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

** **

**FORM 10-Q**

 

**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**FOR THE QUARTERLY PERIOD ENDED AUGUST 2, 2008.**

 

**Commission File Number:  000-50659**

 

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

 

| ** **                                                     | ** ** | **180 East Fifth Street, Suite 1300**                                                                                    | ** ** | ** **                            |
|----------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|
| ** **                                                     | ** ** | **Saint Paul, Minnesota 55101**                                                                                               | ** ** | ** **                            |
| **Minnesota**                                                  | ** ** | **(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.) |

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes xNo o

 

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

 

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

 

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

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practical date:  Common Stock, $.01 par value; 24,118,755shares outstanding as of September 5, 2008.

 

 

 

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**GANDER MOUNTAIN COMPANY**

**QUARTERLY PERIOD ENDED AUGUST 2, 2008**

**Index**

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

 

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**PART I. FINANCIAL INFORMATION**

 

**ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS**

 

**Gander Mountain Company**

**Consolidated Statements of Operations -Unaudited**

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

 
| ** **                                    | ** ** | **13 Weeks Ended** | ** ** | **26 Weeks Ended** | ** ** |
|-----------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                    | ** ** | **August 2,**           | ** ** | **August 4,**           | ** ** | **August 2,** | ** ** | **August 4,** | ** ** |
| ** **                                    | ** ** | **2008**                     | ** ** | **2007**                     | ** ** | **2008** | ** ** | **2007** | ** ** |
| Sales                                         |       | $                            | 252,873    |                         | $          | 216,511 |   | $ | 460,535 |   | $ | 392,260 |   |
| Cost of goods sold                            |       | 185,390                      |       | 164,975                      |       | 351,023 |   | 306,848 |   |
| Gross profit                                  |       | 67,483                       |       | 51,536                       |       | 109,512 |   | 85,412 |   |
| Operating expenses:                           |       |                         |       |                         |       |   |   |   |   |
| Selling, general and administrative  expenses |       | 66,939                       |       | 55,266                       |       | 125,896 |   | 106,808 |   |
| Exit costs, impairment and other charges      |       | 316                          |       | 292                          |       | 1,092 |   | 626 |   |
| Pre-opening expenses                          |       | 408                          |       | 982                          |       | 2,035 |   | 1,712 |   |
| Loss from operations                          |       | (180                         | )          | (5,004                       | )          | (19,511 | ) | (23,734 | ) |
| Interest expense, net                         |       | 4,509                        |       | 4,530                        |       | 9,351 |   | 8,506 |   |
| Loss before income taxes                      |       | (4,689                       | )          | (9,534                       | )          | (28,862 | ) | (32,240 | ) |
| Income tax provision                          |       | 165                          |       | 125                          |       | 437 |   | 250 |   |
| Net loss                                      |       | $                            | (4,854     | )                            | $          | (9,659 | ) | $ | (29,299 | ) | $ | (32,490 | ) |
|                                          |       |                         |       |                         |       |   |   |   |   |
| Basic and diluted loss per common share       |       | $                            | (0.20      | )                            | $          | (0.48 | ) | $ | (1.22 | ) | $ | (1.61 | ) |
|                                          |       |                         |       |                         |       |   |   |   |   |
| Weighted average common shares outstanding    |       | 24,087                       |       | 20,312                       |       | 24,069 |   | 20,201 |   |

 

See accompanying notes to unauditedconsolidated financial statements

 

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**Gander Mountain Company**

**Consolidated Balance Sheets**

**(In thousands)**

 
| ** **                                                                                                             | ** ** | **August 2,** | ** ** | **February 2,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|----------------------|------------|
| ** **                                                                                                             | ** ** | **2008**           | ** ** | **2008**             | ** ** |
| ** **                                                                                                             | ** ** | **(Unaudited)**    | ** ** | ** **           | ** ** |
| **Assets**                                                                                                             | ** ** | ** **         | ** ** | ** **           | ** ** |
| Current assets:                                                                                                        |       |               |       |                 |       |
| Cash and cash equivalents                                                                                              |       | $                  | 1,666      |                 | $          | 2,622 |   |
| Accounts receivable                                                                                                    |       | 17,852             |       | 10,992               |       |
| Income taxes receivable                                                                                                |       | 454                |       | 486                  |       |
| Inventories                                                                                                            |       | 417,207            |       | 403,683              |       |
| Prepaids and other current assets                                                                                      |       | 19,059             |       | 15,987               |       |
| Total current assets                                                                                                   |       | 456,238            |       | 433,770              |       |
| Property and equipment, net                                                                                            |       | 170,661            |       | 168,685              |       |
| Goodwill                                                                                                               |       | 54,330             |       | 48,803               |       |
| Acquired intangible assets, net                                                                                        |       | 19,483             |       | 25,098               |       |
| Other assets, net                                                                                                      |       | 2,079              |       | 3,576                |       |
| Total assets                                                                                                           |       | $                  | 702,791    |                 | $          | 679,932 |   |
|                                                                                                                   |       |               |       |                 |       |
| **Liabilities and shareholders’ equity**                                                                          |       |               |       |                 |       |
| Current liabilities:                                                                                                   |       |               |       |                 |       |
| Borrowings under credit facility                                                                                       |       | $                  | 259,972    |                 | $          | 246,013 |   |
| Accounts payable                                                                                                       |       | 105,147            |       | 72,563               |       |
| Accrued and other current liabilities                                                                                  |       | 55,433             |       | 60,606               |       |
| Notes payable - related parties                                                                                        |       | 10,000             |       | —               |       |
| Current maturities of long term debt                                                                                   |       | 13,712             |       | 8,247                |       |
| Total current liabilities                                                                                              |       | 444,264            |       | 387,429              |       |
|                                                                                                                   |       |               |       |                 |       |
| Long term debt                                                                                                         |       | 58,284             |       | 64,173               |       |
| Deferred income taxes                                                                                                  |       | 7,322              |       | 7,113                |       |
| Other long term liabilities                                                                                            |       | 27,462             |       | 27,397               |       |
|                                                                                                                   |       |               |       |                 |       |
| Shareholders’ equity:                                                                                             |       |               |       |                 |       |
| Preferred stock ($.01 par value, 5,000,000  shares  authorized; no shares issued and outstanding)                      |       | —             |       | —               |       |
| Common stock ($.01 par value, 100,000,000  shares authorized; 24,118,755 and 24,049,064 shares issued and outstanding) |       | 241                |       | 241                  |       |
| Additional paid-in-capital                                                                                             |       | 278,048            |       | 277,110              |       |
| Accumulated deficit                                                                                                    |       | (112,830           | )          | (83,531              | )          |
| Total shareholders’ equity                                                                                        |       | 165,459            |       | 193,820              |       |
| Total liabilities and shareholders’ equity                                                                        |       | $                  | 702,791    |                 | $          | 679,932 |   |

 

See accompanying notes to unauditedconsolidated financial statements

 

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**Gander Mountain Company**

**Consolidated Statements of Cash Flows - Unaudited**

**(In thousands)**

 
| ** **                                                                          | ** ** | **26 Weeks Ended** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                          | ** ** | **August 2,**           | ** ** | **August 4,** | ** ** |
| ** **                                                                          | ** ** | **2008**                     | ** ** | **2007** | ** ** |
| **Operating activities**                                                            | ** ** | ** **                   | ** ** | ** ** | ** ** |
| Net loss                                                                            |       | $                            | (29,299    | ) | $ | (32,490 | ) |
| Adjustments to reconcile net loss to net  cash  used in operating  activities: |       |                         |       |   |   |
| Depreciation and amortization                                                       |       | 15,661                       |       | 12,684 |   |
| Exit costs, impairment and other charges                                            |       | 605                          |       | — |   |
| Stock-based compensation expense                                                    |       | 703                          |       | 743 |   |
| (Gain) loss on disposal of assets                                                   |       | (17                          | )          | 34 |   |
| Change in operating assets and liabilities:                                         |       |                         |       |   |   |
| Accounts receivable                                                                 |       | (6,828                       | )          | (7,053 | ) |
| Inventories                                                                         |       | (13,524                      | )          | (69,816 | ) |
| Prepaids and other current assets                                                   |       | (3,072                       | )          | (5,281 | ) |
| Other assets                                                                        |       | 1,186                        |       | (95 | ) |
| Accounts payable and other liabilities                                              |       | 25,053                       |       | 33,499 |   |
| Deferred income taxes                                                               |       | 209                          |       | — |   |
| Net cash used in operating activities                                               |       | (9,323                       | )          | (67,775 | ) |
|                                                                                |       |                         |       |   |   |
| **Investing activities**                                                            |       |                         |       |   |   |
| Purchases of property and equipment                                                 |       | (12,299                      | )          | (17,475 | ) |
| Acquisition related expenses                                                        |       | (164                         | )          | — |   |
| Proceeds from sale of assets                                                        |       | 29                           |       | — |   |
| Net cash used in investing activities                                               |       | (12,434                      | )          | (17,475 | ) |
|                                                                                |       |                         |       |   |   |
| **Financing activities**                                                            |       |                         |       |   |   |
| Borrowings under credit facility                                                    |       | 13,959                       |       | 76,002 |   |
| Proceeds from short term notes payable -  related parties                           |       | 10,000                       |       | — |   |
| Proceeds from long term debt                                                        |       | —                       |       | 7,582 |   |
| Proceeds from exercise of stock options and  employee stock purchases               |       | 235                          |       | 3,053 |   |
| Reductions in long term debt                                                        |       | (3,393                       | )          | (1,287 | ) |
| Net cash provided by financing activities                                           |       | 20,801                       |       | 85,350 |   |
|                                                                                |       |                         |       |   |   |
| Net increase (decrease) in cash                                                     |       | (956                         | )          | 100 |   |
| Cash, beginning of period                                                           |       | 2,622                        |       | 1,342 |   |
| Cash, end of period                                                                 |       | $                            | 1,666      |   | $ | 1,442 |   |

 

See accompanying notes to unauditedconsolidated financial statements

 

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**Gander Mountain Company**

**Notes to Unaudited Consolidated FinancialStatements**

**Quarterly Period Ended August 2, 2008**

 

**Note 1.Basis of Presentation**

 

The accompanying unaudited financial statements of Gander MountainCompany (“we” or “us”) have been prepared in accordance with the requirementsfor Form 10-Q and do not include all the disclosures normally required inannual financial statements prepared in accordance with U.S. generally acceptedaccounting principles. The interim financial information as of August 2,2008 and for the 13 and 26 weeks ended August 2, 2008 and August 4,2007, is unaudited and has been prepared on the same basis as the auditedannual financial statements. In the opinion of management, this unauditedinformation includes all adjustments necessary for a fair presentation of theinterim financial information. All of these adjustments are of a normalrecurring nature. These interim financial statements filed on this Form 10-Qand the discussions contained herein should be read in conjunction with theannual financial statements and notes included in our Annual Report on Form 10-Kfor the fiscal year ended February 2, 2008, as filed with the Securitiesand Exchange Commission, which includes audited financial statements for ourthree fiscal years ended February 2, 2008.

 

Our business is seasonal in nature and interim results may not beindicative of results for a full year. Historically, we have realized more ofour sales in the latter half of our fiscal year, which includes the hunting andholiday seasons. Our business is also impacted by the timing of new storeopenings. Both variation in seasonality and new store openings impact theanalysis of the results of operations and financial condition for comparableperiods.

 

Reclassifications. Certain prior period amounts have been reclassifiedto conform to the current year presentation. These reclassifications had noimpact on previously reported net income, cash flows or financials position.

 

Withthe acquisition of Overton’s Holding Company (“Overton’s”) in December 2007,our consolidated reporting includes our two reportable segments: Retail andDirect. The Retail segment sells its outdoor lifestyle products and servicesthrough our retail stores. The Direct segment is the internet and catalogoperations of Overton’s.

 

Thefollowing table shows our consolidated sales by product category:

 
| ** **                                    | ** ** | **2nd Quarter** | ** ** | **2nd Quarter** | ** ** |
|-----------------------------------------------|------------|----------------------|------------|----------------------|------------|
| **Category**                                  | ** ** | **2008**             | ** ** | **2007**             | ** ** |
| Hunting and Firearms                          |       | 27.5                 | %          | 31.0                 | %          |
| Fishing and Marine (1)                        |       | 38.0                 | %          | 26.0                 | %          |
| Camping, Paddlesports and Backyard  Equipment |       | 9.8                  | %          | 11.0                 | %          |
| Apparel and Footwear                          |       | 14.8                 | %          | 18.1                 | %          |
| Powersports                                   |       | 6.9                  | %          | 10.1                 | %          |
| Other                                         |       | 1.9                  | %          | 2.5                  | %          |
| Parts and services                            |       | 1.1                  | %          | 1.3                  | %          |
| Total                                         |       | 100.0                | %          | 100.0                | %          |

 

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(1)                                                     Directsegment sales resulting from Overton’s of $39.7 million for the second quarterof fiscal 2008 have been included in the Fishing and Marine category.

 

For comparative purposes,the table below reflects sales by product category of our Retail segment onlyand does not include sales of our Direct segment.

 

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| **Retail segment only**             | ** ** | **2nd Quarter** | ** ** | **2nd Quarter** | ** ** |
|-----------------------------------------------|------------|----------------------|------------|----------------------|------------|
| **Category**                                  | ** ** | **2008**             | ** ** | **2007**             | ** ** |
| Hunting and Firearms                          |       | 32.6                 | %          | 31.0                 | %          |
| Fishing and Marine                            |       | 26.6                 | %          | 26.0                 | %          |
| Camping, Paddlesports and Backyard  Equipment |       | 11.6                 | %          | 11.0                 | %          |
| Apparel and Footwear                          |       | 17.6                 | %          | 18.1                 | %          |
| Powersports                                   |       | 8.2                  | %          | 10.1                 | %          |
| Other                                         |       | 2.2                  | %          | 2.5                  | %          |
| Parts and services                            |       | 1.2                  | %          | 1.3                  | %          |
| Total                                         |       | 100.0                | %          | 100.0                | %          |

 

**Note 2.New Accounting Pronouncement**

 

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

 

In February 2008,the FASB issued FASB Staff Position FAS 157-2, which delays the effective datefor the implementation of SFAS 157 solely for non-financial assets andnon-financial liabilities, except those non-financial items that are recognizedat fair value in the financial statements on a recurring basis (i.e., at leastannually).  The effective date fornon-financial assets and liabilities would be the beginning of our fiscal 2009.

 

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

 

In February 2007,the FASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Liabilities — Including an Amendment of FASB Statement No. 115.*SFAS No. 159 permits us to choose to measure certain financialassets and liabilities at fair value that are not currently required to bemeasured at fair value (the “Fair Value Option”). 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. We adopted SFAS No. 159 but haveelected not to apply the Fair Value Option of SFAS No. 159.

 

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

 

In March 2008, the FASBissued SFAS No. 161, *Disclosures aboutDerivative Instruments and Hedging Activities*, *an amendment of SFAS No. 133*. SFAS No. 161is intended to improve financial standards for derivative instruments andhedging activities by requiring enhanced disclosures to enable investors to betterunderstand the effect these instruments and activities have on an entity’sfinancial position, financial performance and cash flows. Entities are requiredto provide enhanced disclosures about: how and why an entity uses derivativeinstruments; how derivative instruments and related hedged items are accountedfor under SFAS No. 133 and its related interpretations; and how derivativeinstruments and related hedged items affect an entity’s financial position,financial performance and cash flows. SFAS No. 161 is effective forfinancial statements issued for fiscal years and interim periods beginningafter November 15, 2008. We will adopt SFAS No. 161 beginning in thefirst quarter of fiscal 2009. We do not expect SFAS No. 161 to havea material impact on our results of operations, cash flows, or financialposition.

 

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

 

**Note 3.Credit Facility and Indebtedness**

 

Wehave maintained a revolving credit facility with Bank of America, N.A. since2001. Our credit facility provides us with the capital to fund theoperations and growth of our business. Our revolving credit facility has alimit of $345.0 million, with an option to increase this limit by another $55.0million subject to certain terms and conditions. Interest on the outstanding indebtedness under the revolving portionof the credit facility currently accrues at the lender’s prime commerciallending rate, or, if we elect, at the one, two, three or six month LIBOR plus1.25% to 1.75%, depending on our EBITDA, as defined in the credit agreement.Our obligations under the credit facility are secured by interests insubstantially all of the Company’s assets. The credit facility matures on June 30,2012.

 

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

 

OnDecember 6, 2007, we entered into a Fourth Amended and Restated Loan andSecurity Agreement. The amendment and restatement was effected in order to addan additional $40.0 million term loan (“Term Loan B”) to our securedcredit facility to partially fund the acquisition of Overton’s.  The maturity date for Term Loan B is September 30,2011.

 

Wewill not have the ability to exercise the $55.0 million option to increasethe revolving credit facility while our $40.0 million Term Loan B isoutstanding.

 

Outstandingborrowings under the credit facility, including Term Loan A and includingletters of credit, were $273.4 and $258.8 as of August 2, 2008 and August 4,2007, respectively.  The actualavailability under the credit facility is limited to specific advance rates oneligible inventory and accounts receivable. Typically, availability will behighest in the latter half of the fiscal year as inventory levels and advancerates increase. These advance rates are seasonal as well, increasing as weapproach our hunting and holiday seasons and decreasing during non-peakperiods. Based on eligible inventory and accounts receivable balances asof August 2, 2008 and February 2, 2008, our available borrowingcapacity under the credit facility, after subtracting letters of credit, was$30.5 million and $22.3 million, respectively.

 

Effectivewith the December 6, 2007 amendment, financial covenants under the creditfacility require that availability under the line of credit not fall below 5%of the lower of the borrowing base, as defined, or the credit facility limit.This availability test is applied and measured on a daily basis. The 5%requirement increases to 7.5% in August 2009. The credit facility alsocontains other covenants that, among other matters, restrict our ability toincur substantial other indebtedness, create certain liens, engage in certainmergers and acquisitions, sell assets, enter into certain capital leases ormake junior payments, including cash dividends. We were in compliance with allcovenants as of August 2, 2008. Although our current expectations offuture financial performance indicate that we will remain in compliance withthe covenants under our credit facility, if actual financial performance doesnot meet our current expectations, our ability to remain in compliance withthese covenants will be adversely affected. We face a number of uncertaintiesthat may adversely affect our ability to generate sales and earnings, includingthe possibility of continued weakness in the retail environment in the UnitedStates, which may negatively affect future retail sales.

 

**Notes Payable – RelatedParties**

 

Thevalue of our eligible inventory, and the related advance rates under oursecured credit facility are subject to periodic adjustment based on independentvaluations of our collateral performed on behalf of the banks. Any downwardadjustment in the value of our inventory or in our advance rates, whether basedon an assessment of the nature and quality of our inventory or a perceivedincrease in the difficulty of selling collateral under current economicconditions, would adversely affect our availability. Effective June 11,2008, Bank of America, N.A. adjusted our advance rates downward, on averageapproximately 160 basis points, in response to general retail environmentconditions. In order to maintain appropriate levels of availability under oursecured credit facility, on June 9, 2008, we entered into a $10 millionterm loan agreement with our two major shareholders. Amounts advancedunder the agreement mature on December 31, 2008, bear interest at LIBORplus 1%, and may be prepaid and re-borrowed without penalty until the maturitydate.  The loans are unsecured and

 

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the loan agreement containsno restrictive covenants. Proceeds from the loans were used to reduceoutstanding borrowings under our credit facility. The lenders under theagreement are Gratco LLC, an affiliate of David C. Pratt, our chairman, andHoliday Companies, an affiliate of Ronald A. Erickson, our vice-chairman, andGerald A. Erickson, a director of our company. There were no materialtransaction costs associated with the placement.

 

**A summary of all of ourshort term and long term indebtedness is as follows:**

 
| ** **                                              | ** ** | **August 2,** | ** **  | **February 2,** | ** ** |
|---------------------------------------------------------|------------|--------------------|-------------|----------------------|------------|
| **(in thousands)**                                 | ** ** | **2008**           | ** **  | **2008**             | ** ** |
| **Short Term**                                          |       |               |        |                 |       |
| Borrowings under credit facility including  Term Note A | ** ** | **$**              | **259,972** | ** **           | **$**      | **246,013** | ** ** |
|                                                    |       |               |        |                 |       |
| Short term notes payable - related parties              | ** ** | **$**              | **10,000**  | ** **           | **$**      | **—** | ** ** |
|                                                    |       |               |        |                 |       |
| Current portion of Term Note B                          |       | $                  | 5,000       |                 | $          | 2,500 |   |
| Current portion of capitalized lease  obligations       |       | 4,520              |        | 2,512                |       |
| Current portion of equipment notes payable              |       | 3,373              |        | 3,235                |       |
| Current portion of deferred acquisition  obligation     |       | 819                |        | —               |       |
| Total current maturities of long term debt              | ** ** | **$**              | **13,712**  | ** **           | **$**      | **8,247** | ** ** |
|                                                    |       |               |        |                 |       |
| **Long Term**                                           |       |               |        |                 |       |
| Long term portion of Term Note B                        |       | $                  | 35,000      |                 | $          | 37,500 |   |
| Long term portion of capitalized lease  obligations     |       | 10,769             |        | 11,702               |       |
| Long term portion of equipment notes  payable           |       | 11,770             |        | 13,492               |       |
| Long term portion of deferred acquisition  obligation   |       | 745                |        | 1,479                |       |
| Total long term debt                                    | ** ** | **$**              | **58,284**  | ** **           | **$**      | **64,173** | ** ** |

 

**Note 4.Business Acquisition**

 

OnDecember 6, 2007, we completed the acquisition of all of the outstandingequity securities of Overton’s pursuant to a Securities Purchase Agreementamong us, Overton’s and the sellers named therein. As a result of thistransaction, Overton’s became a wholly owned subsidiary of Gander MountainCompany. The total purchase price for the acquisition was $72.3 million.The transaction was accounted for using the purchase method of accounting inaccordance with SFAS No. 141, *BusinessCombinations*.

 

Inaccordance with SFAS No. 141, the total purchase price was allocated toOverton’s net tangible and intangible assets and liabilities based upon theirfair values as of December 6, 2007. This allocation was preliminary andwas subject to the finalization of a valuation by an independent appraiser.During the second quarter of fiscal 2008, the valuation was finalized andresulted in the following adjustments to our intangible assets and goodwill:

 
| ** **                     | ** ** | **(in thousands)**                                         | ** ** |
|--------------------------------|------------|-----------------------------------------------------------------|------------|
| **Asset**                      | ** ** | **Purchase Price  Allocation  February 2, 2008** | ** ** | **Purchase Price  Allocation  August 2, 2008** | ** ** | **Increase  (Decrease)** | ** ** |
| Customer relationships         |       | $                                                               | 1,506      |   | $ | 754 |   | $ | (752 | ) |
| Noncompete agreement           |       | 1,927                                                           |       | 1,178 |   | (749 | ) |
| Tradenames                     |       | 16,251                                                          |       | 13,159 |   | (3,092 | ) |
| Trademarks                     |       | 4,972                                                           |       | 4,207 |   | (765 | ) |
| Goodwill                       |       | 42,282                                                          |       | 47,640 |   | 5,358 |   |
| Goodwill and Intangible Assets |       | $                                                               | 66,938     |   | $ | 66,938 |   | $ | — |   |

 

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**Note 5.Stock-Based Compensation**

 

We have three share-based compensation plans: the 2004 Omnibus StockPlan, the 2002 Stock Option Plan and the Employee Stock Purchase Plan. Inaddition, we granted certain stock option awards in fiscal 1998 and fiscal 2002that were not under a stock-based compensation plan. We are no longerauthorized to grant any awards under the 2002 Stock Option Plan.  As of August 2, 2008, there were a totalof 3,282,815 options to purchase common stock outstanding under all of ourstock option plans and non-plan option awards, with a weighted average exerciseprice of $9.98 and a weighted average remaining life of 6.8 years.  There were 2,350,796 options that wereexercisable as of August 2, 2008 with a weighted-average exercise price of$10.60.

 

Stock-based compensation expense for the 13 weeks ended August 2,2008 and August 4, 2007, was $322,000 and $350,000, respectively.  Stock-based compensation expense for the 26weeks ended August 2, 2008 and August 4, 2007, was $703,000 and$743,000, respectively. As of August 2, 2008, there was approximately $3.0million of unrecognized compensation expense related to stock options that isexpected to be recognized over a weighted-average period of 2.8 years.

 

During the first and second quarters of fiscal 2008, there were 2,877and 0 options, respectively exercised with an immaterial aggregate intrinsicvalue and immaterial cash proceeds to us. During the first quarter of fiscal 2007, there were 157,352 optionsexercised with an aggregate intrinsic value of $383,821, which generated $1.5million in net cash proceeds for us. During the second quarter of fiscal 2007,there were 166,041 options exercised with an aggregate intrinsic value of$853,000, which generated $1.4 million in net cash proceeds for us.

 

As of May 3,2008, there were 1,260,318  sharesavailable for future grant under the 2004 Omnibus Stock Plan.

 

Stock option activity for theperiods presented is as follows:

 
| ** **                                                    | ** ** | **13 weeks - August 2, 2008** | ** ** | **13 weeks - August 4, 2007** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                    | ** ** | **Number of**                                     | ** ** | **Weighted-**                                          | ** ** | **Number of** | ** ** | **Weighted-** | ** ** |
| ** **                                                    | ** ** | **Shares Under**                                  | ** ** | **Average**                                            | ** ** | **Shares Under** | ** ** | **Average** | ** ** |
| ** **                                                    | ** ** | **Option**                                             | ** ** | **Exercise Price**                                | ** ** | **Option** | ** ** | **Exercise Price** | ** ** |
| Outstanding - Beginning                                       |       | 3,353,043                                              |       | $                                                      | 10.04      |   | 3,756,545 |   | $ | 10.20 |   |
| Granted                                                       |       | 30,950                                                 |       | 4.65                                                   |       | 442,300 |   | 12.03 |   |
| Exercised                                                     |       | —                                                 |       | —                                                 |       | (166,041 | ) | 8.61 |   |
| Forfeited                                                     |       | (101,178                                               | )          | 10.57                                                  |       | (83,177 | ) | 14.21 |   |
| Outstanding -Ending                                           |       | 3,282,815                                              |       | $                                                      | 9.98       |   | 3,949,627 |   | $ | 10.39 |   |
|                                                          |       |                                                   |       |                                                   |       |   |   |   |   |
| Weighted-average Black-Scholes fair value  of options granted |       |                                                   |       | $                                                      | 2.70       |   |   |   | $ | 5.95 |   |

 

**Note 6.Earnings Per Share**

 

Basic and diluted income or loss per share isbased upon the weighted average number of shares outstanding.  Diluted loss per share for the 13 and 26weeks ended August 2, 2008 and August 4, 2007, excludes potentiallydilutive stock options from the calculation of weighted average sharesoutstanding because including them would have an anti-dilutive effect on lossper share.  As of August 2, 2008 andAugust 4, 2007, there were a total of 3,282,815 and 3,949,627 options topurchase common stock outstanding, respectively.

 

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

 
| ** **                                                      | ** ** | **August 2,  2008** | ** ** | **February 2,  2008** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------|------------|----------------------------|------------|
| *Property and equipment consists of :* |       |                     |       |                       |       |
| Building                                                        |       | $                        | 6,972      |                       | $          | 6,972 |   |
| Furniture and equipment                                         |       | 150,417                  |       | 141,826                    |       |
| Leasehold improvements                                          |       | 66,107                   |       | 66,102                     |       |
| Computer software and hardware                                  |       | 57,692                   |       | 52,179                     |       |
|                                                            |       | 281,188                  |       | 267,080                    |       |
| Less: Accumulated depreciation and  amortization                |       | (110,527                 | )          | (98,396                    | )          |
| **Property and equipment, net**                                 |       | $                        | 170,661    |                       | $          | 168,685 |   |

 
| ** **                                 | ** ** | **August 2,  2008** | ** ** | **February 2,  2008** | ** ** |
|--------------------------------------------|------------|--------------------------|------------|----------------------------|------------|
| *Other assets consists of:* |       |                     |       |                       |       |
| Deferred loan costs                        |       | $                        | 6,679      |                       | $          | 6,666 |   |
| Other                                      |       | 98                       |       | 1,295                      |       |
|                                       |       | 6,777                    |       | 7,961                      |       |
| Less: Accumulated amortization             |       | (4,698                   | )          | (4,385                     | )          |
| **Other assets, net**                      |       | $                        | 2,079      |                       | $          | 3,576 |   |

** **
| ** **                                                                        | ** ** | **August 2,  2008** | ** ** | **February 2,  2008** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------|------------|----------------------------|------------|
| *Accrued and other current liabilities consist of:* |       |                     |       |                       |       |
| Gift cards and gift certificate liabilities                                       |       | $                        | 20,892     |                       | $          | 29,223 |   |
| Payroll and related fringe benefits                                               |       | 7,085                    |       | 8,393                      |       |
| Sales, property and use taxes                                                     |       | 10,048                   |       | 5,219                      |       |
| Reserve for store exit costs                                                      |       | 2,259                    |       | 3,612                      |       |
| Lease related costs                                                               |       | 1,647                    |       | 1,593                      |       |
| Insurance reserves and liabilities                                                |       | 2,002                    |       | 1,979                      |       |
| Advertising and marketing                                                         |       | 374                      |       | 1,745                      |       |
| Interest                                                                          |       | 1,004                    |       | 938                        |       |
| Other accruals and current liabilities                                            |       | 10,122                   |       | 7,905                      |       |
| **Accrued and other current liabilities**                                         |       | $                        | 55,433     |                       | $          | 60,606 |   |

** **
| ** **                                                    | ** ** | **August 2,  2008** | ** ** | **February 2,  2008** | ** ** |
|---------------------------------------------------------------|------------|--------------------------|------------|----------------------------|------------|
| *Other long-term liabilities consist of:* |       |                     |       |                       |       |
| Deferred rent                                                 |       | $                        | 25,972     |                       | $          | 25,898 |   |
| Insurance reserves and other liabilities                      |       | 1,490                    |       | 1,499                      |       |
| **Other long-term liabilities**                               |       | $                        | 27,462     |                       | $          | 27,397 |   |

 

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**Note 8.Supplemental Cash Flow Information**

 

During the 26 weeks ended August 2, 2008and August 4, 2007, we acquired equipment totaling $2.9 million and $1.6million, respectively, which was financed through capital leases. Purchases ofproperty and equipment in the statement of cash flows exclude theseamounts.  Purchases of propertyand equipment in the statement of cash flows for the 26 weeks ended August 2,2008 and August 4, 2007, alsoexcludes $2.0 and $1.2 million, respectively, in non-cash accruals andreclassifications for property and equipment placed in service that did notrequire the use of cash.

 

**Note 9. Exit Costs, Impairment and Other Charges**

 

Exitcosts, impairment and other charges for the first and second quarters of fiscal2008 include lease termination charges associated with the replacement of threestores, accretion expense on liabilities for lease termination charges andother residual costs of closed stores. For the first and second quarters offiscal 2007, these expenses primarily represented severance costs and thewrite-off of certain web site development costs. The activity of our reservefor store exit costs and other charges****during the first and secondquarters of fiscal 2008 is as follows:

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

 

**Note 10.Income Taxes**

 

Our effective income taxrate was 3.5% and 1.3% for the second quarter of fiscal 2008 and second quarterof fiscal 2007, respectively. The change in the effective tax rate betweenperiods is primarily the result of state income taxes as well as an increase indeferred tax liabilities related to differences in the book-tax basis ofcertain acquired intangible assets.

 

**Note 11.Contingencies**

 

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

 

On July 10,2007, the U.S. District Court issued an order granting our motion for summaryjudgment, ruling that the contingent trademark licensing provision wasunenforceable.  The order provides, in part, that we are free to use ourtrademarks in all respects including direct marketing to consumers. Cabela’s appealed the ruling to the United States Court of Appeals, EighthCircuit.

 

OnAugust 27, 2008, a panel of the United States Court of Appeals, EighthCircuit, unanimously upheld the earlier district court order granting GanderMountain’s motion for summary judgment that the contingent trademark licensingprovision is unenforceable.  The Eighth Circuit order affirms our right touse our trademarks in all respects including direct marketing to consumers andends our long-standing dispute with rival Cabela’s over the right to usecertain Gander Mountain trademarks in direct marketing.

 

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

 

**Note 12. Segment Reporting**

 

Forthe Retail segment, operating expenses primarily consist of distribution centerexpenses associated with moving product from our distribution center to ourretail stores, occupancy costs of the retail stores, store labor, advertising,depreciation, and all other store operating expenses, as well as all expensesassociated with the functional support areas such as executive,merchandising/buying, human resources, information technology, andfinance/accounting.

 

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Forthe Direct segment, operating expenses primarily consist of catalog expenses,e-commerce advertising expenses, and order fulfillment expenses such as laborand overhead, as well as all expenses associated with the functional supportareas such as merchandising/buying, information technology, andfinance/accounting.

 

Segmentassets and liabilities are those assets and liabilities directly used in theoperating segment. For the Retail segment, assets primarily include inventoryin the retail stores, fixtures, and leasehold improvements. For the Directsegment, assets primarily include inventory, goodwill and intangible assets,deferred catalog costs and fixed assets.

 

Priorto the acquisition of Overton’s on December 6, 2007, we operated under onesegment, Retail. Results and selected balance sheet data by business segmentare presented in the following table:

** **
| **Statement of Operations Data:**           | ** ** | **(In thousands)** | ** ** |
|------------------------------------------------------------|------------|-------------------------|------------|
| **13 Weeks Ended August 2, 2008** | ** ** | **Retail**              | ** ** | **Direct** | ** ** | **Total** | ** ** |
| ** **                                                 | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales                                                      |       | $                       | 213,145    |   | $ | 39,728 |   | $ | 252,873 |   |
| (Loss) income from operations                              |       | (2,973                  | )          | 2,793 |   | (180 | ) |
| Depreciation and amortization                              |       | 7,491                   |       | 160 |   | 7,651 |   |
|                                                            |            |                         |            |  |  |  |  |  |  |  |

 
| **26 Weeks Ended August 2, 2008** | ** ** | **Retail** | ** ** | **Direct** | ** ** | **Total**  | ** ** |
|------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales                                                      |       | $          | 401,138    |       | $          | 59,397     |       | $ | 460,535 |   |
| (Loss) income from operations                              |       | (21,716    | )          | 2,205      |       | (19,511    | )          |
| Depreciation and amortization                              |       | 14,872     |       | 789        |       | 15,661     |       |
|                                                            |            |            |            |            |            |            |            |  |  |  |

 
| **Balance sheet data:**            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **As of August 2, 2008** | ** ** | **Retail** | ** ** | **Direct** | ** ** | **Total**  | ** ** |
| ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total assets                                 |       | $          | 607,222    |       | $          | 95,569     |       | $ | 702,791 |   |
| Inventories                                  |       | 396,199    |       | 21,008     |       | 417,207    |       |
| Goodwill and intangible assets               |       | 7,030      |       | 66,783     |       | 73,813     |       |
| Long term debt                               |       | 23,284     |       | 35,000     |       | 58,284     |       |
|                                              |            |            |            |            |            |            |            |  |  |  |

 

**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF 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 of our Form 10-K for fiscal2007”.  Readers are cautioned not toplace undue reliance on these forward-looking statements, which speak only asof the date of this report. We undertake no obligation to revise anyforward-looking statements in order to reflect events or circumstances that maysubsequently arise. Readers are urged to carefully review and consider thevarious disclosures made by us in this report and in our other reports filedwith the Commission that advise interested parties of the risks and factors thatmay affect our business.

 

**Overview**

 

GanderMountain Company operates the nation’s largest retail network of storesspecializing in hunting, fishing, camping, marine and outdoor lifestyleproducts and services. As of August 2, 2008, we have expanded our storebase to 115  conveniently located Gander Mountain outdoor lifestylestores, providing approximately 6.5 million square feet of retail space in23 states: Alabama, Arkansas, Colorado, Florida, Illinois, Indiana, Iowa,Kansas, Kentucky, Maryland, Michigan, Minnesota, Mississippi, New York, NorthCarolina, North Dakota, Ohio, Pennsylvania, Tennessee, Texas, Virginia, WestVirginia and Wisconsin. During the second quarter of fiscal 2008, we opened twonew stores, one of which was a relocation of a store that closed during thefirst quarter of fiscal 2008. These two stores complete our five new storeopenings for fiscal 2008.

 

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Ourcore strategy is to provide our target customers with a unique and broadassortment of outdoor equipment, accessories, related technical apparel andfootwear; expert services; convenient locations and value pricing. Our storesfeature an extensive selection of leading national and regional brands as wellas our company’s owned brands. In March 2003, we began transforming ourmarket position from a traditional specialty store to a large-format,category-focused store. We did this by opening new stores in a large format andincreasing the selling space within our original, small-format stores. Prior toMarch 2003, our typical store was approximately 31,000 square feet. Ourlarge-format stores range from approximately 50,000 to 120,000 square feet,with our current focus primarily upon stores of 60,000 to 65,000 square feetplus an outside selling area. Our large-format stores are generally locatedwith convenient access to a major highway and have an open-style shoppingenvironment characterized by wide aisles, open bar-joist ceilings andhigh-density racking. To further build upon our brand’s reputation for highquality and exceptional value, we are outfitting certain stores and our newstores with additional features such as brick and stone accents, log-wrappedcolumns, and improved branding, fixture, flooring and signage elements. As of August 2,2008, 73 of our 115 stores were in our large format.

 

OnDecember 6, 2007, we acquired Overton’s, Inc., a leading internet andcatalog marketing company targeting recreational boaters and water sportsenthusiasts. Overton’s product line is extensive, ranging from water skis,wakeboards and apparel to electronics, boat covers, boat seats and other marineaccessories. Overton’s products are sold under two principal brands, Overton’sand Consumers Marine, through a multi-channel approach that includes catalogs,websites (*www.Overtons.com* and *www.Consumersmarine.com*) and three retailshowrooms. Overton’s is a wholly-owned subsidiary of Gander Mountain headquarteredin Greenville, North Carolina.

 

Sincethe acquisition of Overton’s, our consolidated reporting includes our tworeportable segments: Retail and Direct. The Retail segment sells its outdoorlifestyle products and services through its 115 retail stores located in23 states. The Direct segment is comprised of the internet and catalogoperations of Overton’s, offering primarily boating and watersports accessoryproducts through numerous direct mail catalogs and its e-commerce websites, aswell as the newly developed e-commerceand catalog efforts of Gander Mountain that will focus on product categories different than that of Overton’sboating and marine related business. During the second quarter of fiscal2008, we achieved a critical milestone in the development of the GanderMountain direct marketing business. On August 3, 2008, we launched our newtransactional website, *“Gandermtn.com”*which offers an initial selection of nearly 12,000 SKU’s.  We will begin to grow the product selectionsand add additional SKU’s over time. During the quarter, we also made significant progress in the developmentof our first catalog since 1996. Distribution of the 244 page Gander Mountain catalog commenced inearly September 2008.

 

Included in our consolidatedsales for the first and second quarters of fiscal 2008, are Overton’s sales of$19.7 million and $39.7 million, respectively. There were no sales during thequarter from the Gander Mountain e-commerce or catalog operations because thoseoperations did not start until the third quarter of fiscal 2008.

 

Thecontinued operation of Overton’s, along with our launch of Gander Mountain’snew e-commerce and catalog efforts are important initiatives toward building amulti-channel national retail operation.

 

**Recent Update**

 

Mark R. Baker,who served as our president and chief executive officer, as well as a member ofour board of directors, resigned from all of the positions he held with ourcompany on September 8, 2008.  Mr. Bakerhas agreed to remain as an employee of our company during a transition periodending on September 30, 2008.

 

David C.Pratt, the chairman of our board of directors, has been appointed as our chiefexecutive officer, on an interim basis, effective September 8, 2008.  Mr. Pratt will continue to serve as thechairman of our board of directors, but has resigned from the compensation andgovernance and nominating committees of our board.

 

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**Consolidated Results of Operations**

 

The following table (1) represents our unaudited consolidatedstatements of operations reflected as a percentage of sales:

 

| ** **                                    | ** ** | **13 Weeks Ended** | ** ** | **26 Weeks Ended** | ** ** |
|-----------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                    | ** ** | **August 2,**           | ** ** | **August 4,**           | ** ** | **August 2,** | ** ** | **August 4,** | ** ** |
| ** **                                    | ** ** | **2008**                     | ** ** | **2007**                     | ** ** | **2008** | ** ** | **2007** | ** ** |
| Sales                                         |       | 100.0                        | %          | 100.0                        | %          | 100.0 | % | 100.0 | % |
| Cost of goods sold                            |       | 73.3                         | %          | 76.2                         | %          | 76.2 | % | 78.2 | % |
| Gross profit                                  |       | 26.7                         | %          | 23.8                         | %          | 23.8 | % | 21.8 | % |
| Operating expenses:                           |       |                         |       |                         |       |   |   |   |   |
| Selling, general and administrative  expenses |       | 26.5                         | %          | 25.5                         | %          | 27.3 | % | 27.2 | % |
| Exit costs, impairment and other charges      |       | 0.1                          | %          | 0.1                          | %          | 0.2 | % | 0.2 | % |
| Pre-opening expenses                          |       | 0.2                          | %          | 0.5                          | %          | 0.4 | % | 0.4 | % |
| Loss from operations                          |       | (0.1                         | )%         | (2.3                         | )%         | (4.2 | )% | (6.1 | )% |
| Interest expense, net                         |       | 1.8                          | %          | 2.1                          | %          | 2.0 | % | 2.2 | % |
| Loss before income taxes                      |       | (1.9                         | )%         | (4.4                         | )%         | (6.3 | )% | (8.2 | )% |
| Income tax provision                          |       | 0.1                          | %          | 0.1                          | %          | 0.1 | % | 0.1 | % |
| Net loss                                      |       | (1.9                         | )%         | (4.5                         | )%         | (6.4 | )% | (8.3 | )% |

 

----

(1) Columns do not add due to rounding.

 

Sales consist of sales from comparable stores, new stores andnon-comparable stores, as well as sales of our Direct segment, operated throughour wholly owned subsidiary, Overton’s. A store is included in the comparablestore base in its fifteenth full month of operations. A relocated store returnsto the comparable store base in its fifteenth full month after relocation. Newstore sales include sales from stores we opened during the current period.Non-comparable store sales include sales in the current period from our storesopened during the previous fiscal year before they have begun their fifteenthmonth of operation.

 

Cost of goods sold includes the cost of merchandise, freight,distribution, inventory shrinkage and store occupancy costs. Store occupancycosts include rent, real estate taxes and common area maintenance charges. Costof goods sold also includes the cost of merchandise and freight expenses of ourDirect segment.

 

Selling, general and administrative expenses include store associatepayroll, taxes and fringe benefits, advertising, maintenance, utilities,depreciation, insurance, bank and credit card charges and other store levelexpenses. It also includes all expenses associated with operating our corporateheadquarters in St. Paul, MN as well as the fulfillment, distribution andcorporate expenses of our Direct segment.

 

Pre-opening expenses consist primarily of payroll, rent, recruiting,advertising and other costs incurred prior to a new store opening.

 

***13 Weeks Ended August 2, 2008 Comparedto 13 Weeks Ended August 4, 2007***

 

*Sales.*  Sales increased by $36.4million, or 16.8%, to $252.9 million in the second quarter of fiscal 2008 from$216.5 million in the second quarter of fiscal 2007. The increase resulted fromsales of $28.7 million from fiscal 2008 and fiscal 2007 new stores not includedin the comparable store sales base, a comparable store sales decrease of $22.9million and a $9.1 million sales decrease from stores closed during 2008 butopen in 2007 as well as changes in other revenue. The increase in sales alsoincludes sales from our Direct business of $39.7 million for the second quarterof fiscal 2008 that were not present in the comparable quarter last year.

 

During the second quarter of fiscal 2008, we opened two new stores.There were no store closings during this quarter. During the second quarter offiscal 2007, we opened three new stores. Our comparable store sales declined 11.7 % for the second quarter offiscal 2008, versus a comparable store sales increase of 4.2% for the second quarterof fiscal 2007. The comparable store sales decline was impacted by the overalleconomic environment, including credit concerns, housing market foreclosures,rising fuel and food prices, rising unemployment and decreased consumerconfidence, and their effects on discretionary spending. Additionally, webelieve less advertising expenditures in the second quarter of fiscal 2008 ascompared to the second quarter of fiscal 2007 impacted the comparable storesales decline.

 

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*Gross Profit.*  Grossprofit increased by $15.9 million, or 30.9%, to $67.5 million in the secondquarter of fiscal 2008 from $51.5 million in the second quarter of fiscal 2007.As a percentage of sales, gross profit increased 288 basis points to 26.7% inthe second quarter of fiscal 2008 from 23.8% in the second quarter of fiscal2007.  The significant factor affectinggross profit during the quarter was an initial product margin increase of 239basis points resulting primarily from (i) the inclusion of the Directbusiness, with margins for the second quarter of fiscal 2008 that were 633basis points higher than our Retail business, and (ii) a continuing trendin improved Retail initial margins. The Retail initial margins benefited fromincreasing scale, continued SKU rationalization efforts, improved pricingstructure and better management of clearance merchandise.

 

Our gross profit was negatively impacted, in the Retail segment, by adeleveraging of our store occupancy costs as a result of lower comparable storesales and lower sales per square foot at our newer, less mature stores. Thisnegative impact, as a percentage of sales, was more than offset by the positiveimpact from the inclusion of the Direct segment sales.

 

*Selling, General and Administrative Expenses.* SG&A expenses increased by $11.7 million, or 21.1%, to $66.9 millionin the second quarter of fiscal 2008 from $55.3 million in the second quarterof fiscal 2007. As a percentage of sales, SG&A expenses increased 95 basispoints to 26.5% in the second quarter of fiscal 2008 from 25.5% in the secondquarter of fiscal 2007. The primary factors in this increase were the inclusion,in the second quarter of fiscal 2008, of $14.6 million of selling, general andadministrative costs of the Direct business partially offset by cost reductionsof 97 basis points in labor, advertising and other general and administrativecosts of the Retail business.

 

*Exit Costs, Impairment and Other Charges.*  Exitcosts, impairment and other charges increased slightly to $316,000 in thesecond quarter of fiscal 2008 from $291,000 in the second quarter of fiscal2007. These expenses for the second quarter of fiscal 2008 include accretionexpense on liabilities for lease termination charges and other residual costsof closed stores. For the second quarter of fiscal 2007, these expensesrepresented the write-off of certain web site development costs and severance costs.

 

*Pre-opening Expenses.* Pre-opening expenses decreased $0.6 million, or 58.4%, to $0.4 millionin the second quarter of fiscal 2008 from $1.0 million in the second quarter offiscal 2007. During the second quarter of fiscal 2008, we opened two new stores.During the second quarter of fiscal 2007, we opened three new stores andincurred costs for nine other new stores that opened in August and September 2007.

 

*Interest Expense, net.* Interest expense of $4.5 million was approximately the same in second quarterof fiscal 2008 as the second quarter of fiscal 2007. Average outstandingborrowings during the second quarter of fiscal 2008 increased $84.0 million or33%, as compared to the second quarter of fiscal 2007, due primarily to (i) thedebt incurred in connection with the Overton’s acquisition in December 2007and (ii) borrowings in the second half of fiscal 2007 and the firstquarter of fiscal 2008 used for new store capital expenditures and new storeinventories. Interest expense from higher average borrowings was offset by anapproximately 170 basis points decrease in average interest rates due togeneral interest rate declines.  Theaverage effective interest rate for the second quarter of fiscal 2008 on all ofour outstanding borrowings was 5.4%.

 

*Income Tax Provision.*  Oureffective income tax rate was 3.5 % and 1.3 % for the second quarter of fiscal2008 and second quarter of fiscal 2007, respectively. The change in theeffective tax rate between periods is primarily the result of state income taxesas well as an increase in deferred tax liabilities related to differences inthe book-tax basis of certain acquired intangible assets.

 

*Net Loss.*  Our net loss was $4.9 millionfor the second quarter of fiscal 2008, as compared to net loss of $9.7 millionfor the second quarter of fiscal 2007, due to the factors discussed above.

 

***26 Weeks Ended August 2, 2008 Comparedto 26 Weeks Ended August 4, 2007***

 

*Sales.*  Sales increased by $68.3million, or 17.4%, to $460.5 million in the first half of fiscal 2008 from$392.3 million in the first half of fiscal 2007. The increase resulted fromsales of $55.5 million from fiscal 2008 and fiscal 2007 new stores not includedin the comparable store sales base, a comparable store sales decrease of $33.9million and a $12.7 million sales decrease from stores closed during 2008 butopen in 2007 as well as changes in other revenue. The increase in sales alsoincludes sales from our Direct business of $59.4 million for the first half offiscal 2008 that was not present in the comparable period last year.

 

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During the first half of fiscal 2008, we opened five new stores andclosed three stores, including one relocation and the consolidation of twosmaller format stores into one large-format store. On a net basis for the 26weeks ended August 2, 2008, we added 308,000 square feet of retail sellingspace, a 5.0 % increase. During the first half of fiscal 2007, we opened fournew stores, including one relocated store. Our comparable store sales declined9.4% for the first half of fiscal 2008, versus a comparable store salesincrease of 2.7% for the first half of fiscal 2007. The comparable store salesdecline was impacted by the overall economic environment, including creditconcerns, housing market foreclosures, rising fuel and food prices, risingunemployment and decreased consumer confidence, and their effects ondiscretionary spending. Additionally, we believe less advertising expendituresin the first half of fiscal 2008 as compared to the first half of fiscal 2007impacted the comparable store sales decline.

 

*Gross Profit.*  Grossprofit increased by $24.1 million, or 28.2%, to $109.5 million in the firsthalf of fiscal 2008 from $85.4 million in the first half of fiscal 2007. As apercentage of sales, gross profit increased 201 basis points to 23.8% in thefirst half of fiscal 2008 from 21.8% in the first half of fiscal 2007.  The significant factor affecting gross profitduring the period was an initial product margin increase of 167 basis pointsresulting primarily from (i) the inclusion of the Direct business, withmargins for the first half of fiscal 2008 that were 669 basis points higherthan our Retail business, and (ii) a continuing trend in improved Retailinitial margins. The Retail initial margins benefited from increasing scale,continued SKU rationalization efforts, improved pricing structure, and bettermanagement of clearance merchandise.

 

Our gross profit was negatively impacted in the Retail segment by adeleveraging of our store occupancy costs as a result of lower comparable storesales and lower sales per square foot at our newer, less mature stores. Thisnegative impact was more than offset by the additional sales from the inclusionof the Direct business in the first half of fiscal 2008.

 

*Selling, General and Administrative Expenses.* SG&A expenses increased by $19.1 million, or 17.9%, to $125.9 million in the first half of fiscal 2008 from $106.8 million in the firsthalf of fiscal 2007. As a percentage of sales, SG&A expenses increased 11basis points to 27.3% in the first half of fiscal 2008 from 27.2% in the firsthalf of fiscal 2007. The primary factors in this increase were the inclusion,in the first half of fiscal 2008, of $22.9 million of selling, general andadministrative costs of the Direct business offset by cost reductions of 155basis points in labor, advertising and other general and administrative costs ofthe Retail business.

 

*Exit Costs, Impairment and Other Charges.*  Exitcosts, impairment and other charges increased $0.5 million, or 74.5%, to $1.1million in the first half of fiscal 2008 from $626,000 in the first half offiscal 2007. These expenses for the first half of fiscal 2008 include leasetermination charges associated with the replacement of three stores, accretionexpense on liabilities for lease termination charges and other residual costsof closed stores. For the first half of fiscal 2007, these expenses representedthe write-off of certain web site development costs and severance costs.

 

*Pre-opening Expenses.* Pre-opening expenses increased $0.3 million, or 18.9%, to $2.0 millionin the first half of fiscal 2008 from $1.7 million in the first half of fiscal2007. During the first half of fiscal 2008, we opened five new stores. Duringthe first half of fiscal 2007, we opened four new stores.

 

*Interest Expense, net.* Interest expense increased by $0.8 million, or 9.9%, to $9.4million in the first half of fiscal 2008 from $8.5 million in the first half offiscal 2007. The increase in interest expense resulted from higher averageoutstanding borrowings. Average outstanding borrowings during the first half offiscal 2008 increased $98 million or 42%, as compared to the first half offiscal 2007, due primarily to (i) the debt incurred in connection with theOverton’s acquisition in December 2007 and (ii) borrowings in thesecond half of fiscal 2007 used for capital expenditures and inventories for ninenew stores opened in the second half of fiscal 2007.  Interest expense from higher averageborrowings was substantially offset by an approximately 160 basis pointsdecrease in average interest rates due to general interest rate declines.  The average effective interest rate for thefirst half of fiscal 2008 on all of our outstanding borrowings was 5.7%.

 

*Income Tax Provision.*  Oureffective income tax rate was 1.5% and 0.8% for the first half of fiscal 2008and first half of fiscal 2007, respectively. The change in the effective taxrate between periods is primarily the result of state income taxes as well asan increase in deferred tax liabilities related to differences in the book-taxbasis of certain acquired intangible assets.

 

*Net Loss.*  Our net loss was $29.3 millionfor the first half of fiscal 2008, as compared to net loss of $32.5 million forthe first half of fiscal 2007, due to the factors discussed above.

 

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**Liquidity and Capital Resources**

 

Our primary capital requirements are forinventory, property and equipment and pre-opening expenses to support our newstore growth plans, and, to the extent of the highly seasonal nature of ourbusiness, operating losses. The following chart summarizes the principalelements of our consolidated cash flow for the comparable periods of our fiscalyears and the number of stores opened during those periods.

 

| ** **                                         | ** ** | **Cash Flow Summary** | ** ** |
|----------------------------------------------------|------------|---------------------------------|------------|
| ** **                                         | ** ** | **26 weeks**               | ** ** | **26 weeks** | ** ** | **Change in Cash ** | ** ** |
| ** **                                         | ** ** | **August 2,  2008**        | ** ** | **August 4,  2007** | ** ** | **Provided /   (Used)** | ** ** |
| Net cash used in operating activities              |       | $                               | (9,323     | ) | $ | (67,775 | ) | $ | 58,452 |   |
| Net cash used in investing activities              |       | (12,434                         | )          | (17,475 | ) | 5,041 |   |
| Net cash provided by financing activities          |       | 20,801                          |       | 85,350 |   | (64,549 | ) |
| Total net increase (decrease) in cash              |       | $                               | (956       | ) | $ | 100 |   | $ | (1,056 | ) |
|                                               |       |                            |       |   |   |   |   |
| Details of financing activities:                   |       |                            |       |   |   |   |   |
| Borrowings under credit facility                   |       | $                               | 13,959     |   | $ | 76,002 |   | $ | (62,043 | ) |
| Proceeds (reductions) in long-term debt,  net      |       | (3,393                          | )          | 6,295 |   | (9,688 | ) |
| Proceeds from short term notes payable             |       | 10,000                          |       | — |   | 10,000 |   |
| Proceeds from stock sales and exercise of  options |       | 235                             |       | 3,053 |   | (2,818 | ) |
| Net cash provided by financing activities          |       | $                               | 20,801     |   | $ | 85,350 |   | $ | (64,549 | ) |
|                                               |       |                            |       |   |   |   |   |
| New store openings, including relocated  stores    |       | 5                               |       | 4 |   |   |   |

 

*Operating Activities.*  Net cash used in operating activities for thefirst half of fiscal 2008 decreased by $58.5 million to $9.3 million, ascompared to $67.8 million for the first half of fiscal 2007.

 

This decrease was primarily the result of the $56.3 million of lesscash used for inventory growth partially offset by $8.4 million of less cashprovided from accounts payable levels and accrued expenses in the first half offiscal 2008 versus the first half of fiscal 2007.

 

Inventory increases in the first half of fiscal 2007 consumed more cashthan the first half of fiscal 2008 because of 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 carryATVs, and our tactical efforts to merchandise certain seasonal inventory in ourstores earlier.  As a result of adecision made in late fiscal 2007 to reduce the number of boat and ATV sellinglocations, powersports inventory is down $12.9 million at the end of the secondquarter of fiscal 2008 as compared to the same period of fiscal 2007.  Overall inventory levels were also reduced asa result of tactical efforts to better manage our inventory. These inventoryreductions were partially offset by inventory increases related to new storesopened in the fall of 2007.  Accountspayable funding was reduced $8.4 million in the first half of fiscal 2008 ascompared to the first half of fiscal 2007, due in part, to fiscal 2007increases in powersports inventory purchases which are usually executed underlonger payment terms. Also contributing to the $58.5 million decrease in cashused in operations was $3.2 million of reduced net losses and $3.0 million ofincreased non-cash depreciation.

 

*Investing Activities*.  Net cash used in investing activities for thefirst half of fiscal 2008 decreased by $5.0 million to $12.4 million, ascompared to $17.5 million for the first half of fiscal 2007.

 

We used cash primarily for equipment to opennew stores, for information technology software and equipment at our corporateoffices and to upgrade existing stores. The decrease in net cash used of $5.0million was primarily due to a reduction in upgrades to existing stores,capitalized lease obligations and a $0.8 million increase in non-cashaccruals in the first half of fiscal 2008 for property and equipment placed inservice that did not yet require the use of cash.  During the first halves of fiscal 2008and fiscal 2007, we acquired equipment totaling approximately $2.9 million and$1.6 million, respectively, that was financed through capital leases. Theseamounts are excluded from purchases of property and equipment in the statementsof cash flows.

 

*Financing Activities*.* *Netcash provided by financing activities for the first half of fiscal 2008decreased by $64.5 million to $20.8 million, as compared to $85.4 million inthe first half of fiscal 2007.

 

Cash used or provided by financing activitiesis primarily the net borrowings needed under our credit facility to fundoperating and investing activities. These borrowings for the first half offiscal 2008 decreased $62.0 million in correlation with the reductions in theuses of cash described above.

 

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**Credit Facility andIndebtedness**

 

We have maintained a revolving credit facility with Bank of America,N.A. since 2001. Our credit facility provides us with the capital tofund the operations and growth of our business. Our revolving credit facilityhas a limit of $345.0 million, with an option to increase this limit by another$55.0 million subject to certain terms and conditions. Interest on the outstanding indebtednessunder the revolving portion of the credit facility currently accrues at thelender’s prime commercial lending rate, or, if we elect, at the one, two, threeor six month LIBOR plus 1.25% to 1.75%, depending on our EBITDA, as defined inthe credit agreement. Our obligations under the credit facility are secured byinterests in substantially all of the Company’s assets. The credit facilitymatures on June 30, 2012.

 

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

 

On December 6, 2007, we entered into a Fourth Amended and RestatedLoan and Security Agreement. The amendment and restatement was effected inorder to add an additional $40.0 million term loan (“Term Loan B”) to oursecured credit facility to partially fund the acquisition of Overton’s.  The maturity date for Term Loan B is September 30,2011.

 

We will not have the ability to exercise the $55.0 million optionto increase the revolving credit facility while our $40.0 million Term Loan Bis outstanding.

 

Outstanding borrowings under the credit facility, including Term Loan Aand including letters of credit, were $273.4 and $258.8 as of August 2,2008 and August 4, 2007, respectively. The actual availability under the credit facility is limited tospecific advance rates on eligible inventory and accounts receivable.Typically, availability will be highest in the latter half of the fiscal yearas inventory levels and advance rates increase. These advance rates areseasonal as well, increasing as we approach our hunting and holiday seasons anddecreasing during non-peak periods. Based on eligible inventory andaccounts receivable balances as of August 2, 2008 and February 2,2008, our available borrowing capacity under the credit facility, aftersubtracting letters of credit, was $30.5 million and $22.3 million,respectively.

 

Effective with the December 6, 2007 amendment, financial covenantsunder the credit facility require that availability under the line of creditnot fall below 5% of the lower of the borrowing base, as defined, or the creditfacility limit. This availability test is applied and measured on a dailybasis. The 5% requirement increases to 7.5% in August 2009. The creditfacility also contains other covenants that, among other matters, restrict ourability to incur substantial other indebtedness, create certain liens, engagein certain mergers and acquisitions, sell assets, enter into certain capitalleases or make junior payments, including cash dividends. We were in compliancewith all covenants as of August 2, 2008. Although our current expectationsof future financial performance indicate that we will remain in compliance withthe covenants under our credit facility, if actual financial performance doesnot meet our current expectations, our ability to remain in compliance withthese covenants will be adversely affected. We face a number of uncertaintiesthat may adversely affect our ability to generate sales and earnings, includingthe possibility of continued weakness in the retail environment in the UnitedStates, which may negatively affect future retail sales.

 

**Notes Payable – Related Parties**

 

The value of our eligible inventory, and the related advance ratesunder our secured credit facility are subject to periodic adjustment based onindependent valuations of our collateral performed on behalf of the banks. Anydownward adjustment in the value of our inventory or in our advance rates,whether based on an assessment of the nature and quality of our inventory or aperceived increase in the difficulty of selling collateral under currenteconomic conditions, would adversely affect our availability. Effective June 11,2008, Bank of America, N.A. adjusted our advance rates downward, on averageapproximately 160 basis points, in response to general retail environmentconditions. In order to maintain appropriate levels of availability under oursecured credit facility, on June 9, 2008, we entered into a $10 millionterm loan agreement with our two major shareholders. Amounts advancedunder the agreement mature on December 31, 2008, bear interest at LIBORplus 1%, and may be prepaid and re-borrowed without penalty until the maturitydate.  The loans are unsecured and the loan agreement contains no restrictivecovenants. Proceeds from the loans were used to reduce outstandingborrowings under our credit facility. The lenders under the agreement areGratco LLC, an affiliate of David C. Pratt, our chairman, and HolidayCompanies, an affiliate of Ronald A. Erickson, our vice-chairman, and Gerald A.Erickson, a director of our company. There were no material transaction costsassociated with the placement.

 

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

 

| ** **                                              | ** ** | **August 2,** | ** **  | **February 2,** | ** ** |
|---------------------------------------------------------|------------|--------------------|-------------|----------------------|------------|
| **(in thousands)**                                 | ** ** | **2008**           | ** **  | **2008**             | ** ** |
| ** **                                              |       |               |        |                 |       |
| **Short Term**                                          |       |               |        |                 |       |
| Borrowings under credit facility including  Term Note A | ** ** | **$**              | **259,972** | ** **           | **$**      | **246,013** | ** ** |
| Short term notes payable - related parties              | ** ** | **$**              | **10,000**  | ** **           | **$**      | **—** | ** ** |
| Current portion of Term Note B                          |       | $                  | 5,000       |                 | $          | 2,500 |   |
| Current portion of capitalized lease  obligations       |       | 4,520              |        | 2,512                |       |
| Current portion of equipment notes payable              |       | 3,373              |        | 3,235                |       |
| Current portion of deferred acquisition  obligation     |       | 819                |        | —               |       |
| Total current maturities of long term debt              | ** ** | **$**              | **13,712**  | ** **           | **$**      | **8,247** | ** ** |
| ** **                                              |       |               |        |                 |       |
| **Long Term**                                           |       |               |        |                 |       |
| Long term portion of Term Note B                        |       | $                  | 35,000      |                 | $          | 37,500 |   |
| Long term portion of capitalized lease  obligations     |       | 10,769             |        | 11,702               |       |
| Long term portion of equipment notes  payable           |       | 11,770             |        | 13,492               |       |
| Long term portion of deferred acquisition  obligation   |       | 745                |        | 1,479                |       |
| Total long term debt                                    | ** ** | **$**              | **58,284**  | ** **           | **$**      | **64,173** | ** ** |

 

**Income Taxes / Net Operating Losses**

 

Oureffective income tax rate was 3.5% and 1.3% for the second quarter of fiscal2008 and second quarter of fiscal 2007, respectively. The change in theeffective tax rate between periods is primarily the result of state incometaxes as well as an increase in deferred tax liabilities related to differencesin the book-tax basis of certain acquired intangible assets. Due to theuncertainty of the realization of net operating loss carry forwards, we havedetermined the realization of the tax benefit related to our net deferred taxasset is uncertain at this time and a valuation allowance was recorded for thenet deferred tax assets, excluding the deferred tax liabilities related toacquired indefinite lived intangible assets. As of August 2, 2008, we havefederal and state net operating loss carryforwards of approximately $83.4million expiring between 2016 and 2027.

 

**Future Capital Requirements**

 

Our future capital requirements will primarily depend on the growth andsuccess of our direct marketing business, the number of new stores we open, thetiming of those openings within a given fiscal year and the need to fundoperating losses. These requirements will include costs directly related toopening new stores and may also include costs necessary to ensure that ourinfrastructure, including technology and distribution capabilities, is able tosupport our store base and expected growth in our retail stores and internetand catalog business. We opened 13, 8 and 19 new stores in each of fiscal years2007, 2006 and 2005, respectively, including one to threerelocated/consolidated stores in each year. Our cash used in investingactivities, for property and equipment purchases, was approximately$46 million, $28 million and $50 million in fiscal 2007, 2006and 2005, respectively.

 

We have opened all five of our fiscal 2008 new stores as of May 31,2008, including one relocation and the consolidation of two smaller formatstores into one large-format store. We expect our total capital expenditures infiscal 2008 to be less than $25 million, including capital expenditures toimprove certain existing stores. However, business conditions, businessstrategy or other factors may cause us to adjust these plans. We believe thatwe will be able to service our business from our existing distributionfacilities through fiscal 2009 or later. We believe the timing of any expansionof our distribution capabilities will depend on the number of new stores weopen, the growth of our internet and catalog business and the ability to financean expansion. The number of new stores we open will depend on the success ofour business in fiscal 2008 and fiscal 2009.

 

On June 9, 2008, we entered into a $10million term loan agreement with our two major shareholders.  Amounts advanced under the agreement matureon December 31, 2008.

 

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The maturity date for the $40.0 million TermNote B is September 30, 2011. Mandatory principal repayments are asfollows:

 
| December 31, 2008 |   | $ | 2.5 million   |
|------------------------|--------|---|---------------|
| July 11, 2009     |   | $ | 2.5 million   |
| December 31, 2009 |   | $ | 5.0 million   |
| Due in 2010            |   | $ | 11.25 million |
| Due in 2011            |   | $ | 18.75 million |

 

Beginning with our acquisition of Overton’s, we have undertaken asignificant step toward our strategy of providing multi-channel offerings toour customers. We expect we will continue to make expenditures in the next 12months to further this important business objective and we may need to fund upto approximately $1.0 million over the next 12 months for capital expendituresrelated to our Direct business.

 

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

 

We intend to satisfy our capital requirements in the next 12 monthswith cash flows from operations, funds available under our credit facility andequipment financing leases. However, if capital requirements for our businessstrategy change, or if sales and cash flows from operations do not meetanticipated levels, we may need to seek additional debt or equity financing inthe public or private markets. Beyond fiscal 2008, we anticipate needingadditional financing to grow our business. There is no assurance that we willbe successful in borrowing additional funds at reasonable rates of interest orissuing equity at a favorable valuation, or at all.

 

**Contractual Obligations and Other Commitments**

 

Our material off-balancesheet arrangements are operating lease obligations for substantially all of ourretail stores, our distribution center and corporate office, as well as lettersof credit.  We excluded these items fromthe balance sheet in accordance with U.S. generally accepted accountingprinciples. As of August 2, 2008, the minimum operating lease payments duewithin one year were $72.9 million. As of August 2, 2008, total minimumoperating lease payments remaining over all of our operating leases were $784.6million. These leases have an average remaining term of approximately 10 yearsand typically provide us with several successive options to extend the term atour election. These obligation amounts include future minimum lease paymentsand exclude direct operating costs such as common area costs and real estatetaxes.

 

Issued and outstandingletters of credit were $13.4 million and $14.3 million at August 2,2008  and August 4, 2007,respectively, and were related primarily to importing of merchandise andsupporting potential insurance program liabilities.

 

In the ordinary course of business, we enter into arrangements withvendors to purchase merchandise in advance of expected delivery. Because mostof these purchase orders do not contain any termination payments or otherpenalties if canceled, they are not included as outstanding contractualobligations. The merchandise purchases, for which we do have firm commitmentsoutstanding, in addition to letters of credit, were $6.2 million and $13.9million as of August 2, 2008 and August 4, 2007, respectively.

 

**Quarterly Results of Operations and Seasonality**

 

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

 

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

 

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The recently acquired Overton’s business is also subject to seasonalfluctuations, with its highest sales activity normally occurring during thefirst and second quarters of our fiscal year, which is the primary season forboating, marine and watersports related products. Historically, Overton’s hasgenerated approximately 65% to 70% of its sales during the first half of ourfiscal year and approximately 50% during the second quarter of our fiscal year.Included in our consolidated sales for the first and second quarters of fiscal2008, are Overton’s sales of $19.7 million and $39.7 million, respectively.

 

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

 

**Critical Accounting Policies and Use of Estimates**

 

Our financial statements are prepared in accordance with U.S. generallyaccepted accounting principles. In connection with the preparation of thefinancial statements, we are required to make assumptions, make estimates andapply judgment that affect the reported amounts of assets, liabilities,revenue, expenses and the related disclosures. We base our assumptions,estimates and judgments on historical experience, current trends and otherfactors that we believe to be relevant at the time the financial statements areprepared. On a regular basis, we review the accounting policies, assumptions,estimates and judgments to ensure that our financial statements are presentedfairly and in accordance with U.S. generally accepted accounting principles.However, because future events and their effects cannot be determined withcertainty, actual results could differ from our assumptions and estimates, andsuch differences could be material.

 

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

 

**New Accounting Pronouncements**

 

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

 

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

 

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

 

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

 

In December 2007, the FASB issued FAS No. 141R, *Business Combinations,* which replaces SFASNo. 141. SFAS 141R establishes principles and requirements for howthe acquirer of a business recognizes and measures in its financial statementsthe identifiable assets acquired and the liabilities assumed. In addition,under SFAS 141(R) adjustments associated with changes in taxcontingencies that occur after the one year measurement period are recorded asadjustments to 

 

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income. This statement iseffective for all business combinations for which the acquisition date is on orafter the beginning of an entity’s first fiscal year that begins after December 15,2008; however, the guidance in this standard regarding the treatment of incometax contingencies is retrospective to business combinations completed prior to January 1,2009. We will adopt SFAS 141(R) for any business combinationsoccurring at or subsequent to February 1, 2009.

 

In March 2008, the FASBissued SFAS No. 161, *Disclosures aboutDerivative Instruments and Hedging Activities*, *an amendment of SFAS No. 133*. SFAS No. 161is intended to improve financial standards for derivative instruments andhedging activities by requiring enhanced disclosures to enable investors tobetter understand the effect these instruments and activities have on an entity’sfinancial position, financial performance and cash flows. Entities are requiredto provide enhanced disclosures about: how and why an entity uses derivativeinstruments; how derivative instruments and related hedged items are accountedfor under SFAS No. 133 and its related interpretations; and how derivativeinstruments and related hedged items affect an entity’s financial position,financial performance and cash flows. SFAS No. 161 is effective forfinancial statements issued for fiscal years and interim periods beginningafter November 15, 2008. We will adopt SFAS No. 161 beginning in thefirst quarter of fiscal 2009. We do not expect SFAS No. 161 to havea material impact on our results of operations, cash flows, or financialposition.

 

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

 

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

 

We are exposed to marketrisk from changes in interest rates on borrowings under our credit facility,Term Loans A and B and certain other term notes. This floating rateindebtedness was $310.0  million at August 2,2008 and averaged $329.9 million during the second quarter of fiscal 2008. Ouraverage interest rate for the second quarter of fiscal 2008 under our creditfacility, including Term Loans A and B, was approximately 5.4% and wasapproximately 170 basis points lower than the same period last year dueprimarily to general interest rate reductions and reductions we obtained in thepricing structure relative to the revolving credit facility and term loan. Ifshort-term floating interest rates on our average variable rate debt for thesecond quarter of fiscal 2008 had increased by 100 basis points, our interestexpense would have increased by approximately $666,000, assuming comparableborrowing levels. These amounts are determined by considering the impact of thehypothetical interest rates on our average amount of floating rate indebtednessoutstanding and cash equivalents balances.

 

We have no derivative financialinstruments or derivative commodity instruments.  We have no significant international sales,however, we import certain items for sale in our stores.  Substantially all of our purchases aredenominated in U.S. dollars.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

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

 

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

####  

**ITEM 1. LEGAL PROCEEDINGS**

 

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

 

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

 

On August 27, 2008, a panel of the UnitedStates Court of Appeals, Eighth Circuit, unanimously upheld the earlierdistrict court order granting Gander Mountain’s motion for summary judgmentthat the contingent trademark licensing provision is unenforceable.  TheEighth Circuit order affirms our right to use our trademarks in all respectsincluding direct marketing to consumers and ends our long-standing dispute withrival Cabela’s over the right to use certain Gander Mountain trademarks indirect marketing.

 

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

 

**ITEM 1A. RISK FACTORS**

 

Not applicable.

 

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

 

Not applicable.

 

**ITEM 3.  DEFAULTS UPON SENIOR SECURITIES**

** **

Not applicable.

 

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

 

OnJune 11, 2008, we held our annual meeting of shareholders for the purposeof (a) electing seven directors to serve until their successors are dulyelected and (b) ratifying the appointment of Ernst & Young LLP asour independent registered public accounting firm for the fiscal year ending January 31,2009.

 

Theshareholders present in person or by proxy cast the following numbers of votes(in whole shares) in connection with the election of directors:

 
| ** **         | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|--------------------|------------|------------|------------|--------------|------------|
| Mark R. Baker      |       | 22,919,606 |       | 264,591      |       |
| Karen M. Bohn      |       | 22,797,019 |       | 387,178      |       |
| Marshall L. Day    |       | 22,750,572 |       | 433,625      |       |
| Richard C. Dell    |       | 22,753,053 |       | 431,143      |       |
| Gerald A. Erickson |       | 22,794,021 |       | 390,176      |       |
| Ronald A. Erickson |       | 22,795,756 |       | 388,441      |       |
| David C. Pratt     |       | 22,742,838 |       | 441,359      |       |

 

Theshareholders present in person or by proxy cast the following numbers of votes(in whole shares) in connection with the ratification of the selection of Ernst &Young LLP as our independent registered public accounting firm for the fiscalyear ending January 31, 2009:

 
| **For**    | ** ** | **Against** | ** ** | **Abstentions** | ** ** | **Broker Non-Votes** | ** ** |
|------------|------------|-------------|------------|-----------------|------------|---------------------------|------------|
| 23,035,480 |       | 141,559     |       | 7,156           |       | 0                         |       |

 

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**ITEM 5. OTHER INFORMATION**

 

Not applicable.

 

**ITEM 6. EXHIBITS**

 

The exhibits filed with this report are setforth on the Exhibit Index filed as a part of this report immediatelyfollowing the signatures to this report.

 

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**SIGNATURES**

 

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

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

 

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**EXHIBITINDEX**

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

 

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

 

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