** **

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

** **

**FORM 10-Q**

 

**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED NOVEMBER 3, 2007.**

 

**Commission File Number:  000-50659**

 

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

 

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

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes x No o

 

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

 

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

 

Indicatethe number of shares outstanding of each of the issuer’s classes of common stock,as of the latest practicable date: Common Stock, $.01 par value; 24,072,494 shares outstanding as of December 10,2007.

 

 

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**GANDER MOUNTAIN COMPANY**

**QUARTERLY PERIOD ENDED NOVEMBER 3, 2007**

**Index**

 
|                                |                                                                                        | **Page** |
|-------------------------------------|---------------------------------------------------------------------------------------------|----------|
| PART I.  FINANCIAL INFORMATION | 2                                                                                           |
| 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 | 10       |
| Item 3.                             | Quantitative  and Qualitative Disclosures About Market Risk                                 | 22       |
| Item 4.                             | Controls and  Procedures                                                                    | 22       |
|                                |                                                                                        |     |
| PART II.  OTHER INFORMATION    | 22                                                                                          |
| Item 1.                             | Legal Proceedings                                                                           | 22       |
| Item 1A.                            | Risk  Factors                                                                               | 23       |
| Item 2.                             | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 23       |
| Item 3.                             | Defaults Upon  Senior Securities                                                            | 23       |
| Item 4.                             | Submission of  Matters to a Vote of Security Holders                                        | 23       |
| Item 5.                             | Other Information                                                                           | 23       |
| Item 6.                             | Exhibits                                                                                    | 23       |
| SIGNATURES                          | 24                                                                                          |
|                                     |                                                                                             |          |  |  |

 

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**PART I. FINANCIAL INFORMATION**

 

**ITEM 1.  UNAUDITED FINANCIALSTATEMENTS**

** **

**GanderMountain Company**

**Statementsof Operations - Unaudited**

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

 
| ** **                                  | ** ** | **13 Weeks Ended**   | ** ** | **39 Weeks Ended**   | ** ** |
|---------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                  | ** ** | **November 3,** | ** ** | **October 28,** | ** ** | **November 3,** | ** ** | **October 28,** | ** ** |
| ** **                                  | ** ** | **2007**             | ** ** | **2006**             | ** ** | **2007** | ** ** | **2006** | ** ** |
| Sales                                       |       | $                    | 259,539    |                 | $          | 246,491 |   | $ | 651,799 |   | $ | 584,553 |   |
| Cost of goods sold                          |       | 189,445              |       | 183,594              |       | 496,293 |   | 450,590 |   |
| Gross profit                                |       | 70,094               |       | 62,897               |       | 155,506 |   | 133,963 |   |
|                                        |       |                 |       |                 |       |   |   |   |   |
| Operating expenses:                         |       |                 |       |                 |       |   |   |   |   |
| Store operating expenses                    |       | 53,392               |       | 44,553               |       | 137,671 |   | 116,880 |   |
| General and administrative expenses         |       | 13,128               |       | 10,490               |       | 36,281 |   | 29,449 |   |
| Pre-opening expenses                        |       | 3,174                |       | 1,772                |       | 5,138 |   | 3,245 |   |
| Gain on insurance settlement                |       | —               |       | (1,400               | )          | — |   | (1,400 | ) |
| Income (loss) from  operations              |       | 400                  |       | 7,482                |       | (23,584 | ) | (14,211 | ) |
| Interest expense, net                       |       | 5,543                |       | 5,456                |       | 14,049 |   | 14,289 |   |
| Income (loss) before  income taxes          |       | (5,143               | )          | 2,026                |       | (37,633 | ) | (28,500 | ) |
| Income tax provision                        |       | —               |       | —               |       | — |   | — |   |
| Net income (loss)                           |       | $                    | (5,143     | )                    | $          | 2,026 |   | $ | (37,633 | ) | $ | (28,500 | ) |
|                                        |       |                 |       |                 |       |   |   |   |   |
| Income (loss) per common  share             |       |                 |       |                 |       |   |   |   |   |
| Basic                                       |       | $                    | (0.25      | )                    | $          | 0.14 |   | $ | (1.86 | ) | $ | (1.99 | ) |
| Diluted                                     |       | $                    | (0.25      | )                    | $          | 0.14 |   | $ | (1.86 | ) | $ | (1.99 | ) |
|                                        |       |                 |       |                 |       |   |   |   |   |
| Weighted average common  shares outstanding |       |                 |       |                 |       |   |   |   |   |
| Basic                                       |       | 20,362               |       | 14,308               |       | 20,255 |   | 14,295 |   |
| Diluted                                     |       | 20,362               |       | 14,325               |       | 20,255 |   | 14,295 |   |

 

See accompanying notes tounaudited financial statements.

 

2

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**Gander Mountain Company**

**BalanceSheets**

**(In thousands)**
| ** **                                                                                                             | ** ** | **November 3,** | ** ** | **February 3,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                                                                                             | ** ** | **2007**             | ** ** | **2007**             | ** ** |
| **Assets**                                                                                                             | ** ** | **(Unaudited)**      | ** ** | ** **           | ** ** |
| Current assets:                                                                                                        |       |                 |       |                 |       |
| Cash and cash equivalents                                                                                              |       | $                    | 1,684      |                 | $          | 1,342 |   |
| Accounts receivable                                                                                                    |       | 22,445               |       | 10,337               |       |
| Inventories                                                                                                            |       | 474,953              |       | 349,120              |       |
| Prepaids and other current assets                                                                                      |       | 13,332               |       | 10,681               |       |
| Total current assets                                                                                                   |       | 512,414              |       | 371,480              |       |
| Property and equipment,  net                                                                                           |       | 168,328              |       | 144,439              |       |
| Other assets, net                                                                                                      |       | 10,269               |       | 5,698                |       |
| Total assets                                                                                                           |       | $                    | 691,011    |                 | $          | 521,617 |   |
| ** **                                                                                                             | ** ** | ** **           | ** ** | ** **           | ** ** |
| **Liabilities and shareholders’  equity**                                                                         | ** ** | ** **           | ** ** | ** **           | ** ** |
| Current liabilities:                                                                                                   |       |                 |       |                 |       |
| Borrowings under credit facility                                                                                       |       | $                    | 307,578    |                 | $          | 168,485 |   |
| Accounts payable                                                                                                       |       | 111,474              |       | 62,868               |       |
| Accrued and other current liabilities                                                                                  |       | 49,511               |       | 48,032               |       |
| Current maturities of long term debt                                                                                   |       | 5,394                |       | 1,677                |       |
| Total current liabilities                                                                                              |       | 473,957              |       | 281,062              |       |
|                                                                                                                   |       |                 |       |                 |       |
| Long term debt                                                                                                         |       | 25,901               |       | 16,421               |       |
| Other long term  liabilities                                                                                           |       | 27,665               |       | 27,343               |       |
|                                                                                                                   |       |                 |       |                 |       |
| 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; 20,362,097  and 20,027,788 shares issued and outstanding) |       | 204                  |       | 200                  |       |
| Additional paid-in-capital                                                                                             |       | 256,734              |       | 252,408              |       |
| Notes receivable from shareholders                                                                                     |       | (4,100               | )          | (4,100               | )          |
| Accumulated deficit                                                                                                    |       | (89,350              | )          | (51,717              | )          |
| Total shareholders’ equity                                                                                        |       | 163,488              |       | 196,791              |       |
| Total liabilities and  shareholders’ equity                                                                       |       | $                    | 691,011    |                 | $          | 521,617 |   |

 

See accompanying notes tounaudited financial statements.

 

3

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**Gander Mountain Company****Statements of Cash Flows - Unaudited****(In thousands)**

** **
| ** **                                                                   | ** ** | **39 Weeks Ended**   | ** ** |
|------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                   | ** ** | **November 3,** | ** ** | **October 28,** | ** ** |
| ** **                                                                   | ** ** | **2007**             | ** ** | **2006** | ** ** |
| **Operating  activities**                                                    | ** ** | ** **           | ** ** | ** ** | ** ** |
| Net loss                                                                     |       | $                    | (37,633    | ) | $ | (28,500 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities: |       |                 |       |   |   |
| Depreciation and amortization                                                |       | 19,770               |       | 16,618 |   |
| Stock-based compensation expense                                             |       | 1,278                |       | 904 |   |
| Loss (gain) on disposal of assets                                            |       | 60                   |       | (782 | ) |
| Change in operating assets and liabilities:                                  |       |                 |       |   |   |
| Accounts receivable                                                          |       | (12,108              | )          | (15,262 | ) |
| Inventories, net of acquired assets                                          |       | (122,435             | )          | (91,228 | ) |
| Prepaids and other current assets                                            |       | (2,651               | )          | (6,377 | ) |
| Other assets, net of acquired assets                                         |       | (1,483               | )          | (1,088 | ) |
| Accounts payable and other liabilities                                       |       | 50,407               |       | 59,687 |   |
| Net cash used in operating activities                                        |       | (104,795             | )          | (66,028 | ) |
| **Investing activities**                                                     | ** ** | ** **           | ** ** | ** ** | ** ** |
| Purchases of property and equipment                                          |       | (40,548              | )          | (31,105 | ) |
| Acquisition of business                                                      |       | (7,080               | )          | — |   |
| Proceeds from insurance settlement                                           |       | —               |       | 5,197 |   |
| Proceeds from sale of assets                                                 |       | —               |       | 2,100 |   |
| Net cash used in investing activities                                        |       | (47,628              | )          | (23,808 | ) |
| **Financing activities**                                                     | ** ** | ** **           | ** ** | ** ** | ** ** |
| Borrowings under credit facility, net of repayments                          |       | 139,093              |       | 84,965 |   |
| Proceeds from long term debt                                                 |       | 13,082               |       | 5,300 |   |
| Reductions in long term debt                                                 |       | (2,463               | )          | (699 | ) |
| Proceeds from exercise of stock options and stock sales                      |       | 3,053                |       | 133 |   |
| Net cash provided by financing activities                                    |       | 152,765              |       | 89,699 |   |
|                                                                         |       |                 |       |   |   |
| Net increase / (decrease) in cash                                            |       | 342                  |       | (137 | ) |
| Cash, beginning of period                                                    |       | 1,342                |       | 1,580 |   |
| Cash, end of period                                                          |       | $                    | 1,684      |   | $ | 1,443 |   |

 

 

See accompanyingnotes to unaudited financial statements.

 

4

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** **

**Gander Mountain Company**

**Notesto Unaudited Financial Statements**

**QuarterlyPeriod Ended November 3, 2007**

** **

**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 November 3, 2007 and for the 13 and 39 weeksended November 3, 2007 and October 28, 2006, is unaudited and hasbeen prepared on the same basis as the audited annual financial statements. Inthe opinion of management, this unaudited information includes all adjustmentsnecessary for a fair presentation of the interim financial information. All ofthese adjustments are of a normal recurring nature. These interim financialstatements filed on this Form 10-Q and the discussions contained hereinshould be read in conjunction with the annual financial statements and notesincluded in our Annual Report on Form 10-K for the fiscal year ended February 3,2007, as filed with the Securities and Exchange Commission, which includesaudited financial statements for our three fiscal years ended February 3,2007.

 

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**

 

We have three share-based compensation plans:the 2004 Omnibus Stock Plan, the 2002 Stock Option Plan and the Employee StockPurchase Plan. In addition, we granted certain stock option awards in fiscal1998 and fiscal 2002 that were not under a stock-based compensation plan. Weare no longer authorized to grant any awards under the 2002 Stock OptionPlan.  As of November 3, 2007, therewere a total of 3,915,045 options to purchase common stock outstanding underall of our stock option plans and non-plan option awards, with a weightedaverage exercise price of $ 10.40 and a weighted average remaining life of 7.3years.  There were 2,622,593 options thatwere exercisable as of November 3, 2007 with a weighted-average exerciseprice of $11.40.

 

Stock-based compensation expense for the 13weeks ended November 3, 2007 and October 28, 2006, was $447,000 and$296,000, respectively. Stock-based compensation expense for the 39 weeks endedNovember 3, 2007 and October 28, 2006, was $1,278,000 and $904,000,respectively. As of November 3, 2007, there was approximately $3.8 millionof unrecognized compensation expense related to stock options that is expectedto be recognized over a weighted-average period of 2.9 years.

 

During our third quarter of fiscal 2007,there were 150 options exercised with an immaterial aggregate intrinsic valueand immaterial cash proceeds to us.  Forthe first nine months of fiscal 2007, there were 323,543 options exercised withan aggregate intrinsic value of $1,238,000, which generated $2,933,000 in netcash proceeds for us.  There were nooption exercises during the nine months of fiscal 2006.

 

As of November 3, 2007, there were 782,667 shares available forfuture grant under the 2004 Omnibus Stock Plan.

 

5

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| ** **                                                    | ** ** | **13 weeks - November 3, 2007** | ** ** | **13 weeks - October 28, 2006**   | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------|------------|----------------------------------------|------------|
| ** **                                                    | ** ** | **Number of  Shares Under  Option**  | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Number of  Shares Under  Option** | ** ** | **Weighted-  Average  Exercise Price** | ** ** |
| Outstanding - Beginning                                       |       | 3,949,627                            |       | $                                      | 10.39      |   | 4,043,656 |   | $ | 10.29 |   |
| Granted                                                       |       | 43,350                               |       | 9.49                                   |       | 74,000 |   | 5.79 |   |
| Exercised                                                     |       | (150                                 | )          | 5.12                                   |       | — |   | — |   |
| Forfeited                                                     |       | (77,782                              | )          | 9.27                                   |       | (24,828 | ) | 10.01 |   |
| Outstanding -Ending                                           |       | 3,915,045                            |       | $                                      | 10.40      |   | 4,092,828 |   | $ | 10.19 |   |
|                                                          |       |                                 |       |                                   |       |   |   |   |   |
| Weighted-average  Black-Scholes fair value of options granted |       |                                 |       | $                                      | 4.60       |   |   |   | $ | 2.84 |   |

 
| ** **                                                    | ** ** | **39 weeks - November 3, 2007** | ** ** | **39 weeks - October 28, 2006**   | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------|------------|----------------------------------------|------------|
| ** **                                                    | ** ** | **Number of  Shares Under  Option**  | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Number of  Shares Under  Option** | ** ** | **Weighted-  Average  Exercise Price** | ** ** |
| Outstanding - Beginning                                       |       | 3,945,475                            |       | $                                      | 10.16      |   | 3,680,804 |   | $ | 10.84 |   |
| Granted                                                       |       | 534,350                              |       | 11.72                                  |       | 607,867 |   | 6.68 |   |
| Exercised                                                     |       | (323,543                             | )          | 9.07                                   |       | — |   | — |   |
| Forfeited                                                     |       | (241,237                             | )          | 10.89                                  |       | (195,843 | ) | 11.08 |   |
| Outstanding -Ending                                           |       | 3,915,045                            |       | $                                      | 10.40      |   | 4,092,828 |   | $ | 10.19 |   |
|                                                          |       |                                 |       |                                   |       |   |   |   |   |
| Weighted-average Black-Scholes  fair value of options granted |       |                                 |       | $                                      | 5.79       |   |   |   | $ | 3.28 |   |

 

**3. New Accounting Pronouncement**

 

InJune 2006, the Financial Accounting Standards Board (“FASB”) issued FASBInterpretation No. 48, *Accounting for Uncertaintyin Income Taxes* (“FIN 48”), an interpretation of Statement ofFinancial Accounting Standards No. 109, *Accountingfor Income Taxes*.  FIN 48clarifies the accounting for uncertainty in income taxes by prescribing arecognition threshold for tax positions taken or expected to be taken in a taxreturn. The recognition threshold requires that we determine whether it is morelikely than not that a tax position will be sustained upon examination, andthen the position is measured at the largest amount of benefit that is greaterthan 50 percent likely of being realized upon ultimate settlement. Unrecognizedtax benefits are tax benefits claimed on our tax returns that do not meet theserecognition and measurement standards. FIN 48 was effective as of the beginningof the first quarter of fiscal 2007. As of November 3, 2007 and February 3,2007, we believe that no reserves for uncertain income tax positions need to berecorded pursuant to FIN 48.  As aresult, and due to our full valuation allowance, we do not have anyunrecognized tax benefits. Thus, our adoption of FIN 48 did not have a materialimpact on our financial position or results of operations. We do not believethere will be any material changes in our unrecognized tax positions over thenext 12 months.

 

Weare subject to audit by the Internal Revenue Service and states in which weoperate, with respect to income taxes for the prior three years. As of February 3,2007, we have federal and state net operating loss carryforwards ofapproximately $54.5 million expiring between 2016 and 2026.

 

InSeptember 2006, the FASB issued SFAS No. 157, *Fair ValueMeasurements* (“SFAS No. 157”). SFAS No. 157 defines fairvalue, establishes a framework for measuring fair value in generally acceptedaccounting principles and expands disclosures about fair value measurements.SFAS No. 157 applies to other accounting pronouncements that require orpermit fair value measurements, as the FASB previously concluded in thoseaccounting pronouncements that fair value is the relevant measurementattribute. Accordingly, SFAS No. 157 does not require any new fair valuemeasurements. SFAS No. 157 is effective for fiscal years beginning after November 15,2007. We plan to adopt SFAS No. 157 beginning in the first quarter offiscal 2008. We are currently evaluating the impact, if any, the adoption ofSFAS No. 157 will have on our financial position and results ofoperations.

 

6

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InFebruary 2007, the FASB issued SFAS No. 159, *The FairValue Option for Financial Assets and Liabilities — Including an Amendment ofFASB Statement No. 115* (“SFAS No. 159”). SFAS No. 159permits us to choose to measure certain financial assets and liabilities atfair value that are not currently required to be measured at fair value (the “FairValue Option”). Election of the Fair Value Option is made on aninstrument-by-instrument basis and is irrevocable. At the adoption date,unrealized gains and losses on financial assets and liabilities for which theFair Value Option has been elected would be reported as a cumulative adjustmentto beginning retained earnings. If we elect the Fair Value Option for certainfinancial assets and liabilities, we will report unrealized gains and lossesdue to changes in their fair value in earnings at each subsequent reportingdate. SFAS No. 159 is effective for our 2008 fiscal year. We are currentlyevaluating the potential impact of adopting SFAS No. 159 on our financialposition and results of operations.

 

**4.Capital Stock**

 

The authorized capital stock of our companyconsists of 100,000,000 shares of common stock, par value $.01 per share, and5,000,000 shares of preferred stock, par value $.01 per share. As of November 3,2007, there were 20,362,097 shares of common stock and no shares of preferredstock outstanding.

 

Refer to the discussion in Note 11 *— Subsequent Events*regarding the sales of unregistered securities on December 6, 2007 and thecancellation of 357,400 shares of outstanding common stock in November 2007.

 

**5.Credit Facility and Secured Borrowings**

 

***Credit facility***—Our credit facilityprovides us with the capital to fund the operations and growth of ourbusiness.  Our revolving credit facilityhas a limit of $345.0 million, with an option to increase the revolvingfacility limit by another $55.0 million subject to certain terms andconditions. On December 6, 2007, pursuant to an amended and restatedagreement, we agreed with Bank of America, N.A., as agent, and the lendersnamed therein, to add a $40.0 million term loan commitment to the lenders’pre-existing term loan commitment of $20.0 million. The maturity date for theadditional term loan under our amended facility is September 30, 2011. Weused the proceeds of the additional term loan to finance an acquisition andplan to continue to utilize the other proceeds of the credit facility forworking capital and general corporate purposes.

 

Outstandingborrowings under the credit facility, including letters of credit, were $316.2million and $267.6 million as of November 3, 2007 and October 28,2006 , respectively.  Actual availabilityunder the amended credit facility is limited to specific advance rates oneligible inventory and accounts receivable. Typically, availability will behighest in the latter half of our fiscal year as inventory levels and advancerates increase. Based on eligible inventory and accounts receivable balances asof November 3, 2007 and October 28, 2006 , our available borrowingcapacity under the credit facility, after subtracting letters of credit, was$48.8 million and $27.4 million, respectively.

 

Prior to December 6, 2007, the creditfacility specified testing of the EBITDA covenant when our availability wasless than 10% of the lesser of (a) the revolving credit facility maximumon any given day or (b) the borrowing base, as defined. It also requiredquarterly testing of the operating cash flow covenant. The December 6,2007 amendment and restatement of our credit facility replaced these formercovenants relating to EBITDA and minimum operating cash flow with a minimumexcess availability reserve covenant. As of November 3, 2007, we were incompliance with all covenants of the credit facility, as amended and restatedon December 6, 2007.

 

***Secured Borrowings***—During fiscal 2007, we entered intoagreements with two banks that allowed us to finance capital expenditures ofcertain of our new stores under long-term, secured financing arrangements. In June 2007,in exchange for $7.3 million, we issued a promissory note carrying a fixedinterest rate of 8.7% and a five year repayment term. In September 2007,in exchange for $5.5 million, we issued a promissory note carrying a fixedinterest rate of 8.0% and a four year repayment term. Monthly payments ofprincipal and interest are made under these notes, which are secured by certainproperty and equipment of 18 new stores we opened in fiscal 2007, 2006 and2005.

 

7

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**6.Earnings Per Share**

 

Basic and diluted income orloss per share is based upon the weighted average number of sharesoutstanding.  Diluted loss per share forthe 13 and 39 weeks ended November 3, 2007 and the 39 weeks ended October 28,2006, excludes potentially dilutive stock options from the calculation ofweighted average shares outstanding because including them would have ananti-dilutive effect on loss per share. Diluted income per common share for the13 weeks ended October 28, 2006 includes potentially dilutive stockoptions determined by applying the treasury stock method.

 

As of November 3, 2007and October 28, 2006, there were a total of 3,915,045 and 4,092,828options to purchase common stock outstanding, respectively.

 

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

 
| **Other Assets**                    | ** ** | **November 3,  2007** | ** ** | **February 3,  2007** | ** ** |
|-------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Goodwill                            |       | $                          | 6,573      |                       | $          | 2,837 |   |
| Loan Fees                           |       | 1,831                      |       | 1,762                      |       |
| Deposits and long term  prepayments |       | 1,233                      |       | 1,099                      |       |
| Non-Compete agreements              |       | 632                        |       | —                     |       |
| **Other Non Current Assets**        |       | $                          | 10,269     |                       | $          | 5,698 |   |

 
| **Accrued and other current  liabilities consist of:** | ** ** | **November 3,  2007** | ** ** | **February 3,  2007** | ** ** |
|--------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Gift cards and gift  certificate liabilities           |       | $                          | 16,279     |                       | $          | 25,616 |   |
| Payroll and related fringe  benefits                   |       | 6,701                      |       | 6,456                      |       |
| Sales, property and use  taxes                         |       | 9,025                      |       | 5,530                      |       |
| Lease related costs                                    |       | 1,436                      |       | 1,325                      |       |
| Insurance reserves and  liabilities                    |       | 1,792                      |       | 2,014                      |       |
| Interest                                               |       | 866                        |       | 391                        |       |
| Due-to-related parties                                 |       | —                     |       | 22                         |       |
| Other accruals and current  liabilities                |       | 13,412                     |       | 6,679                      |       |
| **Accrued and other current liabilities**              |       | $                          | 49,511     |                       | $          | 48,032 |   |

 
| **Long term debt consists of:** | ** ** | **November 3,  2007** | ** ** | **February 3,  2007** | ** ** |
|---------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Capitalized lease  obligations  |       | 11,576                     |       | 11,428                     |       |
| Notes Payable                   |       | 14,325                     |       | 4,993                      |       |
| **Long term debt**              |       | $                          | 25,901     |                       | $          | 16,421 |   |
|                                 |            |                            |            |                            |            |  |  |

 
| **Other long-term liabilities  consist of:** | ** ** | **November 3,  2007** | ** ** | **February 3,  2007** | ** ** |
|----------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Deferred rent                                |       | $                          | 25,958     |                       | $          | 25,310 |   |
| Insurance reserves and  other liabilities    |       | 1,707                      |       | 2,033                      |       |
| **Other long-term liabilities**              |       | $                          | 27,665     |                       | $          | 27,343 |   |

 

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**8. Acquisition of Business**

 

InSeptember 2007, we acquired a competitor’s business consisting of a retailstore that was selling similar outdoor lifestyle products and which was locatedwithin close proximity to one of our retail stores. The purchase price paid incash was $7.1 million including transaction costs. The acquisition wasaccounted for using the purchase method of accounting in accordance with SFAS No. 141,*Business Combinations*. The purchaseprice allocation resulted in an excess of purchase price over net tangibleassets acquired of $3.7 million. Substantially all of the excess was attributedto goodwill except for $250,000 which was allocated to a covenantnot-to-compete agreement. The goodwill will not be subject to amortization forbook purposes but rather an annual impairment test for recoverability. Thegoodwill will be deductible for tax purposes. We have closed the competitor’sstore and transferred the operation and assets to our location.  Results of the acquired business have beenincluded in our operations from the date of the acquisition.

 

**9. Supplemental Cash Flow Information**

 

Duringthe 39 weeks ended November 3, 2007 and October 28, 2006, we acquiredequipment totaling $2.6 million and $1.2 million, respectively, that wasfinanced through capital leases. Purchases of property and equipment in thestatement of cash flows exclude these amounts.

 

**10. Contingencies**

 

***TrademarkLitigation—***OnJuly 2, 2004, we filed a complaint in the U.S. District Court for theDistrict of Minnesota seeking declaratory relief that the contingent trademarklicensing provision of a noncompetition agreement dated May 16, 1996, madebetween our predecessor and Cabela’s Incorporated, is invalid andunenforceable. Although the noncompetition provisions of the noncompetitionagreement expired in June 2003, Cabela’s contends that a contingenttrademark licensing provision of the noncompetition agreement now requires usto grant Cabela’s a license that would preclude our use of certain of ourtrademarks for direct marketing purposes.

 

On July 10, 2007,the U.S. District Court issued an order granting our motion for summaryjudgment, ruling that the contingent trademark licensing provision was unenforceable.  The order provides, in part, that we are freeto use our trademarks in all respects including direct marketing toconsumers.  Cabela’s has appealed theruling to the U.S. Court of Appeals, 8th Circuit.

 

We are not able topredict the ultimate outcome of this litigation, but it could be costly anddisruptive. The total costs may not be reasonably estimated at this time.  If the July 10, 2007 order is reversed,subsequent proceedings might impact the manner in which we market our productsin certain distribution channels in the future. Such an adverse result is notexpected to have an affect on our marketing of products through our retailstores. Nor would an unfavorable result preclude us from engaging in directmarketing activities using trademarks not in dispute. A favorable result wouldconfirm our right to use the subject trademarks in all direct marketingactivities.

 

***OtherLegal Claims—***Variousclaims and lawsuits arising in the normal course of business may be pendingagainst us from time to time. The subject matter of these proceedings typicallyrelate to commercial disputes, employment issues, product liability and othermatters. As of the date of this report, we are not a party to any legalproceedings that are expected, individually or in the aggregate, to have amaterial adverse effect on our financial condition or results of operations.

 

**11. Subsequent Events**

 

***Acquisition of Overton’s*****—**On December 6,2007, we completed the acquisition of all of the outstanding equity securitiesof Overton’s Holding Company pursuant to a Securities Purchase Agreement, datedDecember 6, 2007, among our company, Overton’s and the sellers namedtherein.  As a result of thistransaction, Overton’s became a wholly owned subsidiary of our company.  The total purchase price for the acquisitionwas approximately $70.0 million, net of cash acquired,  (including the repayment of Overton’sexisting long term indebtedness at closing), subject to adjustment for certaintransaction and working capital matters. We financed this purchase price with a new term loan, new equityfinancing described below and borrowings under our revolving credit facility.

 

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Overton’sis a leading internet and catalog marketer of specialty water sports andrelated marine accessories.  Overton’sproducts are sold under two principal brands, Overton’s® and Consumers Marine®,through catalogs, websites and three retail showrooms.  Pursuant to a non-compete agreement enteredinto by Overton’s as part of a previous transaction in 2002, Overton’s isrestricted from selling hunting related products until March 2009.

 

***Credit Facility Amendment in Connection withAcquisition—***On December 6, 2007, we entered into a FourthAmended and Restated Loan and Security Agreement with Bank of America, N.A., asagent and the lenders named therein.  Theamendment and restatement was effected to add a $40.0 million term loan to oursecured credit facility to finance our acquisition of Overton’s and to makecertain other amendments, including reducing permitted capital expenditures andreplacing former covenants relating to minimum operating cash flow and EBITDAwith a minimum excess availability reserve covenant.  The minimum excess availability reserve is5.0% through July 2009 and 7.5% thereafter.  The additional term loan has a four yearmaturity with interest only payments in year one, mandatory semi-annualprincipal payments in years two and three, and mandatory quarterly principalpayments in year four that will fully amortize the loan.  Interest on the additional term loan will beon a tiered schedule ranging from LIBOR plus 3.375% to LIBOR plus 3.875%, basedon the principal amount outstanding.  Theadditional term loan may be prepaid at any time without penalty, provided thatany such prepayments are subject to specified minimum availability tests.  We will not have the ability to exercise thefeature under our revolving credit facility to increase the credit facility toits maximum amount of $400 million, while the additional term loan isoutstanding.  We used all proceeds of theadditional term loan to finance the acquisition of Overton’s.  The amendment and restatement does not changethe interest rates applicable to revolving advances or our previouslyoutstanding term loan.

 

DavidC. Pratt, our Chairman, and Holiday Stationstores, Inc., an affiliate ofRonald A. Erickson, our Vice Chairman, and Gerald A. Erickson, a director ofour company, provided guaranties of the additional term loan to Bank of Americain connection with the financing.  Mr. Prattis guaranteeing up to $40.0 million of the obligations under the additionalterm loan while Holiday is separately guaranteeing up to $9.9 million of theobligations under the additional term loan. Neither Mr. Pratt nor Holiday received any consideration inexchange for their guaranties.

 

***Sale of Securities*****—**On December 6,2007, we entered into Stock Purchase Agreements with GRATCO LLC, an affiliate ofDavid C. Pratt, our Chairman, and with Holiday pursuant to which we sold anaggregate of 4,067,797 shares of ourcommon stock for a per share purchase price of $5.90 and an aggregate purchaseprice of $24,000,002.  GRATCO purchased3,065,000 shares for a purchase price of $18,083,500 and Holiday purchased 1,002,797 shares for a purchaseprice of $5,916,502.

 

***Other Subsequent Events*****—**In November 2007,we accepted the tender of outstanding shares of common stock in exchange forthe cancellation of an outstanding note receivable from a shareholder andformer officer that became due and payable. Accordingly, and in accordance withthe original purchase agreement, we have cancelled and removed $3,500,000 ofnotes receivable and decreased our common stock and additional paid-in-capitalaccounts appropriately. We cancelled 357,400 shares of outstanding common stockin connection with this event.

 

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

 

**ForwardLooking 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 thatcould cause or contribute to such differences include, but are not limited to,those described in Item 1A - “Risk Factors” in our annual report on Form 10-Kfor the fiscal year ended February 3, 2007, as filed with the Securitiesand Exchange Commission.  Readers arecautioned not to place undue reliance on these forward-looking statements,which speak only as of the date of this report. We undertake no obligation torevise any forward-looking statements in order to reflect events orcircumstances that may subsequently arise. Readers are urged to carefullyreview and consider the various disclosures made by us in this report and inour other reports filed with the Commission that advise interested parties ofthe risks and factors that may affect our business.

 

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The interim financialsstatements filed on this Form 10-Q and the discussions contained hereinshould be read in conjunction with the annual financial statements and notesincluded in our Form 10-K, as filed with the Securities and ExchangeCommission, which includes audited financial statements for our three fiscalyears ended February 3, 2007.

 

**Overview**

 

GanderMountain Company operates the nation’s largest retail network of storesspecializing in hunting, fishing, camping, marine and outdoor lifestyleproducts and services. As of November 3, 2007, we expanded our store baseto 115 conveniently located Gander Mountain outdoor lifestyle stores, providingapproximately 6.2 million square feet of retail space in 23 states: Alabama,Arkansas, Colorado, Florida, Illinois, Indiana, Iowa, Kansas, Kentucky, Maryland,Michigan, Minnesota, Mississippi, New York, North Carolina, North Dakota, Ohio,Pennsylvania, Tennessee, Texas, Virginia, West Virginia and Wisconsin. We haveopened 13 new stores in fiscal 2007, including three relocations.  Four new stores were opened in the first halfof fiscal 2007, including one relocated store and nine new stores were openedin the second half of fiscal 2007, including two relocated stores. We havecompleted our opening of new stores for fiscal 2007.  As of November 3, 2007, we have 25% ofour stores located in southern markets as compared to 19% at February 3,2007. Our store locations are as indicated in the table below:

 
| **States and Number of Stores** |
|---------------------------------|
| **Northern  Markets**           | ** ** | **Southern  Markets** |
| Colorado                        |   | 2 |   | Alabama |   | 1 |
| Illinois                        |   | 4 |   | Arkansas |   | 1 |
| Indiana                         |   | 6 |   | Florida |   | 3 |
| Iowa                            |   | 2 |   | Kansas |   | 1 |
| Maryland                        |   | 1 |   | Kentucky |   | 2 |
| Michigan                        |   | 14 |   | Mississippi |   | 1 |
| Minnesota                       |   | 13 |   | North Carolina |   | 3 |
| New York                        |   | 9 |   | Tennessee |   | 2 |
| North Dakota                    |   | 1 |   | Texas |   | 11 |
| Ohio                            |   | 9 |   | Virginia |   | 3 |
| Pennsylvania                    |   | 11 |   | West Virginia |   | 1 |
| Wisconsin                       |   | 14 |   |   |   |   |
|                            | ** ** | **86** | ** ** | ** ** | ** ** | **29** |

 

Ourcore strategy and focus is to provide our target customers with a uniquecombination of a broad assortment of outdoor equipment, accessories, relatedtechnical apparel and footwear; expert services; convenient locations; andvalue pricing. Our stores feature an extensive selection of leading nationaland regional brands as well as our company’s owned brands. We tailor ourmerchandise assortments to take advantage of our customers’ seasonal andregional or local preferences. We seek to combine this broad product offeringwith superior customer service based on our store associates’ extensive productknowledge and outdoor-related experience.

 

Sinceits origin in 1960, our brand name has had a heritage of strong appeal andrelevance to consumers who participate in outdoor sports and recreationactivities, based on our “We Live Outdoors” culture and theme. From 1960 to1996, our predecessor operated a nationwide catalog business that, by 1996,included 17 retail stores. In 1996 and 1997, Holiday Companies, which at thetime owned and operated a group of retail sporting goods stores, acquired theseGander Mountain retail stores, formed our company and began to build a newoutdoor lifestyle business.

 

InMarch 2003, we began transforming our market position from a traditionalspecialty store to a large-format, category-focused store by opening new storesin a large format and increasing the selling space within our original,small-format stores. Prior to March 2003, our typical store wasapproximately 31,000 square feet. Our large-format stores range fromapproximately 50,000 to 100,000 square feet, with our current focus primarilyupon stores of 60,000 to 65,000 square feet with an outside selling area. Ourlarge-format stores generally are located with convenient access to a majorhighway and have a warehouse-style shopping environment characterized byconcrete floors, open-bar joist ceilings, high-density racking and wide aisles.To further build upon our brand’s reputation for high quality and exceptionalvalue, in certain markets we are outfitting stores with additional featuressuch as brick and stone accents, log-wrapped columns, and improved branding,fixture, flooring and signage elements.

 

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Thelarger format enables us to offer more products and services to ourcustomers.  Our large-format stores offerunique features and specialized services, including a full-service gunsmithshop, a full-service archery pro shop, archery target lanes, and a power shopperforming repairs for ATVs, boats and other engines. Some of the large-formatstores also include a bait shop that opens early for the convenience of ourcustomers. Nearly all of our stores have a Gander Mountain Lodge, which is anin-store meeting room available for public use, where we provide hunter safetyclasses, outdoor-skills seminars and other community-focused activities. Manyof our large-format stores utilize adjacent outside selling areas to displayadditional offerings of larger items such as ATVs, boats, kayaks, trailers andcanoes. The outside selling areas increase the efficiency of our stores andoffer greater visibility for the products displayed. As of November 3,2007,  68 of our 115 stores were in ourlarge format.

 

InJanuary 2007, we and Tracker Marine Group, a division of Bass Pro Shops,announced that the popular Tracker Marine Group boat brands will be featured inour stores. Our roll-out of this expanded boat program, which also features theCrestliner, Mercury and Yamaha brands, began mid-quarter of our first quarterof fiscal 2007.  Brand offerings aretailored in each location based on market and store dynamics and customerpreferences. We are currently evaluating the breadth and depth of ourpowersports and service offerings across our retail network in light of currenteconomic conditions and the lower margins we realize on sales of ATVs and boats.We expect to reduce the number of stores in which we offer ATVs, boats andpower shop services based on the results of the evaluation. We will continue tooffer ATVs, boats and power shop services in our larger format stores where webelieve market opportunities exist.

 

Weutilize several strategic and operating initiatives aimed at improving ourmerchandise offerings, enhancing profitability and expanding the number andgeographic diversity of our stores. We measure performance using such keyoperating statistics as comparable store sales, sales per square foot, grossmargin percentage and store operating expenses, with a focus on labor, as apercentage 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 ownedinventory at various times based on payment terms from our vendors. The mostsignificant investments in property and equipment are made at the time a store isopened by us.

 

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. The mix of merchandise in our total sales alsoinfluences our product gross margins. As we continue sales and store growth, anumber of other factors may impact, positively or negatively, our product grossmargin percentage, including:

 

·                  the introduction of new product categorieswith varying gross margin percentage characteristics,

 

·                  changes in the merchandise mix at our currentlocations,

 

·                  differences in merchandise mix by geographiclocation,

 

·                  price competition,

 

·                  clearance activities in connection withseasonal inventory management,

 

·                  closeout sales in connection with storerelocations and consolidations,

 

·                  sourcing of products from locations outsidethe United States,

 

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·                  vendor programs, and

 

·                  supply chain enhancements.

 

Inaddition, our gross margin includes the impacts of store occupancy anddistribution costs. We monitor these costs in absolute dollars and as apercentage of sales.

 

Themost significant store operating expenses are labor and related employeebenefits and advertising. Our employee benefits include health insurance, thecost of which continues to increase faster than the general rate of inflation.We continually monitor this cost and review strategies to effectively controlincreases, but we are subject to the overall trend of increases in health carecosts. Advertising costs are monitored as a percentage of sales. These costsare largely variable, which allows us to actively manage them to facilitateachieving our sales, gross margin percentage and store operating contributionobjectives.

 

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 significant investments in infrastructure, including ourinformation systems, distribution capabilities and personnel. Our currentinfrastructure facilitates our planned opening of stores. We expect theseexpenses to decrease as a percentage of sales over time.

 

Pre-opening expenses will continue to berelated to store openings, including relocations. These expenses will fluctuatebased on the number and timing of new store openings. Beginning in the secondquarter of fiscal 2007, pre-opening expenses also include the costs incurred inpreparing to launch a direct channel offering to customers through ane-commerce web site.

 

Inventoryturns are based on cost of sales and average inventory for the applicableperiod. We recognize that our inventory turns may be lower than those of otherretailers, which we believe is due, in part, to the categories of merchandisewe carry, including firearms, and the large quantities of merchandise we use inour in-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.

 

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.

 

*StrategicAcquisition*

 

OnDecember 6, 2007, we completed the acquisition of all of the outstandingequity securities of Overton’s Holding Company pursuant to a SecuritiesPurchase Agreement. As a result of this transaction, Overton’s became a whollyowned subsidiary of our company.

 

Overton’sis a leading internet and catalog marketer of specialty water sports andrelated marine accessories.  Overton’sproduct line includes water skis, wakeboards, dive gear, apparel, footwear,marine electronics, GPS devices, boat maintenance and repair, trailers, andboat accessories.  Overton’s products aresold under two principal brands, Overton’s® and Consumers Marine®,through catalogs, websites and three retail showrooms.  The acquisition of Overton’s will enable usto accelerate our strategy to reach customers through an integrated,multi-channel approach utilizing catalogs, websites and retail stores.  Overton’s will continue to operate under the “Overton’s®”brand as a wholly-owned subsidiary of our company and our retail store networkwill provide an opportunity to further leverage Overton’s catalog distributionby reaching our customers, many of whom are pre-disposed to boating, fishingand similar outdoor lifestyle activities.

 

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Overton’slatest full year sales were approximately $90.0 million. Like us Overton’s alsooperates a highly seasonal business with approximately 70% of its salesoccurring in the first and second quarters of our fiscal year, with thehistorically highest sales month being June. We believe the seasonality of Overton’s business will reduce seasonalfluctuations in our consolidated business. Overton’s gross margins on products in the aggregate are higher thanours.  Thus, we expect the inclusion ofOverton’s results of operations with ours should favorably impact ourconsolidated gross margin.

 

Pursuantto a non-compete agreement entered into by Overton’s as part of a previoustransaction in 2002, Overton’s is restricted from selling hunting-relatedproducts, as defined in the agreement, until March 2009.  Between our and Overton’s capabilities andresources, we will be able to feature a full complement of internet and catalogofferings.

 

**CriticalAccounting Policies and Use of Estimates**

 

Our financial statements areprepared in accordance with U.S. generally accepted accounting principles.  In connection with the preparation of the financialstatements, we are required to make assumptions, make estimates and applyjudgments that affect the reported amounts of assets, liabilities, revenue,expenses and the related disclosures.  Webase our assumptions, estimates and judgments on historical experience, currenttrends and other factors that we believe to be relevant at the time thefinancial statements are prepared. On a regular basis, we review the accountingpolicies, assumptions, estimates and judgments to ensure that our financial statementsare presented fairly and in accordance with U.S. generally accepted accountingprinciples. However, because future events and their effects cannot bedetermined with certainty, actual results could differ from our assumptions andestimates, 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 February 3,2007.

 

**Resultsof Operations**

 

Thefollowing table represents our unaudited statements of operations reflected asa percentage of sales:

 
| ** **                          | ** ** | **13 Weeks Ended** | ** ** | **39 Weeks Ended** | ** ** |
|-------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                          | ** ** | **November 3,**    | ** ** | **October 28,**    | ** ** | **November 3,** | ** ** | **October 28,** | ** ** |
| ** **                          | ** ** | **2007**           | ** ** | **2006**           | ** ** | **2007** | ** ** | **2006** | ** ** |
| Sales                               |       | 100.0              | %          | 100.0              | %          | 100.0 | % | 100.0 | % |
| Cost of goods sold                  |       | 73.0               | %          | 74.5               | %          | 76.1 | % | 77.1 | % |
| Gross profit                        |       | 27.0               | %          | 25.5               | %          | 23.9 | % | 22.9 | % |
|                                |       |               |       |               |       |   |   |   |   |
| Operating expenses:                 |       |               |       |               |       |   |   |   |   |
| Store operating expenses            |       | 20.6               | %          | 18.1               | %          | 21.1 | % | 20.0 | % |
| General and administrative expenses |       | 5.0                | %          | 4.3                | %          | 5.6 | % | 5.0 | % |
| Pre-opening expenses                |       | 1.2                | %          | 0.7                | %          | 0.8 | % | 0.6 | % |
| Gain on insurance settlement        |       | 0.0                | %          | (0.6               | )%         | 0.0 | % | (0.2 | )% |
| Income (loss) from operations       |       | 0.2                | %          | 3.0                | %          | (3.6 | )% | (2.5 | )% |
| Interest expense, net               |       | 2.2                | %          | 2.2                | %          | 2.2 | % | 2.4 | % |
| Income (loss) before  income taxes  |       | (2.0               | )%         | 0.8                | %          | (5.8 | )% | (4.9 | )% |
| Income tax provision                |       | 0.0                | %          | 0.0                | %          | 0.0 | % | 0.0 | % |
| Net income (loss)                   |       | (2.0               | )%         | 0.8                | %          | (5.8 | )% | (4.9 | )% |

 

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Astore is included in the comparable store base in its fifteenth full month ofoperations.  A relocated store returns tothe comparable store base in its fifteenth full month after relocation.Non-comparable store sales include sales from our stores before they have beguntheir fifteenth month of operation.

 

Cost of goods sold includes the cost ofmerchandise, freight, distribution, inventory shrinkage and store occupancycosts. Store occupancy costs include rent, real estate taxes and common areamaintenance charges. Initial product margin represents sales less the supplier’scost of merchandise only.

 

Store operating expenses include storeassociate payroll, taxes and fringe benefits, advertising, maintenance,utilities, depreciation, insurance, bank and credit card charges and otherstore level expenses.

 

General and administrative expensesinclude all expenses associated with operating our corporate headquarters.

 

Pre-opening expenses consist primarily ofpayroll, rent, recruiting, advertising and other costs incurred prior to a newstore opening. Beginning in the second quarter of fiscal 2007, pre-openingexpenses also include the costs incurred in preparing to launch a directchannel offering to customers through an e-commerce web site.

 

The following table represents our salesby major product category stated as a percentage:

 
| ***Sales by Product  Category***             | ** ** | **13 Weeks Ended** | ** ** |
|----------------------------------------------|------------|--------------------|------------|
| ** **                                   | ** ** | **November 3,**    | ** ** | **October 28,** | ** ** |
| ** **                                   | ** ** | **2007**           | ** ** | **2006** | ** ** |
| Hunting and Firearms/ammo                    |       | 51.9               | %          | 52.5 | % |
| Fishing and Marine                           |       | 9.7                | %          | 9.2 | % |
| Camping, Paddlesports and Backyard Equipment |       | 6.2                | %          | 6.5 | % |
| Apparel and Footwear                         |       | 23.0               | %          | 24.3 | % |
| Powersports                                  |       | 6.3                | %          | 4.4 | % |
| Other                                        |       | 2.9                | %          | 3.1 | % |
| TOTAL                                        |       | 100.0              | %          | 100.0 | % |

 

 

Powersports includes sales of boats, ATVs andaccessories.  The Other category includessales of food and candy, gifts, home décor and parts and service.

 

***Thirteen Weeks Ended November 3, 2007 compared to Thirteen WeeksEnded October 28, 2006***

 

*Sales.* Sales increased by $13.0 million, or 5.3%, to$259.5 million in the third quarter of fiscal 2007 from $246.5 million in thethird quarter of fiscal 2006. This increase resulted primarily from sales of$35.2 million from new stores not yet included in the comparable store salesbase, partially offset by a comparable store sales decrease of $19.2 millionand a $3.0 million sales decrease from relocated or consolidated stores andchanges in other revenues. Comparable store sales decreased 8.4% compared to anincrease of 7.4% in the third quarter of fiscal 2006. We opened nine new storesduring the third quarter of fiscal 2007, including two relocations, compared tofive new stores during the third quarter of fiscal 2006. Total square footageas of November 3, 2007 increased 13.8% to 6.2 million square feet, ascompared to October 28, 2006.

 

Webelieve the comparable store sales decrease was impacted by worsening overalleconomic conditions, including credit concerns, housing market foreclosures,rising fuel and food prices, and decreased consumer confidence. Warm and dryweather conditions in specific markets, particularly in September andOctober, also contributed to weak sales. The sales weakness was present in all of our regions.

 

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*Gross Profit.* Gross profit increased by $7.2 million,or 11.4%, to $70.1 million in the third quarter of fiscal 2007 from $62.9million in the third quarter of fiscal 2006. As a percentage of sales, grossprofit increased 150 basis points to 27.0% in the third quarter of fiscal 2007from 25.5% in the third quarter of fiscal 2006. The primary factors affecting gross profit in the current quarter werean initial product margin increase of 260 basis points as we benefited from ageneral improvement in overall pricing structure, reduced clearance activityand increased penetration of our owned brands from 10.9% to 13.0%.  The sales mix had a slightly negative impacton initial margin resulting primarily from increased lower-margin powersportssales and decreased higher-margin apparel sales.  Gross profit was negatively impactedapproximately 70 basis points due to sales de-leverage in occupancy costs as aresult of the comparable stores sales decrease.

 

*Store Operating Expenses.*  Store operating expenses increased by $8.8million, or 19.8%, to $53.4 million in the third quarter of fiscal 2007 from$44.6 million in the third quarter of fiscal 2006, primarily due to new storegrowth. As a percentage of sales, store operating expenses increased 250 basispoints to 20.6% in the third quarter of fiscal 2007 from 18.1% in the thirdquarter of fiscal 2006. The increase was primarily attributable to the decreasein comparable store sales. Excluding grand opening expenses, advertising andmarketing expenses were approximately the same in the comparable quarters as apercentage of sales.

 

*General and Administrative Expenses.*  General and administrative expenses increasedby $2.6 million, or 25.1% to $13.1 million in the third quarter of fiscal 2007from $10.5 million in the third quarter of fiscal 2006. As a percentage ofsales, general and administrative expenses increased 80 basis points to 5.0 %in the third quarter of fiscal 2007 from 4.3% in the third quarter of fiscal2006. The increase as a percentage of sales was primarily due to severancecosts of $1.2 million and de-leverage as a result of the comparable storessales decrease.

 

*Pre-opening Expenses.*  Pre-opening expenses increased $1.4 million,or 79.1%, to $3.2 million in the third quarter of fiscal 2007 from $1.8 millionin the third quarter of fiscal 2006. We opened nine new stores in the thirdquarter of fiscal 2007 compared to five new stores in the third quarter offiscal 2006. Pre-opening expenses in fiscal 2007 also include approximately$0.2 million of costs related to the development of a direct channel offeringto customers through an e-commerce web site.

 

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

 

*Interest Expense, net.*  Interest expense increased $0.1 million to$5.5 million in the third quarter of fiscal 2007 from $5.4 million in the thirdquarter of fiscal 2006. Average outstanding borrowings for the current quarterincreased approximately 9% as compared to the average outstanding borrowingsfor the third quarter of fiscal 2006. The increase was due to increased cashused in operations primarily to acquire additional inventory, increased cashused to purchase property and equipment and to purchase a competing business asdescribed above, offset by a reduction in debt resulting from the applicationof proceeds from the issuance of $50.0 million of common stock in December 2006.Interest expense was further reduced by an approximately 65-basis pointdecrease in interest rates due to general interest rate declines and as aresult of our February 28, 2007 amendment to our credit facility.

 

*Income Tax Provision.* We did not record an incometax provision for the third quarters of fiscal 2007 or fiscal 2006 due to theuncertainty of the realization of the net operating loss carry forwards. Wehave determined the realization of the tax benefit related to our net deferredtax asset is uncertain at this time and a valuation allowance was recorded forthe entire balance of our net deferred tax asset.

 

*Net Loss.*As a result of the factors discussed above, the netloss was $5.1 million for the third quarter of fiscal 2007, as compared to netincome of $2.0 million for the third quarter of fiscal 2006.

 

***Thirty-Nine Weeks Ended November 3, 2007 compared to Thirty-NineWeeks Ended October 28, 2006.***

 

*Sales.*  Salesincreased by $67.2 million, or 11.5%, to $651.8 million in the first ninemonths of fiscal 2007 from $584.6 million in the first nine months of fiscal2006. This increase resulted primarily from sales of $83.1 million from newstores not yet included in the comparable store sales base, partially offset bya comparable store sales decrease of $10.4 million and a $5.5 million salesdecrease from relocated or consolidated stores and changes in other revenues.Comparable store sales decreased 1.9% compared to a decrease of 2.0% in thefirst nine months of fiscal 2006. We opened thirteen new stores during thefirst nine months of fiscal 2007, including three relocations, compared toeight new stores during the first nine months of fiscal 2006, including onerelocation.

 

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The comparable store salesdecrease was the result of sales weakness across all regions in the thirdquarter of fiscal 2007, which we believe was due to weaker overall economicconditions. The third quarter decrease more than offset the 2.7% increasein sales performance in the first half of fiscal 2007. Overall sales performance was enhanced inthe first six months of fiscal 2007 by the increase in powersports salesgenerated by the rollout of our boat offering across 34 stores, and by strengthin firearms/ammunition and footwear. For the nine months of fiscal 2007, withthe exception of powersports, all major merchandise categories declined on acomparable store basis.

 

*Gross Profit.* Gross profitincreased by $21.5 million, or 16.1%, to $155.5 million in the first ninemonths of fiscal 2007 from $134.0 million in the first nine months of fiscal2006. As a percentage of sales, gross profit increased approximately 100 basispoints to 23.9% in the first nine months of fiscal 2007 from 22.9% in the firstnine months of fiscal 2006.

 

The primary factors affecting grossprofit in the first nine months of fiscal 2007 were an initial margin increaseof approximately 180 basis points due to continued benefits from purchasingleverage and increasing scale, a general improvement in overall pricingstructure related to our Everyday-Low-Price strategy, and lower clearanceactivities. These were partially offset by an 80 basis point decreaseattributable to the shift in sales mix resulting from increased lower-marginpowersports sales and decreased higher-margin apparel sales and a 10 basispoints decrease due to de-leverage in store occupancy costs.

 

*Store Operating Expenses.*  Store operating expenses increased by $20.8million, or 17.8%, to $137.7 million in the first nine months of fiscal 2007from $116.9 million in the first nine months of fiscal 2006. As a percentage ofsales, store operating expenses increased approximately 110 basis points to21.1% in the first nine months of fiscal 2007 from 20.0% in the first ninemonths of fiscal 2006. During the first six months of fiscal 2007 improvedstore labor productivity and favorable trends in insurance claims for which weare self-insured, resulted in leverage as a percentage of sales, but wereoffset by early start-up costs (first quarter) related to the roll-out of theTracker Marine boat program and a new incentive compensation structure (secondquarter). The third quarter comparable store sales decrease de-leveraged storeoperating expenses by approximately 100 basis points for the nine-monthperiod.  Excluding grand openingexpenses, advertising and marketing expense as a percentage of sales wereapproximately the same in the comparable nine-month periods.

 

*General and Administrative Expenses.*  General and administrative expenses increasedby $6.8 million, or 23.2%, to $36.3 million in the first nine months of fiscal2007 from $29.4 million in the first nine months of fiscal 2006. As apercentage of sales, general and administrative expenses increasedapproximately 60 basis points to 5.6% in the first nine months of fiscal 2007from 5.0% in the first nine months of fiscal 2006. The increase as a percentageof sales was primarily due to severance costs of $1.6 million, the newincentive compensation structure implemented in our second quarter of fiscal2007,  as well as increased investment insystems infrastructure and  logisticsconsulting.

 

*Pre-opening Expenses.* Pre-opening expenses increased $1.9 million, or 58.3%, to $5.1 millionin the first nine months of fiscal 2007 from $3.2 million in the first ninemonths of fiscal 2006. We opened 13 new stores in the first nine months offiscal 2007 and we opened eight new stores in the first nine months of fiscal2006. Pre-opening expenses in the first nine months of fiscal 2007 alsoincluded approximately $0.5 million of costs related to the development of adirect channel offering to customers through an e-commerce web site.

 

*Gain on Insurance Settlement*.For the nine months ended October 28, 2006, we recorded a gain of $1.4million in connection with an insurance settlement resulting from flood damageat one of our stores.

 

*Interest Expense, net.*  Interest expense decreased $240,000, or 1.7%, to $14.0 million in the first nine months of fiscal 2007 from $14.3 millionin the first nine months of fiscal 2006. Average outstanding borrowings duringthe first nine months of fiscal 2007 increased 4.0%, as compared to the firstnine months of fiscal 2006, due primarily to increased cash used in operationsprimarily to acquire additional inventory, increased cash used to purchaseproperty and equipment and to purchase a competing business as described above,offset by the reduction of debt from the issuance of $50.0 million of commonstock in December 2006. Interest expense was further reduced by anapproximately 50 basis points decrease in average interest rates due to generalinterest rate declines and as a result of our February 28, 2007 amendmentto our credit facility.

 

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*Income Tax Provision.* We did not record an incometax benefit for the first nine months of fiscal 2007 or fiscal 2006 due to theuncertainty of the realization of the net operating loss carry forwards. Wehave determined the realization of the tax benefit related to our net deferredtax asset is uncertain at this time and a valuation allowance was recorded forthe entire balance of our net deferred tax asset.

 

*Net Loss.*As a result of the factors discussed above, the netloss of $37.6 million for the first nine months of fiscal 2007 represented anincrease of $9.1 million from the net loss of $28.5 million for the first ninemonths of fiscal 2006.

 

**Liquidityand Capital Resources**

 

Ourprimary capital requirements are for inventory, property and equipment 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 thefirst nine months of fiscal 2007 increased by $38.8 million to $104.8 million,as compared to $66.0 million for the first nine months of fiscal 2006. This wasprimarily the result of the $31.2 million of inventory growth and the increasednet loss in the first nine months of fiscal 2007 as compared to the first ninemonths of fiscal 2006. Additional new stores, increased inventory levels inpowersports resulting from the roll-out of the Tracker Marine boat program,increased ATV inventory as a result of more large-format stores that carry ATVsand our tactical efforts to merchandise certain seasonal inventory in ourstores earlier, all contributed to the increased inventories. Funding fromincreased levels of accounts payable and accrued expenses provided $9.3 millionless in the first nine months of fiscal 2007 versus the first nine months offiscal 2006.

 

*Investing Activities*.  Net cash used in investing activities was$47.6 million in the first nine months of fiscal 2007 and $23.8 million inthe first nine months of fiscal 2006. We used cash primarily for equipment toopen new stores, for information technology equipment at our corporate officesand to upgrade existing stores. The increase in net cash used of $23.8 millionwas due to more new stores opened in the first nine months of fiscal 2007 thanthe comparable period in fiscal 2006, the acquisition of a business for $7.1million in the third quarter of fiscal 2007, and $5.2 million in proceeds froman insurance settlement and $2.1 million in proceeds from the sale of assets,both in fiscal 2006, which we did not experience in fiscal 2007. During thefirst nine months of fiscal 2007  and fiscal2006, we acquired equipment totaling approximately $2.6 million and $1.2million, respectively, that was financed through capital leases. These amountsare excluded from purchases of property and equipment in the statements of cashflows.

 

*Financing Activities*. * *Net cash provided by financingactivities for the first nine months of fiscal 2007 increased by $63.1 millionto $152.8 million, as compared to $89.7 million in the first nine months offiscal 2006. Increased net borrowings under our credit facility accounted for$54.1 million of this increase, with these borrowings being utilized to fundthe increase in cash used in operations of $38.8 million and $23.8 million ofadditional cash used for investing activities.Our financing activities wereutilized to fund our continued store and business expansion, includinginventory and property and equipment, and to fund our seasonal operatinglosses. Additional funding sources for these cash needs during the first ninemonths of fiscal 2007 included proceeds of $2.9 million from the exercise of stockoptions.

 

During fiscal 2007, we entered intoagreements with two banks that allowed us to finance capital expenditures ofcertain of our new stores under long-term, secured financing arrangements. In June 2007,in exchange for $7.3 million, we issued a promissory note carrying a fixedinterest rate of 8.7% and a five year repayment term. In September 2007,in exchange for $5.5 million, we issued a promissory note carrying a fixedinterest rate of 8.0% and a four year repayment term. Monthly payments ofprincipal and interest are made under these notes, which are secured by certainproperty and equipment of 18 new stores we opened in fiscal 2007, 2006 and2005.

 

*Equity Financing.* On December 6, 2007, we entered intoStock Purchase Agreements with GRATCO LLC, an affiliate of David C. Pratt, ourChairman, and with Holiday Stationstores, Inc. pursuant to which we soldan aggregate of 4,067,797 shares ofour common stock for a per share purchase price of $5.90 and an aggregatepurchase price of $24,000,002. GRATCO purchased 3,065,000 shares for a purchaseprice of $18,083,500 and Holidaypurchased 1,002,797 shares for a purchase price of $5,916,502.

 

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*Credit Facility.*Our credit facility provides us with the capitalto fund the operations and growth of our business.  Our revolving credit facility has a limit of$345.0 million, with an option to increase the revolving facility limit byanother $55.0 million subject to certain terms and conditions

 

Outstandingborrowings under the credit facility, including letters of credit, were $316.2million and $267.6 million as of November 3, 2007 and October 28,2006, respectively.  Actual availabilityunder the credit facility is limited to specific advance rates on eligibleinventory and accounts receivable. Typically, availability will be highest inthe latter half of our fiscal year as inventory levels and advance ratesincrease. Based on eligible inventory and accounts receivable balances as of November 3,2007 and October 28, 2006, our available borrowing capacity under thecredit facility, after subtracting letters of credit, was $48.8 million and$27.4 million, respectively.

 

OnDecember 6, 2007, we entered into a Fourth Amended and Restated Loan andSecurity Agreement with Bank of America, N.A., as agent and the lenders namedtherein.  The amendment and restatementwas effected to add a $40.0 million term loan to the pre-existing $20.0 millionterm loan under our secured credit facility and to make certain other amendments,including reducing permitted capital expenditures and replacing formercovenants relating to minimum operating cash flow and EBITDA with a minimumexcess availability reserve covenant. The additional term loan has a four year maturity with interest onlypayments in year one, mandatory semi-annual principal payments in years two andthree, and mandatory quarterly principal payments in year four that will fullyamortize the loan.  Interest on theadditional term loan will be on a tiered schedule ranging from LIBOR plus3.375% to LIBOR plus 3.875%, based on the principal amount outstanding.  The additional term loan may be prepaid atany time without penalty, provided that any such prepayments are subject tospecified minimum availability tests.  Wewill not have the ability to exercise the $55.0 million accordion feature underour revolving credit facility, (i.e., increase the credit facility to $400million), while the additional term loan is outstanding.  We used all proceeds of the additional termloan to finance the acquisition of Overton’s. The amendment and restatement does not change the interest ratesapplicable to revolving advances or our previously outstanding term loan.

 

DavidC. Pratt, our Chairman, and Holiday Stationstores, Inc., an affiliate ofRonald A. Erickson, our Vice Chairman, and Gerald A. Erickson, a director,provided guaranties of the additional term loan to Bank of America inconnection with the financing.  Mr. Prattis guaranteeing up to $40.0 million of the obligations under the additionalterm loan while Holiday is separately guaranteeing up to $9.9 million of theobligations under the additional term loan. Neither Mr. Pratt nor Holiday received any consideration inexchange for their guaranties.

 

Prior to December 6, 2007 the creditfacility specified testing of the EBITDA covenant when our availability wasless than 10% of the lesser of (a) the revolving credit facility maximumon any given day or (b) the borrowing base, as defined. It also requiredquarterly testing of the operating cash flow covenant. The December 6,2007 amendment and restatement of our credit facility replaced these formercovenants relating to EBITDA and minimum operating cash flow with a minimumexcess availability reserve covenant of 5.0% through July 2009 and 7.5%thereafter. As of November 3, 2007, we were in compliance with allcovenants of the credit facility, as amended and restated on December 6,2007.

 

*Income Taxes.*Due to the uncertainty of the realization ofnet operating loss carry forwards, we have determined the realization of thetax benefit related to our net deferred tax asset is uncertain at this time anda valuation allowance was recorded for the entire balance of our net deferredtax asset.

 

*Future Capital Requirements*. Our future capitalrequirements will primarily depend on the number of new stores we open, thetiming of those openings within a given fiscal year and the need to fundseasonal or annual operating losses. These requirements will include costsdirectly related to opening new stores and will also include costs necessary toensure that our infrastructure, including technology and distributioncapabilities, is able to support a larger store base. We opened 8, 19 and 19new stores in each of fiscal 2006, 2005 and 2004, respectively. Our cash usedin investing activities was approximately $28.0 million in fiscal 2006 andapproximately $50.0 million in each fiscal 2005 and fiscal 2004. In the firstnine months of fiscal 2007, we opened 13 new stores, including threerelocations, with capital expenditures of $40.5 million.  As of November 3, 2007, all new storesfor fiscal 2007 have been opened. We anticipate total capital expenditures forpurchases of property and equipment to approximate $45.0 million for the fiscalyear 2007.

 

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Webelieve that we will be able to service our existing stores from ourdistribution center through fiscal 2009. We will need to begin to expand ourdistribution capabilities in the next two to three years as we continue to addnew stores. We have undertaken a project to analyze our future distributionrequirements, develop a strategy to meet our needs, and a plan to implementthat strategy. While we believe this project may require significant capital inthe next 36 months, no material commitments currently exist related to thisproject.  The timing and amount of anyfuture commitment related to this project is dependent on a number of factorsincluding new store growth plans, availability of financing and our operatingperformance.

 

Weincurred approximately $0.5 million of expense and $0.4 million of expendituresfor property and equipment during the first nine months of fiscal 2007 relatedto the development of a direct channel offering to customers through ane-commerce web site. With our acquisition of Overton’s, we have undertaken asignificant step toward our strategy of providing multi-channel offerings toour customers. Since the first quarter of fiscal 2007, we have been developinga set of e-commerce capabilities to deploy in a direct channel strategy and wewill continue to work on this important initiative simultaneously with theintegration of Overton’s. We expect we will continue to make expenditures inthe next 12 months to further this important business objective and we may needto fund up to approximately $1.0 million over the next 12 months includingpre-launch expenses and capital expenditures.

 

In2006, we began a significant effort to upgrade our merchandise and informationsystems that will provide enhanced efficiencies in buying, receiving, payablesmanagement and provide better and more detailed operating information fordecision making and continued supply chain improvement. We expect to continueto evaluate, modify and update our information systems over the next severalyears.

 

Weintend to satisfy our capital requirements in the next 12 months with cashflows from operations, funds available under our expanded credit facility andvarious secured financing arrangements. However, if business conditions,business strategy or other factors change, we may need to seek additional debtor equity financing in the public or private markets. There is no assurancethat financing will be available to us on acceptable terms. We expect to openfive to six new stores in fiscal 2008. We may need additional long-termfinancing to grow our business beyond fiscal 2008.

 

**ContractualObligations and Other Commitments**

 

Our material off-balancesheet arrangements are operating lease obligations for substantially all of ourretail stores, our distribution center and corporate office, as well as lettersof credit.  We excluded these items fromthe balance sheet in accordance with U.S. generally accepted accountingprinciples. As of November 3, 2007, the minimum operating lease paymentsdue within one year were $68.4 million. As of November 3, 2007, totalminimum operating lease payments remaining over all of our operating leaseswere $814.9 million. These leases have an average remaining term ofapproximately 10 years and typically provide us with several successive optionsto extend the term at our election. These obligation amounts include futureminimum lease payments and exclude direct operating costs such as common areacosts and real estate taxes.

 

Issued and outstandingletters of credit were $8.7 million and $7.7 million at November 3, 2007and October 28, 2006, respectively, and were related primarily toimporting of merchandise and supporting potential insurance programliabilities.

 

Inthe ordinary course of business, we enter into arrangements with vendors topurchase merchandise in advance of expected delivery. Because most of thesepurchase orders do not contain any termination payments or other penalties ifcanceled, they are not included as outstanding contractual obligations. Themerchandise purchases, for which we do have firm commitments outstanding, inaddition to letters of credit, were $5.7 million and $1.7 million as of November 3,2007 and October 28, 2006, respectively.

 

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**QuarterlyResults of Operations and Seasonality**

 

Our quarterly operating results may fluctuatesignificantly because of several factors, including the timing of new storeopenings and related expenses, profitability of new stores, weather conditionsand general economic conditions. Historically, our business is subject toseasonal fluctuation, with approximately 62% to 65% of our sales activitynormally occurring during the third and fourth quarters of our fiscal year,which are primarily associated with the fall hunting seasons and the holidayseason. Our Overton’s subsidiary experiences a different seasonal fluctuationwith approximately 70.0% of its sales occurring in the first two quarters ofour fiscal year. However, these factors cannot necessarily be used as an indicatorof future results. Our customers’ demand for our products and therefore oursales can be significantly impacted by unseasonable weather conditions thataffect outdoor activities and the demand for related apparel and equipment.This seasonality also impacts our inventory levels, which tend to risebeginning approximately in April, reach a peak in November, and decline tolower levels after the December holiday season.

 

Our pre-opening expenses have and will continue to vary significantlyfrom quarter to quarter, primarily due to the timing of store openings.  We typically incur most pre-opening expensesfor a new store during the three months preceding, and the month of it’sopening. In addition, our labor and operating costs for a newly opened store canbe greater during the first one to two months of operation than what can beexpected after that time, both in aggregate dollars and as a percentage ofsales. Accordingly, the volume and timing of new store openings in any quarterhas had and is expected to continue to have a significant impact on quarterlypre-opening costs and store labor and operating expenses.  Due to these factors, results for anyparticular quarter may not be indicative of results to be expected for anyother quarter or for a full fiscal year.

 

**NewAccounting Pronouncements**

 

InJune 2006, the Financial Accounting Standards Board issued FASBInterpretation No. 48, *Accounting for Uncertaintyin Income Taxes*, an interpretation of Statement of FinancialAccounting Standards No. 109, *Accounting for IncomeTaxes*.  FIN 48 clarifies theaccounting for uncertainty in income taxes by prescribing a recognitionthreshold for tax positions taken or expected to be taken in a tax return. Therecognition threshold requires that we determine whether it is more likely thannot that a tax position will be sustained upon examination, and then theposition is measured at the largest amount of benefit that is greater than 50%likely of being realized upon ultimate settlement. Unrecognized tax benefits aretax benefits claimed on our tax returns that do not meet these recognition andmeasurement standards. FIN 48 was effective as of the beginning of the firstquarter of fiscal 2007. As of November 3, 2007 and February 3, 2007,we believe that no reserves for uncertain income tax positions need to berecorded pursuant to FIN 48.  As aresult, and due to our full valuation allowance, we do not have anyunrecognized tax benefits. Thus, our adoption of FIN 48 did not have a materialimpact on our financial position or results of operations. We do not believethere will be any material changes in our unrecognized tax positions over thenext 12 months.

 

Weare subject to audit by the Internal Revenue Service and states in which weoperate, with respect to income taxes for the prior three years. As of February 3,2007, we have federal and state net operating loss carryforwards ofapproximately $54.5 million expiring between 2016 and 2026.

 

InSeptember 2006, the FASB issued SFAS No. 157, *Fair ValueMeasurements*. SFAS No. 157 defines fair value, establishes aframework for measuring fair value in generally accepted accounting principlesand expands disclosures about fair value measurements. SFAS No. 157applies to other accounting pronouncements that require or permit fair valuemeasurements, as the FASB previously concluded in those accountingpronouncements that fair value is the relevant measurement attribute.Accordingly, SFAS No. 157 does not require any new fair valuemeasurements. 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 offiscal 2008. We are currently evaluating the impact, if any, the adoption ofSFAS No. 157 will have on our financial position and results of operations.

 

InFebruary 2007, the FASB issued SFAS No. 159, *The FairValue Option for Financial Assets and Liabilities — Including an Amendment ofFASB Statement No. 115*. SFAS No. 159 permits us to chooseto measure certain financial assets and liabilities at fair value that are notcurrently required to be measured at fair value. Election of the fair valueoption is made on an instrument-by-instrument basis and is irrevocable. At theadoption date, unrealized gains and losses on financial assets and liabilitiesfor which the fair value option has been elected would be reported as acumulative adjustment to beginning retained earnings. If we elect the fairvalue option for certain financial assets and liabilities, we will reportunrealized gains and losses due to changes in their fair value in earnings ateach subsequent reporting date. SFAS No. 159 is effective for our 2008fiscal year. We are currently evaluating the potential impact of adopting SFAS No. 159on our financial position and results of operations.

 

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**ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

We are exposed to marketrisk from changes in interest rates on borrowings under our credit facility.This floating rate indebtedness was $307.6 million at November 3, 2007 andaveraged $274.4 million during the third quarter of fiscal 2007. Our averageinterest rate for the third quarter of fiscal 2007 under our credit facilitywas approximately 7.0% and was approximately 70 basis points lower than thesame period last year due primarily to general interest rate reductions andreductions we obtained in the pricing structure relative to the revolvingcredit facility and term loan. If short-term floating interest rates on ouraverage variable rate debt for the third quarter of fiscal 2007 had increasedby 100 basis points, our interest expense would have increased by approximately$660,000, assuming comparable borrowing levels. These amounts are determined byconsidering the impact of the hypothetical interest rates on our average amountof floating rate indebtedness outstanding and cash equivalents balances.

 

We have no derivative financial instrumentsor derivative commodity instruments in our cash and cash equivalents.  We have no international sales, however, weimport certain items for sale in our stores. Substantially all of our purchases are denominated in U.S. dollars.

 

**ITEM 4.  CONTROLS AND PROCEDURES**

 

Asof the end of the period covered by this report, we conducted an evaluation, 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) underthe Securities Exchange Act of 1934). Based on this evaluation, the principal executive officer and principalfinancial and accounting officer concluded that our disclosure controls andprocedures are effective to ensure that information required to be disclosed byus in reports that we file or submit under the Securities Exchange Act of 1934is recorded, processed, summarized and reported within the time periodsspecified in Securities and Exchange Commission rules and forms. Ourprincipal executive officer and principal financial and accounting officer alsoconcluded that our disclosure controls and procedures are effective to ensurethat information required to be disclosed in the reports we file or submitunder the Securities Exchange Act of 1934 is accumulated and communicated to ourmanagement, including our principal executive officer and principal financialand accounting officer, to allow timely decisions regarding requireddisclosure.  There was no change in ourinternal control over financial reporting identified in connection with theevaluation required by Rule 13a-15(d) and 15d-15(d) of theSecurities Exchange Act of 1934 that occurred during the period covered by thisreport that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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

####  

**ITEM 1.  LEGAL PROCEEDINGS**

 

***TrademarkLitigation—***OnJuly 2, 2004, we filed a complaint in the U.S. District Court for theDistrict of Minnesota seeking declaratory relief that the contingent trademarklicensing provision of a noncompetition agreement dated May 16, 1996, madebetween our predecessor and Cabela’s Incorporated, is invalid andunenforceable. Although the noncompetition provisions of the noncompetitionagreement expired in June 2003, Cabela’s contends that a contingenttrademark licensing provision of the noncompetition agreement now requires usto grant Cabela’s a license that would preclude our use of certain of ourtrademarks for direct marketing purposes.

 

On July 10, 2007,the U.S. District Court issued an order granting our motion for summaryjudgment, ruling that the contingent trademark licensing provision wasunenforceable.  The order provides, inpart, that we are free to use our trademarks in all respects including directmarketing to consumers.  Cabela’s hasappealed the ruling to the U.S. Court of Appeals, 8th Circuit.

 

We are not able topredict the ultimate outcome of this litigation, but it could be costly anddisruptive. The total costs may not be reasonably estimated at this time.  If the July 10, 2007 order is reversed,subsequent proceedings might impact the manner in which we market our productsin certain distribution channels in the future. Such an adverse result is notexpected to have an affect on our marketing of products through our retailstores. Nor would an unfavorable result preclude us from engaging in directmarketing activities using trademarks not in dispute. A favorable result wouldconfirm our right to use the subject trademarks in all direct marketingactivities.

 

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***OtherLegal Claims—***Variousclaims and lawsuits arising in the normal course of business may be pendingagainst us from time to time. The subject matter of these proceedings typicallyrelate to commercial disputes, employment issues, product liability and othermatters. As of the date of this report, we are not a party to any legalproceedings that are expected, individually or in the aggregate, to have amaterial adverse effect on our financial condition or results of operations.

 

**ITEM 1A.  RISK FACTORS**

 

Notapplicable.

 

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

 

Notapplicable.

 

**ITEM 3.  DEFAULTS UPON SENIOR SECURITIES**

** **

Not applicable.

 

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

 

Notapplicable.

 

**ITEM 5.  OTHER INFORMATION**

 

Not applicable.

 

**ITEM 6.  EXHIBITS**

 

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

 

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**SIGNATURES**

 

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

 
|                   |   |   |   | GANDER MOUNTAIN COMPANY |
|------------------------|--------|--------|--------|-------------------------|
|                   |   |   |   |                    |
|                   |   |   |   |                    |
| December 18, 2007 |   |   |   | By:                     | /s/ Mark R. Baker |   |
|                   |   |   |   |                    | Mark R. Baker |   |
|                   |   |   |   |                    | President and Chief Executive Officer |
|                   |   |   |   |                    | (Principal Executive Officer) |
|                   |   |   |   |                    |   |   |
|                   |   |   |   |                    |   |   |
| December 18, 2007 |   |   |   | By:                     | /s/ Robert J. Vold |   |
|                   |   |   |   |                    | Robert J. Vold |
|                   |   |   |   |                    | Senior Vice President, Chief Financial Officer and  Treasurer |
|                   |   |   |   |                    | (Principal Financial and Accounting Officer) |
|                        |        |        |        |                         |  |  |  |

 

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**EXHIBIT INDEX**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | ** ** | **Method  of Filing**         |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|
| 3.1                  |       | Amended and Restated Articles of Incorporation of  the Registrant                                                                                                                                                                                                                                                                                                                                                                                                                       |       | Incorporated By Reference (1) |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                          |
| 3.2                  |       | Amended and Restated Bylaws of the Registrant                                                                                                                                                                                                                                                                                                                                                                                                                                           |       | Incorporated By Reference (2) |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                          |
| 10.1                 |       | Fourth Amended and Restated Loan and Security  Agreement, dated December 6, 2007, among Gander Mountain Company and the  borrowers named therein, Bank of America, N.A., as administrative agent, Bank  of America Securities, LLC, as the lead arranger, Wells Fargo Foothill, Inc.,  as the syndication agent, The CIT Group/Business Credit, Inc., as  collateral agent, General Electric Capital Corporation, as documentation  agent, and the lenders named therein |       | Incorporated By Reference (3) |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                          |
| 10.2                 |       | Securities Purchase Agreement, dated December 6,  2007, among Gander Mountain Company, Overton’s Holding Company and the  sellers named therein                                                                                                                                                                                                                                                                                                                               |       | Incorporated By Reference (4) |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                          |
| 10.3                 |       | Stock Purchase Agreement, dated December 6,  2007, by and between Gander Mountain Company and GRATCO LLC                                                                                                                                                                                                                                                                                                                                                                           |       | Incorporated By Reference (5) |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                          |
| 10.4                 |       | Stock Purchase Agreement, dated December 6,  2007, by and between Gander Mountain Company and Holiday Stationstores, Inc.                                                                                                                                                                                                                                                                                                                                                     |       | Incorporated By Reference (6) |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                          |
| 31.1                 |       | Rule 13a-14(a)/15d-14(a) Certification by  Principal Executive Officer                                                                                                                                                                                                                                                                                                                                                                                                        |       | Filed Electronically          |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                          |
| 31.2                 |       | Rule 13a-14(a)/15d-14(a) Certification by  Principal Financial and Accounting Officer                                                                                                                                                                                                                                                                                                                                                                                         |       | Filed Electronically          |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                          |
| 32                   |       | Section 1350 Certifications                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       | Filed Electronically          |

 

 

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

 

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

 

(3)          Incorporated by reference to Exhibit 10.1 tothe Registrant’s Current Report on Form 8-K dated December 6, 2007(Commission File No. 000-50659), filed with the Commission on December 7,2007.

 

(4)          Incorporated by reference to Exhibit 2 to theRegistrant’s Current Report on Form 8-K dated December 6, 2007(Commission File No. 000-50659), filed with the Commission on December 7,2007.

 

(5)          Incorporated by reference to Exhibit 10.2 tothe Registrant’s Current Report on Form 8-K dated December 6, 2007(Commission File No. 000-50659), filed with the Commission on December 7,2007.

 

(6)          Incorporated by reference to Exhibit 10.3 tothe Registrant’s Current Report on Form 8-K dated December 6, 2007(Commission File No. 000-50659), filed with the Commission on December 7,2007.

 

 

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