events orcircumstances that may subsequently arise. We urge you to carefully review andconsider the various disclosures made by us in this report and in our other reportsfiled with the Securities and Exchange Commission that advise interestedparties of the risks and factors that may affect our business.

The interim financials statementsfiled on this Form 10-Q and the discussions contained herein should be read inconjunction with the annual financial statements and notes included in our Form10-K, as filed with the Securities and Exchange Commission, which includesaudited financial statements for our three fiscal years ended January 28, 2006.

**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 from 26 stores in 1997to our current base of 105 conveniently located Gander Mountain outdoorlifestyle stores, providing approximately 5.5 million square feet of retailspace in 22 states — Alabama, Arkansas, Colorado, Florida, Illinois, Indiana,Iowa, Kansas, Kentucky, Maryland, Michigan, Minnesota, New York, North Carolina,North Dakota, Ohio, Pennsylvania, Tennessee, Texas, Virginia, West Virginia andWisconsin.

Our core strategy and focus is toprovide our target customers with a unique combination of a broad assortment ofoutdoor equipment, accessories, related technical apparel and footwear, expertservices, convenient locations and value pricing. Our stores feature anextensive selection of leading national and regional brands as well as ourcompany’s owned brands. We tailor our merchandise assortments to take advantageof our customers’ seasonal and regional or local preferences. We seek tocombine this broad product offering with superior customer service based on ourstore associates’ extensive product knowledge and outdoor-related experience.

Since its origin in 1960, our brandname has had a heritage of strong appeal and relevance to consumers whoparticipate in outdoor sports and recreation activities, based on our “We LiveOutdoors” culture and theme. From 1960 to 1996, our predecessor operated anationwide catalog business that, by 1996, included 17 retail stores. In 1996and 1997, Holiday Companies, which at the time owned and operated a group ofretail sporting goods stores, acquired these Gander Mountain retail stores,formed our company and began to build a new outdoor lifestyle business.

In March 2003, we began transforming our market position from atraditional specialty store to a large-format, category-focused store byopening new stores in a large format and increasing the selling space withinour original, small-format stores. Prior to March 2003, our typical store wasapproximately 31,000 square feet. Our large-format stores are typically over60,000 square feet and are typically located with convenient access to a majorhighway. They have a warehouse-style shopping environment characterized byconcrete floors, open-bar joist ceilings, high-density racking and wide aisles.The store design reinforces our overall value proposition to our customers andenables us to substantially increase the breadth and depth of our product andservice offerings. Most of our large-format stores offer all-terrain vehicles(ATVs), and some carry an expanded assortment of fishing and recreationalboats. Our large-format stores offer unique features and specialized services,including a full-service gunsmith shop, a full-service archery pro shop,archery target lanes, and a power shop performing repairs for ATVs, boats andother small engines. Some of the large-format stores also include a bait shopthat opens early for the convenience of our customers. Nearly all of our storeshave a Gander Mountain Lodge, which is an in-store meeting room available forpublic use, where we provide hunter safety classes, outdoor-skills seminars andother community-focused activities. We utilize outside selling areas adjacentto some of our large-format stores to display additional offerings of larger itemssuch as ATVs, boats, kayaks, trailers and canoes. These increase the efficiencyof our stores and also give those products greater visibility. Currently, 56 ofour 105 stores are large-format stores.

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We have a number of strategic and operating initiatives aimed atimproving our merchandise offerings, enhancing profitability and expanding thenumber and geographic diversity of our stores. We measure performance using key operating statistics such as comparablestore sales, sales per square foot, gross margin percentage and store operatingexpenses, with a focus on labor, as a percentage of sales.

Wealso measure and evaluate investments in our retail locations, includinginventory and property and equipment. Inventory performance is primarilymeasured by inventory per square foot and by inventory turns, or the number oftimes store inventory turns over in a given period, and amounts of owned inventoryat various times based on payment terms from our vendors. The most significantinvestments in property and equipment are made at the time a store is opened byus.

Webelieve that the overall growth of our business will allow us to generallymaintain or increase our product gross margins. Increased merchandise volumesshould enable us to improve our purchasing leverage and achieve greater supportthroughout the supply chain. As we continue sales and store growth, a number ofother factors may impact, positively or negatively, our product gross marginpercentage, including:

·                  theintroduction of new product categories with varying gross margin percentagecharacteristics,

·                  changesin the merchandise mix at our current locations,

·                  differencesin merchandise mix by geographic location,

·                  pricecompetition,

·                  clearanceactivities in connection with seasonal inventory management,

·                  closeoutsales in connection with store relocations and consolidations,

·                  sourcingof products from locations outside the United States,

·                  vendorprograms, and

·                  supplychain enhancements.

Inaddition, our gross margin is impacted by store occupancy and distributioncosts. We monitor these costs in absolute dollars and as a percentage of sales.

Themost significant store operating expenses are labor and related employeebenefits, marketing and advertising. Our employee benefits include healthinsurance and worker’s compensation benefits, the costs of which continue toincrease faster than the general rate of inflation. We continually monitorthese costs and review strategies to effectively control increases, but we aresubject to the overall trend of increases in these costs. Marketing andadvertising costs are monitored as a percentage of sales.  These costs are largely variable, whichallows us to actively manage them to facilitate achieving our sales, grossmargin percentage and store operating contribution objectives.

Storeoperating contribution, which is calculated by deducting a store’s operatingexpenses from its gross margin, is used to evaluate overall performance on anindividual store basis.

Generaland administrative expenses are monitored and controlled as a percentage ofsales.  We have made significantinvestments in infrastructure, including our information systems, distributioncapabilities and personnel. Our current infrastructure facilitates our plannedopening of stores, which we believe enables us to leverage our expenses.  Accordingly, we expect certain of theseexpenses to decrease as a percentage of sales over time.

Pre-openingexpenses will fluctuate based on the number and timing of new store openings,including relocations. .

Inventory turnsare based on cost of sales and average inventory for the applicable period. Werecognize that our inventory turns may be lower than those of other retailers,which we believe is due, in part, to the categories of merchandise we carry,including firearms, and the large quantities of merchandise we use in ourin-store displays. We believe we have the opportunity to enhance our supplychain to improve our inventory turns. Additionally, in merchandise categoriesthat experience slower inventory turns, we continue to work with vendors toincrease our trade credit terms to reduce our investment in owned inventory. Wecannot assure you that we will be able to improve our inventory turns orinventory investment.

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Identificationof appropriate new store sites is essential to our growth strategy. We believeour focus on our larger store size and our ability to utilize either recycled,or second-use, facilities or build-to-suit locations provides us with increasedopportunities to find optimal real estate locations on attractive terms. Weevaluate and invest in new stores based on site-specific projected returns oninvestment.

**CriticalAccounting Policies and Use of Estimates**

Ourfinancial statements are prepared in accordance with U.S. generally acceptedaccounting principles.  In connectionwith the preparation of the financial statements, we are required to makeassumptions, make estimates and apply judgments that affect the reportedamounts of assets, liabilities, revenue, expenses and the relateddisclosures.  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 reviewthe accounting policies, assumptions, estimates and judgments to ensure thatour financial statements are presented fairly and in accordance with U.S.generally accepted accounting principles. However, because future events andtheir effects cannot be determined with certainty, actual results could differfrom our assumptions and estimates, and such 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 January28, 2006.

**Resultsof Operations**

The following tableincludes selected items in the unaudited statements of operations, reflected asa percentage of sales:

 
|                                     | ** ** | **13 Weeks Ended** | ** ** | **39 Weeks Ended** | ** ** |
|-------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                          | ** ** | **October 28,**         | ** ** | **October 29,**         | ** ** | **October 28,** | ** ** | **October 29,** | ** ** |
| ** **                          | ** ** | **2006**                     | ** ** | **2005**                     | ** ** | **2006** | ** ** | **2005** | ** ** |
| Sales                               |       | 100.0                        | %          | 100.0                        | %          | 100.0 | % | 100.0 | % |
| Cost of goods  sold                 |       | 74.5                         | %          | 76.5                         | %          | 77.1 | % | 77.7 | % |
| Gross profit                        |       | 25.5                         | %          | 23.5                         | %          | 22.9 | % | 22.3 | % |
|                                |       |                         |       |                         |       |   |   |   |   |
| Operating  expenses:                |       |                         |       |                         |       |   |   |   |   |
| Store operating expenses            |       | 18.1                         | %          | 20.0                         | %          | 20.0 | % | 21.7 | % |
| General and administrative expenses |       | 4.3                          | %          | 4.2                          | %          | 5.0 | % | 5.2 | % |
| Pre-opening expenses                |       | 0.7                          | %          | 1.3                          | %          | 0.6 | % | 1.3 | % |
| Gain on insurance settlement        |       | (0.6                         | )%         | 0.0                          | %          | (0.2 | )% | 0.0 | % |
| Gain on contract settlement         |       | 0.0                          | %          | 0.0                          | %          | 0.0 | % | (0.5 | )% |
| Income (loss)  from operations      |       | 3.0                          | %          | (2.0                         | )%         | (2.5 | )% | (5.4 | )% |
| Interest expense,  net              |       | 2.2                          | %          | 1.5                          | %          | 2.4 | % | 1.4 | % |
| Income (loss)  before income taxes  |       | 0.8                          | %          | (3.5                         | )%         | (4.9 | )% | (6.8 | )% |
| Income tax  provision               |       | 0.0                          | %          | 0.0                          | %          | 0.0 | % | 0.0 | % |
| Net income (loss)                   |       | 0.8                          | %          | (3.5                         | )%         | (4.9 | )% | (6.8 | )% |

 

A store is included inthe comparable store base in its fifteenth full month of operations.  A relocated store returns to the comparablestore base in its fifteenth full month after relocation. Non-comparable storesales include sales from our stores before they have begun their fifteenthmonth of operation.

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Cost of goods soldincludes the cost of merchandise, freight, distribution, inventory shrinkageand store occupancy costs. Store occupancy costs include rent, real estatetaxes and common area maintenance charges. Initial product margin representssales less the supplier’s cost of merchandise only.

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

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

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

***ThirteenWeeks Ended October 28, 2006 compared to Thirteen Weeks Ended October 29, 2005***

*Sales.*  Sales increased by $31.9 million, or 14.9%,to $246.5 million in the third quarter of fiscal 2006 from $214.6 million inthe third quarter of fiscal 2005. This increase primarily resulted from salesof $22.5 million from new stores not yet included in the comparable store salesbase. This increase was supplemented by a comparable store sales increase of$13.8 million, and was partially offset by a $4.4 million sales decrease fromrelocated or consolidated stores and changes in other revenues. Comparablestore sales increased 7.4% compared to a decrease of 8.5% in the third  quarter of fiscal 2005. We opened five newstores during the third quarter of fiscal 2006 compared to nine new storesduring the third quarter of fiscal 2005. Total square footage as of October 28,2006 increased 9.0% to 5.5 million square feet, as compared to October 29,2005.

We believe the comparable store sales increase isprimarily attributable to several merchandising and supply chain improvements.These include in-store merchandising improvements, increased new productofferings, earlier product sets and improved in-stock merchandise levels.Increased penetration of our own Guide Series brand products also contributedpositively, as did normal weather patterns which helped drive demand forcertain products. Cannibalization from some of the new store openings and newcompetition entering some of our markets continues to reduce our overall levelof comparable store sales.

*Gross Profit.*Gross profit increased by $12.5 million, or 24.8%, to $62.9 million in thethird quarter of fiscal 2006 from $50.4 million in the third quarter of fiscal2005. As a percentage of sales, gross profit increased  approximately 200 basis points to 25.5% inthe third quarter of fiscal 2006 from 23.5% in the third quarter of fiscal2005.  Major factors primarily affectinggross profit in the current quarter were:

·                  aninitial product margin increase of approximately 200 basis points as a resultof continued benefits from increasing scale, higher penetration of ourowned-brand merchandise, the positive impact of our Everyday Low Price strategyon our pricing structure, lower clearance inventory coupled with bettermanagement of clearance merchandise and pricing, and an increase in margin inthe third quarter of fiscal 2006 from the absence of liquidation sales from oneclosed store and one relocated store in the third quarter of fiscal 2005,

·                  anincrease of approximately 50 basis points from a reduction in distributioncosts as a result of process and labor efficiencies, offset by

·                  anegative impact of approximately 50 basis points from reduced vendor discountsfor new stores as a result of opening fewer new stores with lower inventoriesfor those new stores, and a continuation in the trend toward higher freightcosts as fuel prices increased.

*Store Operating Expenses.*  Store operating expenses increased by $1.7million, or 3.9%, to $44.6 million in the third quarter of fiscal 2006 from $42.9million in the third quarter of fiscal 2005. As a percentage of sales, storeoperating expenses decreased approximately 190 basis points to 18.1% in thethird quarter of fiscal 2006 from 20.0% in the third quarter of fiscal 2005.Advertising and marketing expenditures were approximately the same in thecomparable quarters however, a higher degree of effectiveness in our programsproduced leverage as advertising and promotion expense decreased 40 basispoints as a percentage of sales in the third quarter of fiscal 2006. Inaddition, improved store labor productivity resulted in leverage ofapproximately 75 basis points and credit card fees were lower due to greaterpenetration of our co-branded credit card which carries a lower fee. Most otherstore operating expenses were favorably leveraged by the comparable store salesincrease.

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*General and Administrative Expenses.*  General and administrative expenses increasedby $1.5 million, or 16.0%, to $10.5 million in the third quarter of fiscal 2006from $9.0 million in the third quarter of fiscal 2005. As a percentage ofsales, general and administrative expenses increased to 4.3% in the thirdquarter of fiscal 2006 from 4.2% in the third quarter of fiscal 2005.

*Pre-opening Expenses.*  Pre-opening expenses decreased $1.0 million,or 36.2%, to $1.8 million in the third quarter of fiscal 2006 from $2.8 millionin the third quarter of fiscal 2005. We opened five new stores in the thirdquarter of fiscal 2006 and we opened nine new stores in the third quarter of fiscal2005.

*Gain on Insurance Settlement*. For the third quarter ended October 28, 2006,we recorded a gain of $1.4 million in connection with an insurance settlementresulting from flood damage at one of our stores.

*Interest Expense, net.*  Interest expense increased by $2.3 million,or 68.6%, to $5.5 million in the third quarter of fiscal 2006 from $3.2 millionin the third quarter of fiscal 2005. The increase resulted from higher averageborrowings incurred to fund our growth, including the addition of a $20 millionterm loan to our credit facility in March 2006. We also experienced higheraverage interest rates of approximately 240 basis points during the thirdquarter of fiscal 2006, as compared to the third quarter of fiscal 2005.

*Income Tax Provision.* We did notrecord income tax expense for the third quarter of fiscal 2006 because ofavailable net operating loss carryforwards. We did not record an income taxbenefit for the third quarter of fiscal 2005 due to the uncertainty of therealization of the net operating loss carry forwards. We have determined therealization of the tax benefit related to our net deferred tax asset isuncertain at this time and a valuation allowance was recorded for the entirebalance of our net deferred tax asset.

*Net Income.*As a result of thefactors discussed above, the net income of $2.0 million for the third quarterof fiscal 2006 represented an increase of $9.5 million from the net loss of$7.5 million for the third quarter of fiscal 2005.

***Thirty-NineWeeks Ended October 28, 2006 compared to Thirty-Nine Weeks Ended October 29,2005***

*Sales.*  Sales increased by $60.9 million, or 11.6%,to $584.6 million in the nine months of fiscal 2006 from $523.7 million in thenine months of fiscal 2005. This increase primarily resulted from sales of$81.1 million from new stores not yet included in the comparable store salesbase. This increase was partially offset by a comparable store sales decreaseof $9.2 million, and a $11.0 million sales decrease from relocated orconsolidated stores and changes in other revenues. Comparable store salesdecreased 2.0% compared to a decrease of 5.1% in the nine months of fiscal2005. We opened eight new stores during the nine months of fiscal 2006 comparedto nineteen new stores during the nine months of fiscal 2005. We relocated onestore during the nine months of fiscal 2006. During the same period of fiscal2005, we relocated two stores and closed one store.

Although our current third quarter of fiscal 2006reflects improvement in comparable store sales, the comparable store salesdecrease and the overall softness in sales for our nine month period of fiscal2006 is primarily reflective of (i) reduced spending in advertising andpromotions in the first six months of fiscal 2006 , (ii) our focus on our EverydayLow Price strategy that resulted in fewer promotions to drive customer traffic,(iii) lower levels of clearance merchandise available to customers, and (iv)cannibalization from some of the new store openings and new competitionentering some of our markets.

*Gross Profit.*Gross profit increased by $17.4 million, or 14.9%, to $134.0 million in thenine months of fiscal 2006 from $116.6 million in the nine months of fiscal2005. As a percentage of sales, gross profit increased approximately 60 basispoints to 22.9% in the nine months of fiscal 2006 from 22.3% in the nine monthsof fiscal 2005.  Major factors primarilyaffecting gross margin in the comparable nine-month periods were:

·                  aninitial product margin increase of approximately 150 basis points as a resultof continued benefits from increasing scale, the positive impact of ourEveryday Low Price strategy on our pricing structure, higher penetration of ourowned-brand merchandise, and lower clearance inventory coupled with bettermanagement of clearance merchandise and pricing,

·                  afavorable impact of approximately 40 basis points from a reduction indistribution costs,

·                  anegative impact of approximately 90 basis points from increased store occupancycosts as a result of reduced leverage from lower comparable store sales andlower sales per square foot at our newer, less mature stores, and

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·                  apositive effect from the increase in co-branded credit card revenues, andnegative effects from reduced vendor discounts for new stores as a result ofopening fewer new stores with lower inventories for those new stores and acontinuation in the trend toward higher freight costs as fuel prices increased.

*Store Operating Expenses.*  Store operating expenses increased by $3.3million, or 2.9%, to $116.9 million in the nine months of fiscal 2006 from$113.6 million in the nine months of fiscal 2005. As a percentage of sales,store operating expenses decreased approximately 170 basis points to 20.0% inthe nine months of fiscal 2006 from 21.7% in the nine months of fiscal 2005. Wereduced advertising and marketing expenditures by 27.3%, or 140 basis points asa percentage of sales, because these expenditures have proven less effective indriving sales in the seasonally slow first and second fiscal quarters. In addition,we had a modest gain in store labor productivity.

*General and Administrative Expenses.*  General and administrative expenses increasedby $2.2 million, or 8.4%, to $29.4 million in the nine months of fiscal 2006from $27.2 million in the nine months of fiscal 2005. As a percentage of sales,general and administrative expenses decreased approximately 20 basis points to5.0% in the nine months of fiscal 2006 from 5.2% in the nine months of fiscal2005 primarily as a result of sales leverage and cost controls. This leveragewas partially offset by stock option expense resulting from the adoption ofSFAS 123R in fiscal 2006 as well as increased occupancy costs related to ourcorporate offices.

*Pre-opening Expenses.*  Pre-opening expenses decreased $3.3 million,or 50.5%, to $3.2 million in the nine months of fiscal 2006 from $6.5 millionin the nine months of fiscal 2005. We opened eight new stores in the ninemonths of fiscal 2006 and we opened nineteen new stores in the nine months offiscal 2006.

*Gain on Insurance Settlement*. For the third quarter ended October 28, 2006,we recorded a gain of $1.4 million in connection with an insurance settlementresulting from flood damage at one of our stores.

*Gain on Contract Settlement*. In March2005, we received a $2.5 million non-recurring payment relating to thetermination of our contract with the former provider of our co-branded creditcard services in consideration of the lost opportunity.

*Interest Expense, net.*  Interest expense increased by $7.1 million,or 97.1%, to $14.3 million in the nine months of fiscal 2006 from $7.2 millionin the nine months of fiscal 2005. The increase resulted from higher averageborrowings incurred to fund our growth, including the placement of $20 millionof convertible debt in August 2005 and the addition of a $20 million term loanto our credit facility in March 2006. We also experienced higher averageinterest rates of approximately 250 basis points during the nine months offiscal 2006, as compared to the nine months of fiscal 2005.

*Income Tax Provision.* We did notrecord an income tax benefit for the nine months of fiscal 2006 or fiscal 2005due to the uncertainty of the realization of the net operating loss carryforwards. We have determined the realization of the tax benefit related to ournet deferred tax asset is uncertain at this time and a valuation allowance wasrecorded for the entire balance of our net deferred tax asset.

*Net Loss.*As a result of thefactors discussed above, the net loss of $28.5 million for the nine months offiscal 2006 represented a decrease of $7.0 million from the net loss of $35.5million for the nine months of fiscal 2005.

**Liquidityand Capital Resources**

Ourprimary capital requirements are for inventory, capital improvements andpre-opening expenses to support our new store growth plans, and, to the extentof the highly seasonal nature of our business, operating losses.

*Operating Activities.*  Net cash used in operating activities for thenine months of fiscal 2006 decreased by $18.7 million to $66.0 million, ascompared to $84.7 million for the nine months of fiscal 2005. There were elevenfewer new stores opened during the nine months of fiscal 2006 as compared tothe nine months of fiscal 2005. This resulted in $36.9 million less cash usedto fund inventory growth in the nine months of fiscal 2006 as compared to thenine months of fiscal 2005. In addition, our efforts to manage inventories haveresulted in lower levels of inventories in our recently opened new stores, aswell as a reduction in inventories in all our stores. This reduced use of cashwas partially offset by a reduction of $19.7 million in cash generated fromaccounts payable and other liabilities resulting from several factors,including lower inventory levels, reduced tenant improvement allowances relatedto fewer new stores in the nine months of fiscal 2006 compared to the ninemonths of fiscal 2005, increased efficiencies in systems and processes thatimproved timeliness of vendor payments, fewer new store openings where wetypically obtain extended terms from our vendors on initial inventory purchases,improved timing of accounts payable reductions for vendor allowances andincreased foreign product sourcing activities, which often involve the use ofletters of credit or other arrangements.

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*Investing Activities*.  Net cash used in investing activities was$23.8 million in the nine months of fiscal 2006 and $47.8 million in the ninemonths of fiscal 2005. We used cash primarily for tenant improvements andequipment to open new stores and to remodel and upgrade existing stores. Theyear over year decrease in net cash used of $24.0 million was primarily due tothe opening of eight new stores in the nine months of fiscal 2006 as comparedto the opening of nineteen new stores in the nine months of fiscal 2005. Wealso expended $5.6 million to replace our corporate aircraft in June 2006 andreceived proceeds of $2.1 million from the sale of the replaced aircraft.Proceeds of $5.2 million from our insurance settlement also reduced our net cashused in investing activities in the nine months of fiscal 2006. In addition wepurchased $1.2 million of non-cash equipment expenditures which were financedthrough capital lease transactions during the nine months of fiscal 2006.

Purchasesof property and equipment in the nine months of fiscal 2005 also includedexpenditures for equipment for our distribution center, information technologyequipment and office furniture and equipment at our new corporate headquarters.

*Financing Activities*. * *Net cash provided byfinancing activities for the nine months of fiscal 2006 decreased by $43.3million to $89.7 million, as compared to $133.0 million in the nine months offiscal 2005. The reduced funding needed from our credit facility was due to thedecrease in cash used in operations of $18.7 million and a $24.0 million netreduction in cash used for investing activities.  Our financing activities were utilized tofund our continued store expansion, including inventory, property andequipment, and to fund our operating losses. In addition, we financed theacquisition of our corporate aircraft with a $5.3 million, seven-year term notepayable and we added $1.2 million in new capital leases.

*Credit Facility. *To meet our liquidity and capital needs, we enteredinto a credit facility with Bank of America, N.A.  This credit facilityprovides for revolving loans in an aggregate amount of up to $275 millionincluding up to $50 million in the form of letters of credit, and matures onJune 30, 2009.  Availability under the facilitymay be further increased to $300 million, subject to certain conditionsincluding the absence of default. The actual availability under the amendedcredit facility is limited to 85% of eligible credit card receivables plus thelesser of 68% to 75% of eligible inventory or 85% of the inventory’sliquidation value, in each case, net of specified reserves and less any lettersof credit outstanding. Interest on the outstanding indebtedness under therevolving credit facility currently accrues at the lender’s prime commerciallending rate plus 0% to 0.5% depending on our EBITDA, as defined in the creditagreement, or, if we elect, at the one, two, three or six month LIBOR plus1.25% to 2.25% depending on such EBITDA. Our obligations under the creditfacility are secured by interests in substantially all of our assets.

On March 3, 2006,we amended and restated our credit facility. The principal purpose of theamendment was to add a $20 million term loan to the credit facility. The amountof the term loan is not deducted in determining availability under therevolving credit facility, except to the extent that the balance of the termloan exceeds approximately 4% to 5% of the eligible borrowing base. The termloan matures on June 30, 2009 and bears interest at either (a) 2% over thehigher of Bank of America’s prime rate or the federal funds rate plus 0.5%, or(b) LIBOR plus 4%.  This additionalfinancing was obtained to maintain the liquidity levels necessary to fundcontinued growth and seasonal cash flow needs.

Effective May 25,2006, we amended our credit facility to adjust the level of the EBITDAcovenants for the months of April 2006 through July 2006. As amended, testingof the EBITDA covenant is required when our availability is less than 10% ofthe lesser of (a) the revolving credit facility maximum on any given day or (b)the borrowing base, as defined and adjusted for certain reserves. The creditfacility continues to specify quarterly testing of the operating cash flowcovenant.  Other substantive terms of theagreement were not materially changed in the May 25, 2006 amendment. The creditagreement contains certain covenants that, among other things, restrict ourability to incur substantial indebtedness, create certain liens, engage incertain mergers and acquisitions, sell assets, enter into certain capitalleases or make junior payments, including dividends. We are in compliance withall covenants of the credit facility.

Outstandingborrowings under the credit facility, including letters of credit, were $267.6million and $233.7 million as of October 28, 2006 and October 29, 2005,respectively.  Actual availability underthe amended credit facility is limited to specific advance rates on eligibleinventory and accounts receivable up to the $295 million facility limit.Typically, availability will be highest in the latter half of our fiscal yearas inventory levels and advance rates increase. Based on eligible inventory andaccounts receivable balances as of October 28, 2006 and October 29, 2005, ouravailable borrowing capacity under the credit facility, after subtractingletters of credit, was $27.4 million and $41.3 million, respectively. Thisavailable borrowing capacity was $45.2 million as of December 1, 2006.

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*Income Taxes.*Due to the uncertaintyof the realization of net operating loss carry forwards, we have determined therealization of the tax benefit related to our net deferred tax asset isuncertain at this time and a valuation allowance was recorded for the entirebalance of our net deferred tax asset.

*Future Capital Requirements*.  Our future capital requirements willprimarily depend on our future financial performance, the number of new storeswe open and the timing of those openings within a given fiscal year. Theserequirements will include costs directly related to opening new stores and mayalso include costs necessary to ensure that our infrastructure, includingtechnology and distribution capabilities, is able to support a larger storebase. We will continue to open new stores in fiscal 2007, with three plannedopenings in the first half of fiscal 2007, and we anticipate total capitalexpenditures of $30 to $35 million for fiscal 2007. However, businessconditions, business strategy or other factors may cause us to adjust theseplans.

Additional needs forcapital include funding seasonal inventory levels and operating losses due toour seasonality, and may include investments for an expansion into otherdistribution channels in addition to our retail channel. We do not expect ourinvestments in other distribution channels to be significant in fiscal 2006 orduring the first half of fiscal 2007. We also expect to continue to increaseour direct product sourcing activities, requiring additional funding possiblythrough increased letters of credit or trade credit.

We intend to satisfy ourcapital requirements over the next twelve months with cash flows fromoperations, funds available under our credit facility, equipment financingleases, funds from additional borrowing capacity, and to the extent necessary,from other available capital sources. We may seek additional debt or equityfinancing in the public or private capital markets. Our ability to accesscapital sources is impacted by our financial performance, as well as by generalbusiness, economic and other factors, some of which are beyond our control.There is no assurance that financing will be available to us on acceptableterms.

We privately placed a $20million subordinated unsecured convertible note in August 2005. The holder ofthe note is a trust, the current beneficiary of which is a member of our boardof directors. The note matures in August 2010. The note is convertible into shares of our common stock at the price of$16 per share, subject to certain adjustments. If the note is notconverted,  $20 million will be due atmaturity.

**Contractual Obligations and Other Commitments**

Our material off-balancesheet arrangements are operating lease obligations for substantially all of ourretail stores, our distribution center and corporate office and letters ofcredit.  We excluded these items from thebalance sheet in accordance with U.S. generally accepted accounting principles.As of October 28, 2006, the minimum operating lease payments due within oneyear were $54.1 million. As of October 28, 2006, total minimum operating leasepayments remaining over all of our operating leases were $634.7 million. Theseleases have an average remaining term of 10.1 years. These obligation amountsinclude future minimum lease payments and exclude direct operating costs suchas common area costs and real estate taxes.

Issued and outstanding letters of credit were $7.7million and $6.1 million at October 28, 2006 and October 29, 2005,respectively, and were related primarily to importing of merchandise andsupporting potential insurance program liabilities.

Inthe ordinary course of business, we enter into arrangements with vendors topurchase merchandise in advance of expected delivery. Because most ofthese purchase orders do not contain any termination payments or otherpenalties if cancelled, they are not included as outstanding contractualobligations. The merchandise purchases for which we do have firm commitmentsoutstanding, in addition to letters of credit, were $1.7 million and $6.1 millionas of October 28, 2006 and October 29, 2005, respectively.

**Quarterly Results of Operationsand Seasonality**

Our quarterlyoperating results may fluctuate significantly because of several factors,including the timing of new store openings and related expenses, profitabilityof new stores, weather conditions and general economic conditions. Our businessis also subject to seasonal fluctuation, with approximately 62% to 65% of oursales activity normally occurring during the third and fourth quarters of ourfiscal year, which are primarily associated with the fall hunting seasons andthe holiday season.  However, this factorcannot necessarily be used as an indicator of future results. Our customers’demand for our products and therefore our sales, can be significantly impactedby unseasonable weather conditions that affect outdoor activities and thedemand for related apparel and equipment. This seasonality also impacts ourinventory levels, which tend to rise beginning approximately in April, reach a peakin November, and decline to lower levels after the December holiday season.

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Our pre-openingexpenses have and will continue to vary significantly from quarter to quarter,primarily due to the timing of store openings. We typically incur most pre-opening expenses for a new store during thethree months preceding, and the month of, its opening.  In addition, our labor and operating costsfor a newly opened store can be greater during the first one to two months of operationthan what can be expected after that time, both in aggregate dollars and as apercentage of sales.  Accordingly, thevolume and timing of new store openings in any quarter has had and is expectedto continue to have a significant impact on quarterly pre-opening costs andstore labor and operating expenses.  Dueto these factors, results for any particular quarter may not be indicative ofresults to be expected for any other quarter or for a full fiscal year.

**Critical Accounting Policies andUse of Estimates**

**Adoption of SFAS 123R**

Effective January29, 2006, we adopted the fair-value recognition provisions of the FinancialAccounting Standards Board’s Statement No. 123 (revised 2004), *Share-Based Payment* (“SFAS 123R”), whichrequires the measurement and recognition of compensation expense for allstock-based payment awards made to employees and directors including employeestock option awards and employee stock purchases made under our employee stockpurchase plan. We adopted the provisions of SFAS 123R, using themodified-prospective transition method. Under this transition method,stock-based compensation expense was recognized in the financial statements forthe 13 and 39 weeks ended October 28, 2006, for granted, modified, or settledstock options and for expense related to the employee stock purchase plan. Theprovisions of SFAS 123R apply to new stock options and stock optionsoutstanding, but not yet vested, on the effective date of January 29,2006. Results for prior periods have not been restated, in accordance with themodified-prospective transition method.

Theamount of compensation expense for stock-based awards to be recognized during aperiod is based on the portion of the awards that are ultimately expected tovest. We estimate option forfeitures at the time of grant and revise thoseestimates in subsequent periods if actual forfeitures differ significantly fromthose estimates. Compensation cost is recognized using a straight-lineamortization method over the requisite service period**,**whichtypically is the vesting period.

As aresult of adopting SFAS 123R, our income from operations for the 13 weeksending October 28, 2006 is $296,000 lower, and our loss from operations for the39 weeks ended October 28, 2006 is $834,000 higher, than if we had continued toaccount for share-based compensation under APB No. 25. Basic and diluted incomeper share for the 13 weeks ended October 28, 2006 is $.02 lower and basic anddiluted loss per share for the 39 weeks ended October 28, 2006 is $.06 higher,than under APB No. 25.  There was no impacton cash flows.

AtOctober 28, 2006, there was approximately $2,750,000 of total unrecognizedstock-based compensation expense related to unvested option awards.Unrecognized stock-based compensation is expected to be recognized over aweighted-average period of 2.2 years.

**New Accounting Pronouncement**

InSeptember 2006, the Securities and Exchange Commission (SEC) issued StaffAccounting Bulletin (SAB) No. 108, *Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements*(“SAB No. 108”), which provides interpretive guidance on theconsideration of the effects of prior year misstatements in quantifying currentyear misstatements for the purpose of a materiality assessment. SAB No. 108 iseffective for fiscal years ending after November 15, 2006. We are requiredto adopt SAB No. 108 for our fiscal year ending February 3, 2007. We arecurrently assessing the impact, if any, the adoption of SAB No. 108 will haveon our financial position and results of operations.

InSeptember 2006, the Financial Accounting Standards Board (“FASB”), issued SFASNo. 157, *Fair Value Measurements* (“SFAS No. 157”). SFAS No. 157defines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles and expands disclosures about fairvalue measurements. SFAS 157 applies to other accounting pronouncements thatrequire or permit fair value measurements, as the FASB previously concluded inthose accounting pronouncements that fair value is the relevant measurementattribute. Accordingly, SFAS 157 does not require any new fair valuemeasurements. SFAS No. 157 is effective for fiscal years beginning afterNovember 15, 2007. We plan to adopt SFAS No. 157 beginning in the first quarterof fiscal 2008. We are currently evaluating the impact, if any, the adoption ofSFAS No. 157 will have on our financial position and results of operations.

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InJune 2006, the FASB issued FASB Interpretation No. 48, *Accounting for Uncertainty in Income Taxes* (“FIN 48”), aninterpretation of Statement of Financial Accounting Standards No. 109, *Accounting for Income Taxes*. FIN 48 clarifies the accounting for uncertainty in income taxes byprescribing a recognition threshold for tax positions taken or expected to be takenin a tax return. FIN 48 is effective for fiscal years beginning afterDecember 15, 2006. We do not believe the adoption of FIN 48 will have amaterial impact on net earnings, cash flows or financial position.

In March 2006, the FASB’s Emerging Issues Task Forcereleased Issue 06-3, *How Sales Taxes CollectedFrom Customers and Remitted to Governmental Authorities Should Be Presented inthe Income Statement* (“EITF 06-3”). A consensus was reached thatentities may adopt a policy of presenting sales taxes in the statement ofoperations on either a gross or net basis. If taxes are significant, an entityshould disclose its policy of presenting taxes and the amount of taxes ifreflected on a gross basis in the income statement. EITF 06-3 is effective forperiods beginning after December 15, 2006. We present sales net of sales taxesin our statement of operations and do not anticipate changing our policy as aresult of EITF 06-3.

**ITEM 3.  QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

We are exposed tomarket risk from changes in interest rates on borrowings under our creditfacility. This floating rate indebtedness was $259.9 million at October 28,2006 and averaged $240.5 million during the third quarter of fiscal 2006. Ouraverage interest rate for the third quarter of fiscal 2006 under our creditfacility was 7.9% and was approximately 240 basis points higher than the sameperiod last year due primarily to general interest rate movement. If short-termfloating interest rates on our average variable rate debt for the third quarterof fiscal 2006 had increased by 100 basis points, our interest expense wouldhave increased by approximately $0.6 million, assuming comparable borrowinglevels. These amounts are determined by considering the impact of thehypothetical interest rates on our average amount of floating rate indebtednessoutstanding and cash equivalents balances.

We have noderivative financial instruments or derivative commodity instruments in ourcash and cash equivalents.  We have nointernational sales, however, we import certain items for sale in ourstores.  Substantially all of ourpurchases 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, underthe supervision and with the participation of the principal executive officerand principal financial and accounting officer, of our disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934 (the “Exchange Act”)). Based on this evaluation, the principal executive officer and principalfinancial 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 Exchange Act is recorded,processed, summarized and reported within the time periods specified inSecurities and Exchange Commission rules and forms.  There was no change in our internal controlover financial reporting identified in connection with the evaluation requiredby Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during theperiod covered by this report that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

#### **PARTII. OTHER INFORMATION**

**ITEM 1.  LEGAL PROCEEDINGS**

***Trademark Litigation* -**OnJuly 2, 2004, we filed a complaint in the U.S. District Court for the Districtof Minnesota seeking declaratory relief that the contingent trademark licensingprovision of a noncompetition agreement dated May 16, 1996, made between ourpredecessor and Cabela’s Incorporated, is invalid and unenforceable. Althoughthe noncompetition provisions of the noncompetition agreement expired in June2003, Cabela’s contends that a contingent trademark licensing provision of thenoncompetition agreement now requires us to grant Cabela’s a license that wouldpreclude the use by us or Cabela’s of certain of our trademarks for directmarketing purposes.

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On August18, 2005, the court ruled that the contingent trademark licensing provision isnot legally invalid as a noncompetition agreement and dismissed ourcomplaint.  The court also acknowledged that it had not been asked at thatpoint to determine, and was not determining, the scope of the contingenttrademark license or the parties’ respective rights thereunder.  InDecember 2005, the court granted our motion to file an amended reply to Cabela’scounterclaim, in which we raised multiple additional issues regarding thevalidity, enforceability, and interpretation of any trademark rights allegedlypossessed by Cabela’s, and any limitations upon our rights to engage in certainmarketing activities under the trademarks at issue.  These issues remainbefore the court.  Discovery is currently underway and the court hasestablished a trial-ready date of May 1, 2007.

Weare not able to predict the ultimate outcome of such proceedings, but they maybe costly and disruptive. The total costs may not be reasonably estimated atthis time. The outcome of this dispute may impact the manner in which wemarket our products in certain distribution channels in the future. It isnot expected to have any affect on the marketing of our products through ourretail stores.

*****Other Legal Claims*-****Various claims and lawsuits arising in the normal course ofbusiness may be pending against us from time to time. The subject matter ofthese proceedings typically relate to commercial disputes and employmentissues. As of the date of this report, we are not a party to any legalproceedings that are expected, individually or in the aggregate, to have amaterial adverse effect on our financial condition or results of operations.

**ITEM 1A.  RISK FACTORS**

Not applicable.

**ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES ANDUSE OF PROCEEDS**

Not applicable.

**ITEM3.  DEFAULTS UPON SENIOR SECURITIES**

Not applicable.

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

Not applicable.

**ITEM 5.  OTHER INFORMATION**

Notapplicable.

**ITEM 6.  EXHIBITS**
| Exhibit No. | ** ** | **Description**                                                                       | ** ** | **Method of Filing**          |
|-------------|------------|---------------------------------------------------------------------------------------|------------|-------------------------------|
| 3.1         |       | Amended and Restated Articles of Incorporation of  the Registrant                     |       | Incorporated By Reference (1) |
|        |       |                                                                                  |       |                          |
| 3.2         |       | Amended and Restated Bylaws of the Registrant                                         |       | Incorporated By Reference (2) |
|        |       |                                                                                  |       |                          |
| 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)   Incorporatedby reference to Exhibit 3.3 to Amendment No. 1 to the Registrant’s RegistrationStatement on Form S-1 (Registration No. 333-112494), filed with the Commissionon March 15, 2004.

(2)   Incorporatedby reference to Exhibit 3.4 to Amendment No. 1 to the Registrant’s RegistrationStatement on Form S-1 (Registration No. 333-112494), filed with the Commissionon March 15, 2004.

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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 |
|------------------------|-------------------------|
|                   |                    |
|                   |                    |
| Date: December 7, 2006 | By:                     | /s/ Mark R. Baker |   |
|                   |                    | Mark R. Baker |
|                   |                    | *President and Chief Executive Officer*(Principal Executive Officer) |
|                   |                    | * * |
|                   |                    | * * |
| Date: December 7, 2006 | By:                     | /s/ Dennis M. Lindahl |   |
|                   |                    | Dennis M. Lindahl |
|                   |                    | *Executive Vice President, Chief Financial Officer  and Treasurer*(Principal Financial and Accounting Officer) |

 

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**EXHIBITS**

 
| Exhibit No. | ** ** | **Description**                                                                       | ** ** | **Method of Filing**          |
|-------------|------------|---------------------------------------------------------------------------------------|------------|-------------------------------|
| 3.1         |       | Amended and Restated Articles of Incorporation of  the Registrant                     |       | Incorporated By Reference (1) |
|        |       |                                                                                  |       |                          |
| 3.2         |       | Amended and Restated Bylaws of the Registrant                                         |       | Incorporated By Reference (2) |
|        |       |                                                                                  |       |                          |
| 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)      Incorporatedby reference to Exhibit 3.3 to Amendment No. 1 to the Registrant’s RegistrationStatement on Form S-1 (Registration No. 333-112494), filed with the Commissionon March 15, 2004.

(2)      Incorporatedby reference to Exhibit 3.4 to Amendment No. 1 to the Registrant’s RegistrationStatement on Form S-1 (Registration No. 333-112494), filed with the Commissionon March 15, 2004.

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