Table of Contents

 

 

 

**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**Form 10-Q**

 

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**(Mark One)**

 

**x****  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended March 31, 2010**

 

**OR**

 

**£****              TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from                 to                 .**

 

**Commission file number: 001-34728**

 

**DOUGLAS DYNAMICS, INC.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                    | ** ** | **134275891**       |
|---------------------------------|------------|---------------------|
| (State or other jurisdiction of |       | (I.R.S. Employer    |
| incorporation or organization)  |       | Identification No.) |

 

**7777 North 73rd Street**

**Milwaukee, Wisconsin 53223**

(Address of principal executive offices) (Zip code)

 

**(414) 354-2310**

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

 

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

 

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

 

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

 

Number of shares of registrant’s common shares outstanding as of June 16, 2010 was 21,310,426

 

 

 

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**DOUGLAS DYNAMICS, INC.**

** **

**Table of Contents**

 
| **PART I.  FINANCIAL INFORMATION**                                                                     | 1  |
|-------------------------------------------------------------------------------------------------------------|----|
| Item 1.  Financial Statements                                                                               | 1  |
| Unaudited Consolidated Balance Sheets as of  March 31, 2010 and December 31, 2009                 | 1  |
| Unaudited Consolidated Statements of Operations for  the three months ended March 31, 2010 and 2009    | 2  |
| Unaudited Consolidated Statements of Cash Flows for  the three months ended March 31, 2010 and 2009    | 3  |
| Notes to Unaudited Consolidated Financial Statements                                                        | 4  |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations         | 13 |
| Item 3. Quantitative and Qualitative Disclosures About  Market Risk                                         | 23 |
| Item 4. Controls and Procedures                                                                             | 24 |
| **PART II. OTHER INFORMATION**                                                                         | 24 |
| Item  1. Legal Proceedings                                                                                  | 24 |
| Item  1A. Risk Factors                                                                                      | 24 |
| Item 2. Unregistered Sales of Equity Securities, Use  of Proceeds and Issuer Purchases of Equity Securities | 32 |
| Item 3. Defaults Upon Senior Securities                                                                     | 32 |
| Item 4. (Removed and Reserved)                                                                              | 32 |
| Item  5. Other Information                                                                                  | 32 |
| Item 6.  Exhibits                                                                                           | 33 |
| Signatures                                                                                                  | 34 |

 

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Table ofContents

 

**PART I. FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**Douglas Dynamics, Inc.**

 

**UnauditedConsolidated Balance Sheets**

 

**(in thousands except share data)**

 
| ** **                                                                                                                                                       | ** **   | **March 31,** | ** **   | **December 31,** | ** **   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|--------------------|--------------|-----------------------|--------------|
| ** **                                                                                                                                                       | ** **   | **2010**           | ** **   | **2009**              | ** **   |
| ** **                                                                                                                                                       | ** **   | **(unaudited)**    | ** **   | **(audited)**         | ** **   |
| *** ***                                                                                                                                                     | *** *** | *** ***       | *** *** | *** ***          | *** *** |
| **Assets**                                                                                                                                                       |         |               |         |                  |         |
| Current assets:                                                                                                                                                  |         |               |         |                  |         |
| Cash and cash equivalents                                                                                                                                        |         | $                  | 69,377       |                  | $            | 69,073 |   |
| Accounts receivable, net                                                                                                                                         |         | 9,599              |         | 32,172                |         |
| Inventories                                                                                                                                                      |         | 39,271             |         | 26,697                |         |
| Deferred income taxes                                                                                                                                            |         | 3,729              |         | 3,729                 |         |
| Prepaid income taxes                                                                                                                                             |         | 5,051              |         | —                |         |
| Prepaid management fees-related party                                                                                                                            |         | 104                |         | 417                   |         |
| Prepaid and other current assets                                                                                                                                 |         | 1,924              |         | 1,446                 |         |
| Total current assets                                                                                                                                             |         | 129,055            |         | 133,534               |         |
|                                                                                                                                                             |         |               |         |                  |         |
| Property, plant, and equipment, net                                                                                                                              |         | 25,884             |         | 26,661                |         |
| Goodwill                                                                                                                                                         |         | 107,222            |         | 107,222               |         |
| Other intangible assets, net                                                                                                                                     |         | 131,410            |         | 132,950               |         |
| Deferred financing costs, net                                                                                                                                    |         | 3,009              |         | 3,311                 |         |
| Other long-term assets                                                                                                                                           |         | 942                |         | 941                   |         |
| Total assets                                                                                                                                                     |         | $                  | 397,522      |                  | $            | 404,619 |   |
|                                                                                                                                                             |         |               |         |                  |         |
| **Liabilities, redeemable stock and  stockholders’ equity**                                                                                                 |         |               |         |                  |         |
| Current liabilities:                                                                                                                                             |         |               |         |                  |         |
| Accounts payable                                                                                                                                                 |         | $                  | 3,885        |                  | $            | 5,170 |   |
| Accrued expenses and other current liabilities                                                                                                                   |         | 9,531              |         | 12,598                |         |
| Accrued interest                                                                                                                                                 |         | 2,457              |         | 5,367                 |         |
| Income taxes payable                                                                                                                                             |         | —             |         | 1,202                 |         |
| Short-term borrowings                                                                                                                                            |         | 6,000              |         | —                |         |
| Current portion of long-term debt                                                                                                                                |         | 850                |         | 850                   |         |
| Total current liabilities                                                                                                                                        |         | 22,723             |         | 25,187                |         |
|                                                                                                                                                             |         |               |         |                  |         |
| Retiree health benefit obligation                                                                                                                                |         | 8,002              |         | 7,848                 |         |
| Pension obligation                                                                                                                                               |         | 9,017              |         | 8,957                 |         |
| Deferred income taxes                                                                                                                                            |         | 20,021             |         | 18,913                |         |
| Deferred compensation                                                                                                                                            |         | 1,544              |         | 1,482                 |         |
| Long-term debt, less current portion                                                                                                                             |         | 231,600            |         | 231,813               |         |
| Other long-term liabilities                                                                                                                                      |         | 2,110              |         | 2,195                 |         |
|                                                                                                                                                             |         |               |         |                  |         |
| Reedemable preferred stock - Series A, par  value $0.01, 65,000 shares authorized, no shares outstanding at  March 31, 2010 and December 31, 2009 |         | —             |         | —                |         |
| Reedemable preferred stock - Series B, par  value $0.01, 1 share issued and outstanding at March 31, 2010 and  December 31, 2009                  |         | 1                  |         | 1                     |         |
| Reedemable preferred stock - Series C, par  value $0.01, 1 share issued and outstanding at March 31, 2010 and  December 31, 2009                  |         | 1                  |         | 1                     |         |
|                                                                                                                                                             |         |               |         |                  |         |
| Stockholders’ equity:                                                                                                                                       |         |               |         |                  |         |
| Common Stock, par value $0.01, 23,750,000 shares  authorized 14,421,736 shares issued and outstanding at March 31, 2010  and December 31, 2009         |         | 144                |         | 144                   |         |
| Additional paid-in capital                                                                                                                                       |         | 59,973             |         | 59,973                |         |
| Stockholders’ notes receivable                                                                                                                              |         | (1,013             | )            | (1,013                | )            |
| Retained earnings                                                                                                                                                |         | 47,336             |         | 53,055                |         |
| Accumulated other comprehensive loss, net of tax                                                                                                                 |         | (3,937             | )            | (3,937                | )            |
| Total stockholders’ equity                                                                                                                                  |         | 102,503            |         | 108,222               |         |
| Total liabilities, redeemable stock and  stockholders’ equity                                                                                               |         | $                  | 397,522      |                  | $            | 404,619 |   |

 

See the accompanying notes to consolidated financial statements.

 

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Douglas Dynamics, Inc.

Consolidated Statements ofOperations

(In thousands, except share data)

 
| ** **                                             | ** ** | **Three Months Ended**  | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|
| ** **                                             | ** ** | **March 31, 2010** | ** ** | **March 31, 2009** | ** ** |
| ** **                                             | ** ** | **(unaudited)**         | ** ** |
|                                                   |       |                    |       |   |   |
| Net sales                                              |       | $                       | 14,647     |   | $ | 15,173 |   |
| Cost of sales                                          |       | 12,667                  |       | 12,160 |   |
| Gross profit                                           |       | 1,980                   |       | 3,013 |   |
|                                                   |       |                    |       |   |   |
| Selling, general, and administrative expense           |       | 5,808                   |       | 5,532 |   |
| Intangibles amortization                               |       | 1,540                   |       | 1,540 |   |
| Management fees-related party                          |       | 347                     |       | 325 |   |
|                                                   |       |                    |       |   |   |
| Loss from operations                                   |       | (5,715                  | )          | (4,384 | ) |
|                                                   |       |                    |       |   |   |
| Interest expense, net                                  |       | (3,715                  | )          | (4,012 | ) |
| Other income (expense), net                            |       | 6                       |       | (59 | ) |
| Loss before taxes                                      |       | (9,424                  | )          | (8,455 | ) |
|                                                   |       |                    |       |   |   |
| Income tax benefit                                     |       | (3,705                  | )          | (3,993 | ) |
|                                                   |       |                    |       |   |   |
| Net loss                                               |       | $                       | (5,719     | ) | $ | (4,462 | ) |
|                                                   |       |                    |       |   |   |
| Weighted average number of common shares  outstanding: |       |                    |       |   |   |
| Basic                                                  |       | 14,421,736              |       | 14,429,645 |   |
| Diluted                                                |       | 14,421,736              |       | 14,429,645 |   |
|                                                   |       |                    |       |   |   |
| Loss Per Share:                                        |       |                    |       |   |   |
| Basic                                                  |       | $                       | (0.40      | ) | $ | (0.31 | ) |
| Diluted                                                |       | $                       | (0.40      | ) | $ | (0.31 | ) |

 

See the accompanying notes to consolidated financial statements.

 

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**Douglas Dynamics, Inc.**

 

**Unaudited Consolidated Statementsof Cash Flows**

 

**(in thousands)**

 
| ** **                                                                                 | ** ** | **Three Months Ended**  | ** ** |
|--------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                 | ** ** | **March 31, 2010** | ** ** | **March 31, 2009** | ** ** |
| ** **                                                                                 | ** ** | **(unaudited)**         | ** ** |
| ** **                                                                                 | ** ** | ** **              | ** ** | ** ** | ** ** |
| **Operating activities**                                                                   |       |                    |       |   |   |
| Net loss                                                                                   |       | $                       | (5,719     | ) | $ | (4,462 | ) |
| Adjustments to reconcile net loss to net cash  provided by (used in) operating activities: |       |                    |       |   |   |
| Depreciation and amortization                                                              |       | 3,557                   |       | 2,833 |   |
| Amortization of deferred financing costs                                                   |       | 302                     |       | 284 |   |
| Stock-based compensation                                                                   |       | —                  |       | 732 |   |
| Provision for losses on accounts receivable                                                |       | 49                      |       | 49 |   |
| Deferred income taxes                                                                      |       | 1,108                   |       | (105 | ) |
| Changes in operating assets and liabilities:                                               |       |                    |       |   |   |
| Accounts receivable                                                                        |       | 22,524                  |       | 21,215 |   |
| Inventories                                                                                |       | (12,574                 | )          | (12,534 | ) |
| Prepaid and other assets and prepaid income taxes                                          |       | (5,217                  | )          | (3,339 | ) |
| Accounts payable                                                                           |       | (1,285                  | )          | (1,788 | ) |
| Accrued expenses and other current liabilities                                             |       | (7,179                  | )          | (7,924 | ) |
| Deferred compensation                                                                      |       | 62                      |       | 63 |   |
| Benefit obligations and other long-term  liabilities                                       |       | 129                     |       | 440 |   |
| Net cash used in operating activities                                                      |       | (4,243                  | )          | (4,536 | ) |
|                                                                                       |       |                    |       |   |   |
| **Investing activities**                                                                   |       |                    |       |   |   |
| Capital expenditures                                                                       |       | (1,240                  | )          | (1,322 | ) |
| Net cash used in investing activities                                                      |       | (1,240                  | )          | (1,322 | ) |
|                                                                                       |       |                    |       |   |   |
| **Financing activities**                                                                   |       |                    |       |   |   |
| Stock repurchases                                                                          |       | —                  |       | (1,000 | ) |
| Payments of deferred financing costs                                                       |       | —                  |       | (45 | ) |
| Revolver borrowings                                                                        |       | 6,000                   |       | — |   |
| Repayment of long-term debt                                                                |       | (213                    | )          | (213 | ) |
| Net cash provided by (used in) financing activities                                        |       | 5,787                   |       | (1,258 | ) |
| Change in cash and cash equivalents                                                        |       | 304                     |       | (7,116 | ) |
| Cash and cash equivalents at beginning of period                                           |       | 69,073                  |       | 53,552 |   |
| Cash and cash equivalents at end of period                                                 |       | $                       | 69,377     |   | $ | 46,436 |   |

 

See the accompanying notes to consolidated financial statements.

 

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**Douglas Dynamics, Inc.**

 

**Notes toUnaudited Consolidated Financial Statements**

**(in thousands except share and per share data)**

 

**1.****             ****Description of business and basis of presentation**

 

DouglasDynamics, Inc., is the North American leader in the design, manufactureand sale of snow and ice control equipment for light trucks, which is comprisedof snowplows and sand and salt spreaders, and related parts andaccessories.  The Company’s snow and icecontrol products are sold through a network of over 720 truck equipmentdistributors that purchase directly from the Company and are located throughoutthe snowbelt regions in North America (primarily the Midwest, East and Northeastregions of the United States as well as all provinces of Canada). The Companysells its products under the WESTERN®, FISHER®, and BLIZZARD® brands.** **The Company isheadquartered in Milwaukee, WI and currently has manufacturing facilities inMilwaukee, WI, Rockland, ME, and Johnson City, TN; however, the Company plansto close its Johnson City, TN facility in mid-2010.  The Company operates as a single segment.

 

Allshare and per share data reported herein have been retrospectively restated toreflect the 23.75-for-one stock split of the Company’s common stock thatoccurred on May 7, 2010, immediately prior to the consummation of theCompany’s initial public offering (“IPO”).

 

***Initial Public Offering***

 

OnMay 10, 2010, the Company completed its IPO of 10,000,000 shares of commonstock at a public offering price of $11.25 per share, less underwritingdiscounts.  The 10,000,000 shares soldincluded 6,500,000 shares sold by the Company and 3,500,000 shares sold bycertain selling stockholders.  Inaddition, on May 14, 2010, the selling stockholders in the IPO closed thesale of an additional 1,500,000 shares to the underwriters at the publicoffering price of $11.25, less underwriting discounts, pursuant to theunderwriters’ exercise in full of their overallotment option.  The Company received approximately $73,125 ingross proceeds from the issuance and sale of its common stock in the IPO andapproximately $62,639 in net proceeds after deducting underwriting discountsand total expenses related to the offering.  The Company did not receive any proceeds fromthe sale of its stock by the selling stockholders in the IPO.

 

Capitalizationsummary upon closing of IPO:

 
| Common stock issued and outstanding at  December 31, 2009    |   | 14,421,736 |   |
|-------------------------------------------------------------------|--------|------------|--------|
| Issuance and sales of common stock by Company  through IPO        |   | 6,500,000  |   |
| Issuance of non-vested common stock in connection  with IPO       |   | 208,130    |   |
| Options exercised in connection with IPO                          |   | 180,567    |   |
| Fractional shares repurchased and retired in  connection with IPO |   | (7         | )      |
| Common stock issued and outstanding as of  May 14, 2010      |   | 21,310,426 |   |

 

Concurrentwith the closing of the IPO, the Company repurchased its one issued andoutstanding share of Series B preferred stock and one issued andoutstanding share of Series C preferred stock, each at a price of $1,000per share.  As of June 17, 2010, thedate of the filing of this Quarterly Report on Form 10-Q, the Company hasno preferred stock outstanding.

 

***Summary ofSignificant Accounting Policies***

 

***Interim Consolidated Financial Information***

 

Theaccompanying consolidated balance sheet as of March 31, 2010 and theconsolidated statements of operations and cash flows for the three months endedMarch 31, 2010 and 2009 have been prepared by the Company and have notbeen audited.  In the opinion ofmanagement, all adjustments, consisting of only normal recurring adjustmentsnecessary for the fair presentation of the financial position, results ofoperations and cash flows, have been made.

 

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Pursuant to the rules and regulations of the Securities andExchange Commission certain information and footnote disclosure normallyincluded in consolidated financial statements prepared in accordance with U.S.generally accepted accounting

 

**Douglas Dynamics, Inc.**

 

**Notes to Unaudited Consolidated Financial Statements**

**(in thousands except share and per share data)**

 

principleshave been condensed or omitted from the accompanying interim consolidatedfinancial statements.  These consolidatedfinancial statements should be read in conjunction with the auditedconsolidated financial statements and notes thereto included in theconsolidated financial statements for the year ended December 31, 2009.

 

Othercomprehensive income (loss) includes the net income or loss of the Company plusthe Company’s adjustments for its defined benefit plans based on themeasurement date as of the Company’s year end. Other comprehensive loss was the same as net loss for the three monthsended March 31, 2010 and 2009.

 

TheCompany’s business is seasonal and consequently its results of operations andfinancial condition vary from quarter-to-quarter.  In addition, because of this seasonality, theCompany’s results of operations for any quarter may not be indicative ofresults of operations that may be achieved for a subsequent quarter or the fullyear, and may not be similar to results of operations experienced in prioryears. The Company attempts to manage the seasonal impact of snowfall on itsrevenues in part through its pre-season sales program. This pre-season salesprogram encourages the Company’s distributors to re-stock their inventoryduring the second and third quarters in anticipation of the peak fourth quarterretail sales period by offering favorable pre-season pricing and paymentdeferral until the fourth quarter. As a result, the Company tends to generateits greatest volume of sales during the second and third quarters. By contrast,its revenue and operating results tend to be lowest during the first quarter asmanagement believes the Company’s end-users prefer to wait until the beginningof a snow season to purchase new equipment and as the Company’s distributorssell off inventory and wait for the pre-season sales incentive period tore-stock inventory. Fourth quarter sales vary from year-to-year as they areprimarily driven by the level, timing and location of snowfall during thequarter. This is because most of the Company’s fourth quarter sales andshipments consist of re-orders by distributors seeking to restock inventory tomeet immediate customer needs caused by snowfall during the winter months.

 

***Fair value measurements***

 

The Company adopted the guidance originally issuedin FASB statement No. 157, *Fair Value Measurements*(codified in Accounting Standards Codification (“ASC”) 820-10, *Fair Value Measurementsand Disclosures*) (“ASC 820-10”) on January 1, 2008.  ASC 820-10, among other things, defines fairvalue, establishes a consistent framework for measuring fair value, and expandsdisclosure for each major asset and liability category measured at fair valueon either a recurring basis or nonrecurring basis.  ASC 820-10 clarifies that fair value is anexit price, representing the amount that would be received to sell an asset orpaid to transfer a liability in an orderly transaction between marketparticipants.  As such, fair value is amarket-based measurement that should be determined based on assumptions thatmarket participants would use in pricing an asset or liability.  As a basis for considering such assumptions,the pronouncement establishes a three-tier fair value hierarchy, whichprioritizes the inputs used in measuring fair value as follows:  (Level 1) observable inputs such as quoted pricesin active markets;  (Level 2) inputs,other than the quoted prices in active markets, that are observable eitherdirectly or indirectly; and (Level 3) unobservable inputs in which there islittle or no market data, which require the reporting entity to develop its ownassumptions.

 

Assets and liabilities measured at fair value arebased on the market approach, which is prices and other relevant informationgenerated by market transactions involving identical or comparable assets orliabilities.  At March 31, 2010 and December 31,2009, the Company did not have any financial instruments accounted for at fairvalue.

 

***Principles of consolidation***

 

Theaccompanying consolidated financial statements include the accounts of DouglasDynamics, Inc. and its direct wholly-owned subsidiary, Douglas Dynamics,L.L.C., and its indirect wholly-owned subsidiaries, Douglas Dynamics FinanceCompany and Fisher, L.L.C. (hereinafter collectively referred to as the “Company”).  All intercompany balances and transactionshave been eliminated in consolidation.

 

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**Douglas Dynamics, Inc.**

 

**Notes to Unaudited Consolidated Financial Statements**

**(in thousands except share and per share data)**

 

***Use of estimates***

 

The preparation of the financial statements in conformity with U.S.generally accepted accounting principles requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting periods.  Accordingly, actualresults could differ from those estimates.

 

**2.****             ****Fair Value**

 

Thecarrying values of the Company’s cash and cash equivalents (Level 1 per ASC820-10), trade accounts receivable, accounts payable, accrued expenses andshort term borrowings approximated fair value as of March 31, 2010.  The fair value of the Company’s long-termdebt, including current maturities, is estimated using discounted cash flowsbased on the Company’s current incremental borrowing rates for similar types ofborrowing arrangements.  The carryingvalue and fair value (Level 2 per ASC 820-10) of the Company’s long-term debtat March 31, 2010 were $232,450 and $227,915, respectively.

 

**3.****             ****Inventories**

 

Inventoriesconsist of the following:

 
| ** **                         | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                               |       |                     |       |                        |       |
| Finished goods and work-in-process |       | $                        | 37,755     |                        | $          | 24,639 |   |
| Raw material and supplies          |       | 1,516                    |       | 2,058                       |       |
|                               |       | $                        | 39,271     |                        | $          | 26,697 |   |

 

**4.****             ****Property, plant and equipment**

 

Property,plant and equipment are summarized as follows:

 
| ** **                          | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|-------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                                |       |                     |       |                        |       |
| Land                                |       | $                        | 1,000      |                        | $          | 1,000 |   |
| Land improvements                   |       | 2,218                    |       | 2,218                       |       |
| Buildings                           |       | 13,766                   |       | 13,766                      |       |
| Machinery and equipment             |       | 23,092                   |       | 23,092                      |       |
| Furniture and fixtures              |       | 6,934                    |       | 6,934                       |       |
| Mobile equipment and other          |       | 969                      |       | 969                         |       |
| Construction-in-process             |       | 5,491                    |       | 4,252                       |       |
| Total property, plant and equipment |       | 53,470                   |       | 52,231                      |       |
| Less accumulated depreciation       |       | (27,586                  | )          | (25,570                     | )          |
| Net property, plant and equipment   |       | $                        | 25,884     |                        | $          | 26,661 |   |

 

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**Douglas Dynamics, Inc.**

 

**Notes to Unaudited Consolidated Financial Statements**

**(in thousands except share and per share data)**

 

**5.****             ****Long-Term Debt**

 

Long-termdebt is summarized below:

 
| ** **              | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|-------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                    |       |                     |       |                        |       |
| Term Loan               |       | $                        | 82,450     |                        | $          | 82,663 |   |
| Senior notes            |       | 150,000                  |       | 150,000                     |       |
| Total long-term debt    |       | 232,450                  |       | 232,663                     |       |
| Less current maturities |       | 850                      |       | 850                         |       |
|                    |       | $                        | 231,600    |                        | $          | 231,813 |   |

 

***Senior Credit Facilities***

 

Asof December 31, 2009 and March 31, 2010, the Company’s senior creditfacilities consisted of an $85,000 term loan facility and a $60,000 revolvingcredit facility with a group of banks. The senior credit facilities have amaturity date of the earlier of (a) 180 days prior to theJanuary 15, 2012 scheduled maturity date of the Company’s senior notes or(b) May 2013, for the term loan facility and May 2012, for therevolving credit facility. Interest rates are the base rate, plus a margin orat the Company’s option, the eurodollar rate plus a margin.

 

Underthe revolving credit facility, the margin for base rate loans is either 0.25%or 0.50% and the margin for eurodollar rate loans is either 1.25% or 1.50%, ineach case determined based on the Company’s leverage ratio from time to time.Under the term loan facility, the margin for base rate loans is 1.25% and themargin for eurodollar rate loans is 2.25%. The senior credit facilities wereused to refinance the Company’s previous credit facility and are also used topay dividends, make acquisitions and for other general corporate purposes.  The term loan facility is payable in equalquarterly installments of $212.5 with the balance payable at maturity.

 

AtMarch 31, 2010 the Company had outstanding borrowings on the revolvingcredit facility of $6,000 and remaining borrowing availability of $53,961.

 

TheCompany’s senior credit facilities include certain negative and operatingcovenants, including restrictions on its ability to pay dividends, and othercustomary covenants, representations and warranties and events of default.  The senior credit facilities entered into bythe Company’s subsidiaries significantly restrict its subsidiaries from payingdividends and otherwise transferring assets to Douglas Dynamics, Inc. Theterms of the Company’s revolving credit facility specifically restrict subsidiariesfrom paying dividends if a minimum availability under the revolving creditfacility is not maintained (such event, a “liquidity event”), and both seniorcredit facilities restrict subsidiaries from paying dividends above certainlevels or at all if an event of default has occurred.  In addition, the Company’s revolving creditfacility includes a requirement that, subject to certain exceptions, capitalexpenditures not exceed $10.0 million in any calendar year and, during theoccurrence of a liquidity event, that the Company comply with a monthly minimumfixed charge coverage ratio test of 1.0:1.0. Compliance with the fixed charge coverage ratio test is subject tocertain cure rights under the Company’s revolving credit facility.  At March 31, 2010, the Company was incompliance with the respective covenants. The credit facilities are collateralized by substantially all assets ofthe Company.

 

Inaccordance with the senior credit facilities, the Company is required to makeadditional principal prepayments over the above scheduled payments undercertain conditions. This includes, in the case of the term loan facility, 100%of the net cash proceeds of certain asset sales, certain insurance orcondemnation events, certain debt issuances, and, within 150 days of the endof the fiscal year, 50% of excess cash flow, as defined, including a deductionfor allowed distributions (which percentage is reduced to 25% or 0% upon theachievement of certain leverage ratio thresholds), for any fiscal year. Excesscash flow is

 

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**Douglas Dynamics, Inc.**

 

**Notes to Unaudited Consolidated Financial Statements**

**(in thousands except share and per share data)**

 

definedin the senior credit facilities as consolidated adjusted EBITDA plus a workingcapital adjustment less the sum of repayments of debt and capital expendituressubject to certain adjustments, interest and taxes paid in cash, managementfees and certain restricted payments (including dividends or distributions).Working capital adjustment is defined in the senior credit facilities as thechange in working capital, defined as current assets excluding cash and cashequivalents less current liabilities excluding current portion of long termdebt.  As of March 31, 2010 andDecember 31, 2009, the Company was not required to make an excess cashflow payment.

 

***Senior Notes***

 

Asof March 31, 2010 and December 31, 2009, the Company had outstanding$150,000 of 7.75% senior notes (the “Senior Notes”) due January 15, 2012.The Senior Notes are redeemable at any time on or after January 15, 2009,at the Company’s option, in whole or in part, upon not less than 30 daysnor more than 60 days notice to each holder of the Senior Notes. Shouldthe Company repurchase all of the Senior Notes, the redemption prices for thepurchase of the Senior Notes would equal 101.938% and 100.000%, if redeemedduring the twelve month period commencing January 15, 2010 and 2011 andthereafter, respectively. Interest on the Senior Notes is payable semiannually.

 

Theindenture for the Senior Notes contains certain non-financial covenants thatrestrict the Company’s ability to borrow money, pay dividends on or repurchase capitalstock, make investments and sell assets or enter into mergers or acquisitions.At March 31, 2010 and December 31, 2009, the Company was incompliance with all covenants under the indenture governing the Senior Notes.The Senior Notes are unsecured and unconditionally guaranteed by DouglasDynamics, Inc. and all of the subsidiaries of the Company.

 

***Amendments to Senior Credit Facilities andRedemption of Senior Notes***

 

Concurrentwith the consummation of the IPO, the Company amended its senior credit facilitiesto allow, among other things, (i) it to redeem the Senior Notes, (ii) increasethe size of its term loan facility by $40,000 and (iii) amend certain ofthe provisions in its senior credit facilities which govern the Company’sability to pay dividends. After effecting the discharge of the Senior Notes,and unless terminated earlier, the Company’s revolving credit facility willmature on May 21, 2012. After effecting the discharge of the Senior Notes,the Company’s term loan will amortize in nominal amounts quarterly with thebalance payable on May 21, 2013 with respect to the existing term loansand May 21, 2016 with respect to the additional term loans.  In addition, in connection with theamendments to the Company’s senior credit facilities, the interest on theexisting portion of the term loan facility was increased from an interest rateequal to (at the Company’s option) either the base rate plus 1.25% or theeurodollar rate plus 2.25% to (at the Company’s option) either the base rate(which shall be no less than 3%) plus 3.5% or the eurodollar rate (which shallbe no less than 2%) plus 4.5%.  Theinterest for the additional $40,000 increase in the Company’s term loanfacility is an interest rate equal to (at the Company’s option) either the baserate (which shall be no less than 3%) plus 4% or the eurodollar rate (whichshall be no less than 2%) plus 5%.

 

OnJune 9, 2010 the Company completed the redemption of its SeniorNotes.  The Company redeemed its SeniorNotes with the proceeds from the additional term loan, together with the IPOproceeds and cash on hand for a total of $157,557 including $4,650 of accruedinterest and the $2,907 redemption premium which will be recorded as a loss onearly extinguishment of debt in the second quarter of 2010.  In addition, the Company will write off ofapproximately $1,007 of deferred financing costs.

 

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**Douglas Dynamics, Inc.**

 

**Notes to Unaudited Consolidated Financial Statements**

**(in thousands except share and per share data)**

 

**6.****             ****Accrued Expenses and Other Liabilities**

 

Accruedexpenses and other liabilities are summarized as follows:

 
| ** **                | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|---------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                      |       |                     |       |                        |       |
| Payroll and related costs |       | $                        | 3,033      |                        | $          | 3,659 |   |
| Employee benefits         |       | 2,887                    |       | 2,534                       |       |
| Accrued warranty          |       | 1,933                    |       | 3,040                       |       |
| Other                     |       | 1,678                    |       | 3,365                       |       |
|                      |       | $                        | 9,531      |                        | $          | 12,598 |   |

 

**7.****             ****Warranty Liability**

 

TheCompany accrues for estimated warranty costs as sales are recognized andperiodically assesses the adequacy of its recorded warranty liability andadjusts the amount as necessary.  TheCompany’s warranties generally provide, with respect to its snow and icecontrol equipment, that all material and workmanship will be free from defectfor a period of two years after the date of purchase by the end-user, and withrespect to its parts and accessories purchased separately, that such parts andaccessories will be free from defect for a period of one year after the date ofpurchase by the end-user.  Certainsnowplows only provide for a one year warranty. The Company determines the amount of the estimated warranty costs (andits corresponding warranty reserve) based on the Company’s prior five years ofwarranty history utilizing a formula driven by historical warranty expense andapplying management’s judgment.  TheCompany adjusts its historical warranty costs to take into account uniquefactors such as the introduction of new products into the marketplace that donot provide a historical warranty record to assess.  The warranty reserve is included with AccruedExpenses and Other Current Liabilities in the accompanying consolidated balancesheets.

 

Thefollowing is a rollforward of the Company’s warranty liability:

 
| ** **                             | ** ** | **Three months ended**  | ** ** |
|----------------------------------------|------------|-------------------------|------------|
| ** **                             | ** ** | **March 31, 2010** | ** ** | **March 31, 2009** | ** ** |
|                                   |       |                    |       |   |   |
| Balance at the beginning of the period |       | $                       | 3,040      |   | $ | 2,272 |   |
| Warranty provision                     |       | 229                     |       | 140 |   |
| Claims paid/settlements                |       | (1,336                  | )          | (1,149 | ) |
| Balance at the end of the period       |       | $                       | 1,933      |   | $ | 1,263 |   |

 

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**Douglas Dynamics, Inc.**

 

**Notes to Unaudited Consolidated Financial Statements**

**(in thousands except share and per share data)**

 

**8.****             ****Employee Retirement Plans**

 

Thecomponents of net periodic pension cost consisted of the following:

 
| ** **                              | ** ** | **Three months ended**   | ** ** |
|-----------------------------------------|------------|--------------------------|------------|
| ** **                              | ** ** | **March 31,  2010** | ** ** | **March 31,  2009** | ** ** |
| Component of net periodic pension cost: |       |                     |       |   |   |
| Service cost                            |       | $                        | 200        |   | $ | 205 |   |
| Interest cost                           |       | 358                      |       | 339 |   |
| Expected return on plan assets          |       | (290                     | )          | (246 | ) |
| Amortization of net loss                |       | 81                       |       | 130 |   |
| Net periodic pension cost               |       | $                        | 349        |   | $ | 428 |   |

 

TheCompany estimates its total required minimum contributions to its pension plansin 2010 will be $1,050.  As of March 31,2010, the Company has made $289 of cash contributions to the pension plansversus $207 during the same period in 2009.

 

**9.****             ****Stock Repurchases**

 

On January 23, 2009, the Company enteredinto securities repurchase agreements with certain members of management.  Pursuant to these agreements, the Companyrepurchased at fair value and subsequently retired 27,004 shares of commonstock and 89,371 stock options in exchange for aggregate consideration of$1,137, comprised of a cash payment of $1,000 and the satisfaction of theremaining principal amount of $137 on promissory notes held by the members ofmanagement.  As a result of therepurchase of stock options, the Company recorded $732 of compensation expensein the three months ended March 31, 2009 which represented the fair valueof the repurchased options.

 

**10.****      ****Earnings Per Share**

 

Basicearnings per share of common stock is computed by dividing net income (loss) bythe weighted average number of common shares outstanding during theperiod.  Diluted earnings per share ofcommon stock is computed by dividing net income(loss) by the weighted averagenumber of common stock and common stock equivalents related to the assumedexercise of stock options, using the treasury stock method.  Stock options for which the exercise priceexceeds the average fair value have an anti-dilutive effect on earnings pershare and are excluded from the calculation. There were 819,185 shares excluded from diluted earnings per share forthe three months ended March 31, 2010 and 2009, as the shares would beanti-dilutive for those periods as the Company incurred a net loss.

 

Thefollowing shares were used to calculate basic and diluted earnings per sharefor the three months ended March 31,

 
| ** **                                                  | ** ** | **2010**   | ** ** | **2009**   | ** ** |
|-------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                        |       |       |       |       |       |
| Basic weighted average common shares outstanding            |       | 14,421,736 |       | 14,429,645 |       |
| Incremental shares applicable to common stock  options      |       | —     |       | —     |       |
| Average diluted weighted average common shares  outstanding |       | 14,421,736 |       | 14,429,645 |       |

 

Thedeferred common stock units are convertible to common stock upon the earlier tooccur of (i) a change of control or (ii) the later of the closing ofa qualified initial public offering of the Company’s common stock or the expiration of the lock-up agreemententered into in connection with the qualified initial public offering.  The impact of the conversion of the deferred commonstock units is excluded from diluted earnings per share calculations for allyears presented, as this contingent event did not occur by the end of therespective reporting periods.  The numberof shares of common stock that would be issued

 

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**Douglas Dynamics, Inc.**

 

**Notes to Unaudited Consolidated Financial Statements**

**(in thousands except share and per share data)**

 

uponthe expiration of the lock-up agreement entered into in connection with aqualified initial public offering or a change of control is 174,230 shares.

 

**11.****      ****Commitments and Contingencies**

 

Inthe ordinary course of business, the Company is engaged in various litigationincluding product liability and intellectual property disputes.  However, the Company does not believe thatany pending litigation will have a material adverse effect on its consolidatedfinancial position.  In addition, theCompany is not currently a party to any environmental-related claims or legalmatters.

 

**12.****      ****Restructuring**

 

OnApril 27, 2009, the Company announced a plan to close its Johnson City, TNmanufacturing facility and move production from this facility to its Milwaukee,WI and Rockland, ME facilities by mid-2010. The Company expects to realize significant annual cost savings andimproved customer delivery performance as a result.  The closure will result in the elimination ofapproximately 100 positions in Johnson City and the addition of approximately50 positions in Rockland and approximately 35 positions in Milwaukee.

 

Relatedto the facility closure, the Company recorded $63 of employee termination costs and $377 for other closurecosts for the three months ended March 31, 2010.  No restructuring expenses were recorded forthe three months ended March 31, 2009, as the plan was not in effect atsuch time.  The Company expects the totalcost of this restructuring to be $2,288 consisting of employee terminationcosts of $824 and other costs of $1,464. The other costs consist principally of facility move preparation andequipment relocation costs.  These costsare included in the “Selling, General and Administrative Expense” line in theCompany’s condensed consolidated statements of operations.

 

Thefollowing represents a reconciliation of changes in the restructuring reservesrelated to this project through March 31, 2010.

 
| ** **                                                   | ** ** | **Employee  Termination  Costs** | ** ** | **Other Exit  Costs** | ** ** | **Total** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------|------------|-----------------------|------------|-----------|------------|
| Accrued restructuring reserves as of  December 31, 2009 |       | $                                | 690        |                  | $          | —    |       | $ | 690 |   |
| Activity during three months ended March 31,  2010:     |       |                             |       |                  |       |      |       |
| Charges to earnings                                          |       | 63                               |       | 377                   |       | 440       |       |
| Payments                                                     |       | —                           |       | (377                  | )          | (377      | )          |
| Accrued restructuring reserves as of  March 31, 2010    |       | $                                | 753        |                  | —     |      | $          | 753 |   |
|                                                              |            |                                  |            |                       |            |           |            |  |  |  |

 

Inconnection with the restructuring, the Company reassessed the useful lives ofits manufacturing facility and certain equipment.  As a result of this assessment, the Companyassigned shorter useful lives to these assets and recorded accelerateddepreciation of $950 for the three months ended March 31, 2010.  This change in estimate reduced basic anddiluted earnings per share by $0.04.

 

Basedon the anticipated reduction in workforce, the Company anticipates recognizinga curtailment gain related to its other post retirement benefit plans, whichwill be recorded in the statements of operations when the participants areterminated.  The exact amount of thisgain is not known at this time.  Inaddition, the Company anticipates recognizing a curtailment gain related to itspension plans.  Because the estimatedcurtailment gain is less than the unrecognized actuarial losses, thecurtailment gain will be recorded as a component of other comprehensive income(loss).

 

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**Douglas Dynamics, Inc.**

 

**Notes to Unaudited Consolidated Financial Statements**

**(in thousands except share and per share data)**

 

**13.****      ****Income Taxes**

 

Deferred income taxes reflect the net taxeffects of temporary differences between the carrying amounts of assets andliabilities for financial reporting purposes and the amounts used for incometax purposes.  The largest item affectingdeferred taxes is the difference between book and tax amortization of goodwilland other intangibles amortization.  TheCompany does not have any significant permanent differences and estimates thatthe effective combined federal and state tax rate for 2010 will beapproximately 38 percent.  The Company’seffective tax rate (benefit) was 39.3% and 47.2% for the three months ended March 31,2010 and 2009, respectively.  Theeffective tax rate (benefit) for the three months ended March 31, 2009 washigher than the corresponding period in 2010 due to the release of a valuation allowance for Wisconsin net operatinglosses (NOLs) in the first quarter of 2009 due to a tax law change in the stateof Wisconsin resulting in the ability to utilize the NOLs in future periods.

 

**14.****      ****RelatedParty Transactions**

 

The Company is party to a Joint ManagementServices Agreement with Aurora Management Partners, LLC (“AMP”) and ACOFManagement, LP (“ACOF”), affiliates of its principal stockholders.  Pursuant to the version of the agreement ineffect as of March 31, 2009 and 2010, the Company agreed to pay an annualmanagement fee of $1,250 per annum, to AMP and ACOF, pro rata in accordancewith their respective holdings, plus reimbursement of reasonable out-of-pocketexpenses, in exchange for consultation and advice in fields such as financialservices, accounting, general business management, acquisitions, dispositionsand banking.  During the three monthsended March 31, 2010 and 2009, the Company recognized management fees andrelated expenses of $347 and $325, respectively, relating to this agreement.

 

In connection with the Company’s IPO, theCompany amended and restated the terms of its Joint Management ServicesAgreements to, among other things, (i) extend the term of service untilthe earlier of (A) the fifth anniversary of the consummation of theCompany’s IPO, (B) such time as AMP and ACOF, together with theiraffiliates, collectively hold less than 5% of the Company’s outstanding commonstock and (C) such time as all parties mutually agree in writing, whileeliminating all other termination events (other than termination for cause); (ii) eliminatethe annual management fee, as well as the provision obligating the Company topay AMP and ACOF a transaction fee in the event of an acquisition or any saleor disposition of the Company or any of its divisions or any sale ofsubstantially all Company assets or similar transactions in exchange for aone-time fee of $5,800 upon the consummation of the IPO, pro rata in accordancewith their respective holdings; and (iii) modify the expense reimbursementprovisions to include reimbursement for out-of-pocket expenses incurred inconnection with SEC and other legally required filings made by each of AMP andACOF with respect to the Company’s securities and certain other expenses.  The one-time management fee was paid on May 10,2010, and will be recorded as a second quarter expense in 2010.

 

**15.****      ****SubsequentEvents**

 

In connection with the Company’s IPO, on May 4,2010, the Company granted 208,130 shares of restricted stock to certain membersof management.  The restricted stockvests in five equal annual installments. The Company will record compensation expense related to this restrictedstock ratably over the five year vesting period beginning in the second quarterof 2010.

 

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**Item 2.    *Management’s Discussion and Analysis of FinancialCondition and******Results of Operations***

 

*The following discussion and analysis of our financial condition andresults of operations should be read in conjunction with our consolidatedfinancial statements and related notes which are included in Item 1 of thisQuarterly Report on Form 10-Q, as well as the information contained in theprospectus related to our initial public offering*(“IPO”)*  dated May 4, 2010, filedwith the Securities and Exchange Commission (“SEC”) in accordance with Rule 424(b) ofthe Securities Act of 1933, as amended (the “Securities Act”) on May 6,2010, which is accessible on the SEC’s website at www.sec.gov.*

 

*In this Quarterly Report on Form 10-Q,**unlessthe context indicates otherwise: “Douglas Dynamics,” the “Company,” “we,” “our,”or “us” refer to Douglas Dynamics, Inc. (formerly known as DouglasDynamics Holdings, Inc.).*

 

**Forward-LookingStatements**

 

*This Quarterly Report on Form 10-Q contains certain “forward-lookingstatements” within the meaning of Section 21E of the Securities ExchangeAct of 1934, as amended (the “Exchange Act”). These statements include information relating to future events, productdemand, the payment of dividends,, future financial performance, strategies,expectations, closure of our Johnson City manufacturing facility,competitiveenvironment, regulation and availability of financial resources.  These statements are often identified by useof words such as “anticipate,” “believe,” “intend,” “estimate,” “expect,” “continue,”“should,” “could,” “may,” “plan,” “project,” “predict,” “will” and similarexpressions and include references to assumptions and relate to our futureprospects, developments and business strategies.  Such statements involve known and unknownrisks, uncertainties and other factors that could cause our actual results,performance or achievements to be materially different from any future results,performance or achievements expressed or implied by these forward-lookingstatements.  Factors that could cause orcontribute to such differences include, but are not limited to: (i) weatherconditions, particularly lack of or reduced levels of snowfall; (ii) asignificant decline in economic conditions; (iii) our inability tomaintain good relationships with our distributors; (iv) lack of availableor favorable financing options for our end-users or distributors; (v) increasesin the price of steel or other materials necessary for the production of ourproducts that cannot be passed on to our distributors; (vi) the inabilityof our suppliers to meet our volume or quality requirements; (vii) ourinability to protect or continue to build our intellectual property portfolio; (viii) ourinability to develop new products or improve upon existing products in responseto end-user needs; (ix) losses due to lawsuits arising out of personalinjuries associated with our products; and (x) our inability to competeeffectively against competition, as well as those discussed in the sectionentitled “Risk Factors,” set forth in Part II, Item 1A of thisQuarterly Report on Form 10-Q.** **Given these risks anduncertainties, you should not place undue reliance on these forward-lookingstatements.  In addition, theforward-looking statements in this Quarterly Report on Form 10-Q speakonly as of the date hereof and we undertake no obligation, except as requiredby law, to update or release any revisions to any forward-looking statement,even if new information becomes available in the future.*

 

**Our Business**

 

Weare the North American leader in the design, manufacture and sale of snow andice control equipment for light trucks, which consists of snowplows and sandand salt spreaders, and related parts and accessories. We sell our productsunder the WESTERN®, FISHER® and BLIZZARD® brands which are among the mostestablished and recognized in the industry. We believe that in 2009 our shareof the light truck snow and ice control equipment market was greater than 50%.We sell our products exclusively through what we believe is the industry’s mostextensive North American distributor network, which primarily consists of over720 truck equipment distributors who purchase directly from us and are locatedthroughout the snowbelt regions in North America (primarily the Midwest, Eastand Northeast regions of the United States as well as all provinces of Canada).We have longstanding relationships with many of our distributors, with anaverage tenure of approximately 15 years. We continually seek to grow andoptimize our network by opportunistically adding high-quality, well-capitalizeddistributors in select geographic areas and by cross-selling ourindustry-leading brands within our distribution network. Beginning in 2005, webegan to extend our reach to international markets, establishing distributionrelationships in Northern Europe and Asia, where we believe meaningful growthopportunities exist.

 

Theannual demand for snow and ice control equipment is driven primarily by thereplacement cycle of the existing installed base, which is predominantly afunction of the average life of a snowplow or spreader and is driven by usageand maintenance

 

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practicesof the end-user. We believe actively-used snowplows are typically replaced, onaverage, every 7 to 8 years. The primary factor influencing the replacementcycle for snow and ice control equipment is the level, timing and location ofsnowfall.

 

Accordingly,our sales depend primarily on the level, timing and location of snowfall. Salesof our products in any given year and region are most heavily influenced bylocal snowfall levels in the prior snow season. Heavy snowfall during a givenwinter causes usage of our equipment to increase, resulting in greater wear andtear and shortened life cycles, thereby creating a need for replacementequipment and additional parts and accessories. In addition, when there is aheavy snowfall in a given winter, the increased income our professionalsnowplowers generate from their professional snowplow activities provides themwith increased purchasing power to purchase replacement snow and ice controlequipment prior to the following winter. Moreover, in our experience, thetiming of snowfall in a given winter also influences our end-users’decision-making process. Because an early snowfall can be viewed as a sign of aheavy upcoming snow season, our end-users may respond to an early snowfall bypurchasing replacement snow and ice control equipment earlier than they mightotherwise have. Alternatively, light snowfall during a given winter season maycause equipment usage to decrease, thereby extending its useful life anddelaying replacement equipment purchases. Because the level, timing andlocation of snowfall are critical drivers of our sales, our results ofoperations vary from year-to-year and from season to season as snowfall variesfrom year to year. See “—Seasonality and Year-to-Year Variability” and “RiskFactors—The year-to-year variability of our business can cause our results ofoperations and financial condition to be materially different fromyear-to-year; whereas the seasonality of our business can cause our results ofoperations and financial condition to be materially different fromquarter-to-quarter.” While snowfall levels vary within a given year and fromyear-to-year, snowfall, and the corresponding replacement cycle of snow and icecontrol equipment, is relatively consistent over multi-year periods.

 

Thedemand for our snow and ice control equipment can also be influenced by generaleconomic conditions in the United States, as well as local economic conditionsin the snowbelt regions in North America. In stronger economic conditions, ourend-users may choose to replace or upgrade existing equipment before its usefullife has ended, while in weak economic conditions, our end-users may seek toextend the useful life of equipment, thereby increasing the sales of parts andaccessories. While our parts and accessories yield slightly higher grossmargins than our snow and ice control equipment, they yield significantly lowerrevenue than equipment sales, which adversely affects our results ofoperations. However, since snow and ice control management is anon-discretionary service necessary to ensure public safety and continuedpersonal and commercial mobility in populated areas that receive snowfall,end-users cannot extend the useful life of snow and ice control equipmentindefinitely and must replace equipment that has become too worn, unsafe orunreliable, regardless of economic conditions.

 

***Costs of Sales and Selling, General and Administrative Expense***

 

Ourcosts of sales consist primarily of variable costs, including labor, materialsand manufacturing overhead. Our selling, general and administrative expensesconsist primarily of our expenses for general administration, sales, marketing,advertising, administration, incentive plans and intangible amortization.Because of our highly variable cost structure, we are able to easily reduce ourcosts of sales during periods following a year in which snowfall levels werelow and during periods in which sales are lower. Our selling, general andadministrative expenses can also be reduced temporarily in such periods tomaximize cash flow.

 

Althoughsteel is a significant component of our cost of sales, we attempt to mitigateincreases in the price of steel by implementing corollary price increases forour products in the form of a permanent price increase (in circumstances inwhich we believe the increase in the price of steel will be permanent) ortemporary surcharges (in circumstances in which we believe the increase in theprice of steel will be temporary).

 

Specifically,our cost of sales increased in 2008 and remained high in 2009 due in large partto elevated steel costs but also due to increased sales. Through theimplementation of a permanent price increase and temporary invoice surchargecommencing in the fourth quarter of 2008 and extending such price increasethrough the twelve months ended December 31, 2009 and the invoicesurcharge through January 31, 2009, we were successful in insulating ourgross profit from the effect of steel price increases on our 2008 purchases.Though we continued to mitigate the effect of elevated steel costs throughout2009, our gross profit in that period declined relative to the correspondingperiod in 2008. This was mainly due to the decline in unit sales of snow andice control equipment we experienced and the consequent decrease in net salesrelative to fixed costs. Notwithstanding that decrease, we believe the measureswe have taken to mitigate the effect of steel prices remained effectivethroughout 2009, and we intend to continue to implement similar measures tomitigate steel cost increases in the future.

 

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**Initial Public Offering**

 

OnMay 10, 2010, the Company completed its IPO of 10,000,000 shares of commonstock at a public offering price of $11.25 per share, less underwritingdiscounts.  The 10,000,000 shares soldincluded 6,500,000 shares sold by the Company and 3,500,000 shares sold bycertain selling stockholders.  Inaddition, on May 14, 2010, the selling stockholders in the IPO closed thesale of an additional 1,500,000 shares to the underwriters at the publicoffering price of $11.25, less underwriter discounts, pursuant to theunderwriters’ exercise in full of their overallotment option.  The Company received approximately $73.1million in gross proceeds from the issuance and sale of its common stock in theIPO and approximately $62.6 million in net proceeds after deductingunderwriting discounts and total expenses related to the IPO.  The Company did not receive any proceeds fromthe sale of its stock by the selling stockholders in the IPO.  The Company used the proceeds from the IPO,together with the increase in its term loan facility and cash on hand, toredeem all of its outstanding $150.0 million, 7.75% senior notes due January 15,2012, including accrued and unpaid interest and the related redemption premium.

 

**Results of Operations**

 

***Three Months Ended March 31, 2010 Compared to Three Months Ended March 31,2009***

 

*Overview*

 

The following table showsour sales of snow and ice control equipment and related parts and accessoriesas a percentage of net sales for the three months ended March 31, 2010 and2009.  During the three months ended March 31,2010 and 2009, we sold 2,646 and 2,399 units of snow and ice control equipment,respectively.

 
| ** **            | ** ** | **Three months ended March 31,** | ** ** |
|-----------------------|------------|---------------------------------------|------------|
| ** **            | ** ** | **2010**                              | ** ** | **2009** | ** ** |
|                  |       |                                  |       |   |   |
| Equipment             |       | 59                                    | %          | 56 | % |
|                  |       |                                  |       |   |   |
| Parts and accessories |       | 41                                    | %          | 44 | % |

 

The following table setsforth, for the three months ended March 31, 2010 and 2009, theconsolidated statements of operations of Douglas Dynamics, Inc. and itssubsidiaries.  All intercompany balancesand transactions have been eliminated in consolidation.  In the table below and throughout this “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,”consolidated statements of operations data for the three months ended March 31,2010 and 2009 have been derived from our unaudited consolidated financialstatements.  The information contained inthe table below should be read in conjunction with our consolidated financialstatements and the related notes included elsewhere in this Quarterly Report onForm 10-Q.

 

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| ** **                                   | ** ** | **Three Months Ended**          | ** ** |
|----------------------------------------------|------------|---------------------------------|------------|
| ** **                                   | ** ** | **March 31, 2010**         | ** ** | **March 31, 2009** | ** ** |
| ** **                                   | ** ** | **(in thousands)  (unaudited)** | ** ** |
|                                         |       |                            |       |   |   |
| Net sales                                    |       | $                               | 14,647     |   | $ | 15,173 |   |
| Cost of sales                                |       | 12,667                          |       | 12,160 |   |
| Gross profit                                 |       | 1,980                           |       | 3,013 |   |
|                                         |       |                            |       |   |   |
| Selling, general, and administrative expense |       | 5,808                           |       | 5,532 |   |
| Intangibles amortization                     |       | 1,540                           |       | 1,540 |   |
| Management fees-related party                |       | 347                             |       | 325 |   |
|                                         |       |                            |       |   |   |
| Loss from operations                         |       | (5,715                          | )          | (4,384 | ) |
|                                         |       |                            |       |   |   |
| Interest expense, net                        |       | (3,715                          | )          | (4,012 | ) |
| Other income (expense), net                  |       | 6                               |       | (59 | ) |
| Loss before taxes                            |       | (9,424                          | )          | (8,455 | ) |
|                                         |       |                            |       |   |   |
| Income tax benefit                           |       | (3,705                          | )          | (3,993 | ) |
|                                         |       |                            |       |   |   |
| Net loss                                     |       | $                               | (5,719     | ) | $ | (4,462 | ) |

 

The following table sets forth for the three monthsended March 31, 2010 and 2009, the percentage of certain items in ourconsolidated statement of operations, relative to net sales:

 

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| ** **                                   | ** ** | **Three Months Ended**  | ** ** |
|----------------------------------------------|------------|-------------------------|------------|
| ** **                                   | ** ** | **March 31, 2010** | ** ** | **March 31, 2009** | ** ** |
| ** **                                   | ** ** | ** **              | ** ** | ** ** | ** ** |
| Net sales                                    |       | 100.0                   | %          | 100.0 | % |
| Cost of sales                                |       | 86.5                    |       | 80.1 |   |
| Gross profit                                 |       | 13.5                    |       | 19.9 |   |
|                                         |       |                    |       |   |   |
| Selling, general, and administrative expense |       | 39.7                    |       | 36.5 |   |
| Intangibles amortization                     |       | 10.5                    |       | 10.1 |   |
| Management fees-related party                |       | 2.4                     |       | 2.1 |   |
|                                         |       |                    |       |   |   |
| Loss from operations                         |       | (39.0                   | )          | (28.9 | ) |
|                                         |       |                    |       |   |   |
| Interest expense, net                        |       | (25.4                   | )          | (26.4 | ) |
| Other income (expense), net                  |       | 0.0                     |       | (0.4 | ) |
| Loss before taxes                            |       | (64.3                   | )          | (55.7 | ) |
|                                         |       |                    |       |   |   |
| Income tax benefit                           |       | (25.3                   | )          | (26.3 | ) |
|                                         |       |                    |       |   |   |
| Net loss                                     |       | (39.1                   | )%         | (29.4 | )% |

 

*Net Sales*

 

Historically,first quarter net sales are the lowest of any quarter, typically averaging lessthan 10% of full year net sales. Management believes this is due to distributors and end-users generallynot wanting to replace equipment until the beginning of a snow season anddistributors generally waiting until the Company’s pre-season sales program tore-stock their inventory.  As such, theCompany historically generates a net loss in the first quarter.

 

Netsales were $14.6 million for the three months ended March 31, 2010compared to $15.2 million in the three months ended March 31, 2009, adecrease of $0.6 million, or 3.5%. This decline was driven by a reductionin parts and accessories sales of $0.8 million or 11%.  Slightly offsetting this decline was anincrease in equipment sales of $0.2 million or 2% in the three months ended March 31,2010 from the corresponding period last year, due in part to heavy snowfall in February 2010in the eastern region of the United States.

 

*Cost of Sales*

 

Costof sales were $12.7 million for the three months ended March 31, 2010compared to $12.2 million for the three months ended March 31 2009,an increase of $0.5 million, or 4.2%. This increase in cost of sales wasdriven entirely by one time, non-recurring accelerated depreciation coststotaling $1.0 million, associated with reassessing the useful lives of theCompany’s manufacturing facilities and certain equipment  at our Johnson City plant. Excluding theseone time, non-recurring costs, cost of sales for the three months ended March 31,2010 would have been $11.7 million with costs of sales as a percentage of netsales being 80.1% for both the three months ended March 31, 2010 and2009.  ** **As a percentage of cost of sales,fixed and variable costs were approximately 36% and 64%, respectively, for thethree months ended March 31, 2010 versus approximately 26% and 74%,respectively, for the three months ended March 31, 2009.  Fixed costs as a percentage of cost of saleswere higher in the three months ended March 31 2010 due to the $1.0million of one time, non recurring costs associated with our Johnson City plantclosure noted above.

 

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*Gross Profit*

 

Grossprofit was $2.0 million for the three months ended March 31, 2010compared to $3.0 million in the three months ended March 31, 2009, adecrease of $1.0 million, or 34.3%, due primarily to the one time, nonrecurring plant closure costs described above under “—Cost of Sales.”  As a percentage of net sales, gross profitdecreased from 19.9% for the three months ended March 31, 2009 to 13.5%for the corresponding period in 2010, primarily as a result of the factorsdiscussed above under “—Net Sales” and “—Cost of Sales.”

 

*Selling, General and Administrative Expense*

 

Selling,general and administrative expenses were $5.8 million for the three monthsended March 31, 2010, compared to $5.5 million for the three months ended March 312009, an increase of $0.3 million. ** **This increasewas primarily attributable to one time, non recurring plant closure costs atour Johnson City facility totaling  $0.4million, comprised namely of employee termination and plant relocation costs.As a percentage of net sales, selling, general and administrative expensesincreased from 39.7% for the three months ended March 31, 2009 to 36.5%for the corresponding period in 2009 due to the factors discussed above.

 

*Interest Expense*

 

Interestexpense was $3.7 million for the three months ended March 31, 2010compared to $4.0 million in the corresponding period in 2009, a decreaseof $0.3 million. This decrease was due to reduced interest rates on ourterm loan of $0.3 million.

 

*Income Taxes*

 

TheCompany’s effective tax rate (a benefit) was 39.3% and 47.2% for the threemonths ended March 31, 2010 and 2009, respectively.  The effective tax rate (benefit) for thethree months ended March 31, 2009 was higher than the corresponding periodin 2010 due to the release of a valuation allowance for Wisconsin net operatinglosses (NOLs) in the first quarter of 2009 as a result of a tax law change inthe state of Wisconsin resulting in the ability to utilize the NOLs in futureperiods.

 

*Net Loss*

 

Netloss for the three months ended March 31, 2010 was $5.7 millioncompared to net loss of $4.5 million for the corresponding period in 2009,an increase of $1.3 million, or 28.2%. This increase in net loss wasdriven by the factors described above and primarily by the impact of one time,non recurring costs associated with the closure of our Johnson City plant. As apercentage of net sales, net loss was 39.0% for the three months endedMarch 31, 2010 compared to 29.4% for the three months ended March 31,2009.

 

*AdjustedEBITDA*

 

AdjustedEBITDA for the three months ended March 31, 2010 was negative $1.2 millioncompared to negative $0.5 million in the corresponding period in 2009, adecrease of $0.7 million, or 138.4%.  Asa percentage of net sales, Adjusted EBITDA decreased from a negative 3.3% forthe three months ended March 31, 2009 to a negative 8.1% for the threemonths ended March 31, 2010.  Thedecrease in Adjusted EBITDA is primarily attributable to reduced productionlevels, which resulted in lower overhead absorption. This stemmed from thetransition of production from our Johnson City plant to our Milwaukee andRockland manufacturing facilities.

 

*Non-GAAPFinancial Measure*

 

AdjustedEBITDA does not conform to U.S. generally accepted accounting principles (“GAAP”).It should not be construed as an alternative to the reported results determinedin accordance with GAAP. Adjusted EBITDA represents net income (loss) beforeinterest, taxes, depreciation and amortization, as further adjusted formanagement fees paid by us to affiliates of our principal stockholders,stock-based compensation, certain non-recurring charges related to the closureof our Johnson City, Tennessee manufacturing facility and certain unrelatedlegal expenses.   We use, and we believe our investors benefit from thepresentation of Adjusted EBITDA in evaluating our operating performance becauseit provides us and our investors with additional tools to compare our operatingperformance on a consistent basis by removing the impact of certain items thatmanagement believes do not directly reflect our core operations. In addition,we believe that Adjusted EBITDA is useful to investors and other external usersof our consolidated financial statements in evaluating our operatingperformance as compared to that of other companies, because it allows

 

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themto measure a company’s operating performance without regard to items such asinterest expense, taxes, depreciation and depletion, and amortization andaccretion, which can vary substantially from company to company depending uponaccounting methods and book value of assets and liabilities, capital structureand the method by which assets were acquired. Our management also uses AdjustedEBITDA for planning purposes, including the preparation of our annual operatingbudget and financial projections. Management also uses Adjusted EBITDA toevaluate our ability to make certain payments, including dividends, incompliance with our senior credit facilities, which is determined based on acalculation of “Consolidated Adjusted EBITDA” that is substantially similar toAdjusted EBITDA.

 

AdjustedEBITDA has limitations as an analytical tool. As a result, you should notconsider it in isolation, or as a substitute for net income, operating income,cash flow from operating activities or any other measure of financialperformance or liquidity presented in accordance with GAAP. Some of theselimitations are:

 

·                  Adjusted EBITDA does not reflect our cashexpenditures or future requirements for capital expenditures or contractualcommitments;

·                  Adjusted EBITDA does not reflect changes in,or cash requirements for, our working capital needs;

·                  Adjusted EBITDA does not reflect the interestexpense, or the cash requirements necessary to service interest or principalpayments, on our indebtedness;

·                  Although depreciation and amortization arenon-cash charges, the assets being depreciated and amortized will often have tobe replaced in the future, and Adjusted EBITDA does not reflect any cashrequirements for such replacements;

·                  Other companies, including other companies inour industry, may calculate Adjusted EBITDA differently than we do, limitingits usefulness as a comparative measure; and

·                  Adjusted EBITDA does not reflect taxobligations whether current or deferred.

 

Thefollowing table presents a reconciliation of net income (loss), the mostcomparable GAAP financial measure, to Adjusted EBITDA as well as the resultingcalculation of Adjusted EBITDA for the three months ended March 31, 2010and 2009:

 

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| ** **                      | ** ** | **Three months ended March 31,** | ** ** |
|---------------------------------|------------|---------------------------------------|------------|
| ** **                      | ** ** | **2010**                              | ** ** | **2009** | ** ** |
|                            |       |                                  |       |   |   |
| **Net Loss**                    |       | $                                     | (5,719     | ) | $ | (4,462 | ) |
|                            |       |                                  |       |   |   |
| Interest Expense - Net          |       | 3,715                                 |       | 4,012 |   |
| Income Taxes                    |       | (3,705                                | )          | (3,993 | ) |
| Depreciation Expense            |       | 2,017                                 |       | 1,293 |   |
| Amortization                    |       | 1,540                                 |       | 1,540 |   |
| **EBITDA**                      |       | (2,152                                | )          | (1,610 | ) |
|                            |       |                                  |       |   |   |
| Management Fees                 |       | 347                                   |       | 325 |   |
| Stock Based Compensation (1)    |       | —                                |       | 732 |   |
| Other non-recurring charges (2) |       | 619                                   |       | 55 |   |
|                            |       |                                  |       |   |   |
| **Adjusted EBITDA**             |       | $                                     | (1,186     | ) | $ | (498 | ) |

 

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(1)          Reflects the stock-basedcompensation expense associated with the repurchase of stock options from certainof our executives.

 

(2)          Reflects severance andone-time, non-recurring expenses for costs related to the closure of our JohnsonCity facility of $440 and $0 for the three months ended March 31, 2010 and2009, respectively, and $179 and $55 of unrelated legal fees for the threemonths ended March 31, 2010 and 2009, respectively.

 

**Discussion of Critical Accounting Policies**

 

Fora discussion of our critical accounting policies, please see the disclosureincluded in the prospectus related to our IPO, filed with the SEC in accordancewith Rule 424(b) of the Securities Act, under the heading  “Management’sDiscussion and Analysis of Financial Condition and Results of Operation — CriticalAccounting Policies” on May 6, 2010, which is accessible on the SEC’s websiteat www.sec.gov.

 

**New Accounting Pronouncements**

 

For the three months ended March 31, 2010, theCompany did not adopt any new accounting pronouncements that had a significantimpact to the Company’s consolidated financial statements.

 

**Liquidity and Capital Resources**

 

Ourprincipal sources of cash have been and we expect will continue to be cash fromoperations and borrowings under our senior credit facilities.  As of March 31, 2010, our senior creditfacilities consisted of a $60 million senior secured revolving credit facility,entered into by our subsidiaries, Douglas Dynamics, L.L.C., DouglasDynamics Finance Company and Fisher, LLC, as borrowers and an $85 millionsenior secured term loan facility, entered into by Douglas Dynamics,L.L.C., as borrower, each on May 21, 2007. Concurrent with the consummation of our IPO, we amended our seniorcredit facilities to, among other things, (i) allow us to redeem ourSenior Notes, (ii) increase the size of our term loan facility by $40million, which additional term loans will mature in May 2016 and(iii) amend certain of the provisions in our senior credit facilitieswhich govern our ability to pay dividends.

 

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On June 9,2010, we completed the redemption of our $150 million of 7.75% senior notes(the “Senior Notes”) due January 15, 2012. We redeemed the Senior Notes using the proceeds from our IPO, togetherwith the increase in our term loan facility and cash on hand, for a total of$157.6 million including accrued interest and redemption premium.

 

We expect that our primary uses of cash will be toprovide working capital, meet debt service requirements, finance capitalexpenditures, pay dividends under our dividend policy and support our growth,including through potential acquisitions, and for other general corporatepurposes.  For a description of theseasonality of our working capital rates see “—Seasonality and Year-To-YearVariability.”

 

As discussed in the prospectus relating to our IPO, inconnection with our IPO, our Board of Directors adopted a dividend policy,reflecting an intention to distribute to our stockholders a regular quarterlycash dividend, commencing in the third quarter of 2010 in equal quarterlyinstallments at an initial annual rate of $0.73 per share.  The declaration and payment of thesedividends to holders of our common stock will be at the discretion of our Boardof Directors and will depend upon many factors, including our financialcondition and earnings, legal requirements, taxes and other factors our Boardof Directors may deem to be relevant. The terms of our indebtedness alsorestricts us from paying cash dividends on our common stock under certaincircumstances. As a result of this dividend policy, we may not have significantcash available to meet any large unanticipated liquidity requirements. As aresult, we may not retain a sufficient amount of cash to fund our operations orto finance unanticipated capital expenditures or growth opportunities,including acquisitions. Our Board of Directors may, however, amend, revoke orsuspend our dividend policy at any time and for any reason.

 

As of March 31, 2010, we had $123.4 millionof total liquidity, comprised of $69.4 million in cash and cashequivalents and borrowing availability of $54.0 million under our revolvingcredit facility.  Borrowing availabilityunder our revolving credit facility is governed by a borrowing base, thecalculation of which includes cash on hand. Accordingly, use of cash on handmay also result in a reduction in the amount available for borrowing under ourrevolving credit facility.  Furthermore,our revolving credit facility requires us to maintain at least $6 millionof borrowing availability. We expect that cash on hand, generated fromoperations, as well as available credit under our senior credit facilities willprovide adequate funds for the purposes described above for at least the next12 months.

 

The following table shows our cash and cashequivalents and inventories at March 31, 2010, December 31, 2009 and March31, 2009.

 
| ** **                | ** ** | **As of**                    | ** ** |
|---------------------------|------------|------------------------------|------------|
| ** **                | ** ** | **March 31, 2010** | ** ** | **December 31, 2009** | ** ** | **March 31, 2009** | ** ** |
| Cash and cash equivalents |       | $                            | 69,377     |   | $ | 69,703 |   | $ | 46,436 |   |
| Inventories               |       | 39,271                       |       | 26,697 |   | 41,335 |   |
|                           |            |                              |            |  |  |  |  |  |  |  |

 

We had cash and cash equivalents of $69.4 millionat March 31, 2010 compared to cash and cash equivalents of$46.4 million at March 31, 2009. The table below sets forth a summary of the significant sources and usesof cash for the periods presented in thousands.

 
| ** **                                          | ** ** | **Three  months ended March  31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|------------------------------------|------------|------------|------------|------------|------------|
| **Cash Flows (in thousands)**                       | ** ** | **2010**                           | ** ** | **2009**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| Net cash used in operating activities               |       | $                                  | (4,243     | )          | $          | (4,536     | )          | $ | 293 |   | (6.5 | )% |
| Net cash used in investing activities               |       | (1,240                             | )          | (1,322     | )          | 82         |       | (6.2 | )% |
| Net cash provided by (used in) financing activities |       | 5,787                              |       | (1,258     | )          | 7,045      |       | (560.0 | )% |
|                                                |       |                               |       |       |       |       |       |   |   |
| Increase (decrease) in cash                         |       | $                                  | 304        |       | $          | (7,116     | )          | $ | 7,420 |   | (104.3 | )% |

 

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Netcash used in operating activities decreased $0.3 million from the threemonths ended March 31, 2009 to the three months ended March 31, 2010due mainly to minor changes in working capital.

 

Net cash used in investing activities decreased$0.1 million for the three months ended March 31, 2010, compared tothe corresponding period in 2009.  Thiswas due to the fact that a majority of our capital expenditures for the threemonths ended March 31, 2010 were in our manufacturing plants in Milwaukee,WI and Rockland, ME to support the closure of our Johnson City, TNmanufacturing plant planned for mid-2010.

 

Net cash provided by (used in) financing activitiesincreased $7.0 million for the three months ended March 31, 2010compared to the corresponding period in 2009, primarily as a result of revolverborrowings of $6.0 million to fund working capital requirements for our pre-seasoninventory build.

 

**Off-Balance Sheet Arrangements**

 

We are not party to any off-balance sheetarrangements that have or are reasonably likely to have a material current orfuture effect on our financial condition, changes in financial condition,revenues, expenses, results of operations, liquidity, capital expenditures orcapital resources.

 

**Seasonality and Year-to-Year Variability**

 

Our business is seasonal and also varies fromyear-to-year. Consequently, our results of operations and financial conditionvary from quarter-to-quarter and from year-to-year as well. In addition,because of this seasonality and variability, our results of operations for anyquarter may not be indicative of results of operations that may be achieved fora subsequent quarter or the full year, and may not be similar to results ofoperations experienced in prior years. That being the case, while snowfalllevels vary within a given year and from year-to-year, snowfall, and the correspondingreplacement cycle of snow and ice control equipment, is relatively consistentover multi-year periods.

 

Sales of our products are significantly impacted bythe level, timing and location of snowfall, with sales in any given year andregion most heavily influenced by snowfall levels in the prior snow season(which we consider to begin in October and end in March) in that region.This is due to the fact that end-user demand for our products is drivenprimarily by the condition of their snow and ice control equipment, and in thecase of professional snowplowers, by their financial ability to purchase new orreplacement snow and ice control equipment, both of which are significantlyaffected by snowfall levels. Heavy snowfall during a given winter causes usageof our products to increase, resulting in greater wear and tear to our productsand a shortening of their life cycles, thereby creating a need for replacementsnow and ice control equipment and related parts and accessories. In addition,when there is a heavy snowfall in a given winter, the increased income ourprofessional snowplowers generate from their professional snowplow activitiesprovides them with increased purchasing power to purchase replacementsnow and ice control equipment prior to the following winter. To a lesserextent, sales of our products are influenced by the timing of snowfall in agiven winter. Because an early snowfall can be viewed as a sign of a heavyupcoming snow season, our end-users may respond to an early snowfall bypurchasing replacement snow and ice control equipment during the current seasonrather than delaying purchases until after the season is over when mostpurchases are typically made by end-users.

 

We attempt to manage the seasonal impact of snowfallon our revenues in part through our pre-season sales program, which involvesactively soliciting and encouraging pre-season distributor orders in the secondand third quarters by offering our distributors a combination of pricing,payment and freight incentives during this period. These pre-season salesincentives encourage our distributors to re-stock their inventory during thesecond and third quarters in anticipation of the peak fourth quarter retailsales period by offering pre-season pricing and payment deferral until thefourth quarter. As a result, we tend to generate our greatest volume of sales(an average of over two-thirds over the last ten years) during the second andthird quarters, providing us with manufacturing

 

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visibilityfor the remainder of the year. By contrast, our revenue and operating resultstend to be lowest during the first quarter as management believes our end-usersprefer to wait until the beginning of a snow season to purchase new equipmentand as our distributors sell off inventory and wait for our pre-season salesincentive period to re-stock inventory. Fourth quarter sales vary fromyear-to-year as they are primarily driven by the level, timing and location ofsnowfall during the quarter. This is because most of our fourth quarter salesand shipments consist of re-orders by distributors seeking to restock inventoryto meet immediate customer needs caused by snowfall during the winter months.

 

Because of the seasonality of our sales, weexperience seasonality in our working capital needs as well. In the firstquarter we typically require capital as we are generally required to build ourinventory in anticipation of our second and third quarter pre-season sales.During the second and third quarters, our working capital requirements rise asour accounts receivables increase as a result of the sale and shipment ofproducts ordered through our pre-season sales program and we continue to buildinventory. Working capital requirements peak towards the end of the thirdquarter and then begin to decline through the fourth quarter through areduction in accounts receivables when we receive the majority of the paymentsfor pre-season shipped products.

 

We also attempt to manage the impact of seasonalityand year-to-year variability on our business costs through the effectivemanagement of our assets. Our asset management and profit focus strategiesinclude:

 

·                  the employment of a highlyvariable cost structure facilitated by a core group of workers that wesupplement with a temporary workforce as sales volumes dictate, which allows usto adjust costs on an as-needed basis in response to changing demand;

·                  our enterprise-wide leanconcept, which allows us to adjust production levels up or down to meet demand;

·                  the pre-season order programdescribed above, which incentivizes distributors to place orders prior to theretail selling season; and

·                  a vertically integratedbusiness model.

 

These asset management and profit focus strategies,among other management tools, allow us to adjust fixed overhead and sales,general and administrative expenditures to account for the year-to-yearvariability of our sales volumes.

 

Additionally, although modest, our annual capitalexpenditure requirements can be temporarily reduced by up to approximately 40%in response to actual or anticipated decreases in sales volumes. If we areunsuccessful in our asset management initiatives, the seasonality andyear-to-year variability effects on our business may be compounded and in turnour results of operations and financial condition may suffer.

 

**Item 3.      *Quantitativeand Qualitative Disclosures About Market Risk***

 

We do not use financial instruments for speculativetrading purposes, and do not hold any derivative financial instruments thatcould expose us to significant market risk. Our primary market risk exposuresare changes in interest rates and steel price fluctuations.

 

**Interest Rate Risk**

 

We are exposed to market risk primarily from changesin interest rates.  Certain of ourborrowings, including our term loan and any revolving borrowings under oursenior credit facilities, are at variable rates of interest and expose us tointerest rate risk.  In addition, theinterest rate on any revolving borrowings is subject to an increase in theinterest rate based on our average daily availability under our revolvingcredit facility.  When the average dailyexcess availability on our revolving credit facility falls below $25 million,our interest rate on the revolving credit facility will increase by 0.25%.  The maximum impact this would have on ourinterest expense would be $150,000 per year. If interest rates increase, our debt service obligations on our variablerate indebtedness would increase even though the amount borrowed remained thesame, and our net income and cash flows would correspondingly decrease.

 

Asof March 31, 2010, we had outstanding borrowings under our term loan of$82. 5 million.  A hypothetical interestrate change of 1%, 1.5% and 2% on our term loan would have changed interest

 

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incurred for the threemonths ended March 31, 2010 by $0. 2 million, $0.3 million and $0.4million, respectively. 

 

Asof March 31, 2010, we had outstanding borrowings under our revolvingcredit facility of $6.0 million. A hypothetical interest rate change of 1%,1.5% and 2% on our revolving credit facility would have had an immaterialeffect on interest incurred for the three months ended March 31, 2010.

 

**Commodity Price Risk**

 

In the normal course of business, we are exposed tomarket risk related to our purchase of steel, the primary commodity upon whichour manufacturing depends. Our steel purchases as a percentage of revenue was34.1% and 45.1% for the three months ended March 31, 2010 and 2009,respectively.  While steel is typicallyavailable from numerous suppliers, the price of steel is a commodity subject tofluctuations that apply across broad spectrums of the steel market. We do notuse any derivative or hedging instruments to manage steel price risk. If theprice of steel increases, our variable costs could also increase. Whilehistorically we have successfully mitigated these increased costs through theimplementation of either permanent price increases and/or temporary invoicesurcharges, in the future we may not be able to successfully mitigate thesecosts, which could cause our gross margins to decline. If our costs for steelwere to increase by $1.00 in a period where we are not able to pass any of thisincrease onto our distributors, our gross margins would decline by $1.00 in theperiod in which such inventory was sold.

 

**Item 4.      *ControlsAnd Procedures***

 

**Evaluation of Disclosure Controls and Procedures**

 

Our management, with the participation of our ChiefExecutive Officer and Chief Financial Officer, evaluated the effectiveness ofour disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended) as of theend of the period covered by this Quarterly Report on Form 10-Q. Based onthat evaluation, our Chief Executive Officer and Chief Financial Officerconcluded that as of the end of the period covered by this Quarterly Report ourdisclosure controls and procedures were effective to provide reasonableassurance that information required to be disclosed by us in reports that wefile or submit under the Securities Exchange Act of 1934, as amended, isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms, and include controls and procedures designedto ensure that the information required to be disclosed by us in such reportsis accumulated and communicated to our management, including our ChiefExecutive Officer and Chief Financial Officer, as appropriate, to allow timelydecisions regarding required disclosures.

 

**Changes in Internal Control Over Financial Reporting**

 

There have been no changes in the company’s internalcontrol over financial reporting that occurred during the period covered by thisQuarterly Report on Form 10-Q that have materially affected, or are reasonablylikely to materially affect, the Company’s internal control over financialreporting.

 

**PART II.OTHER INFORMATION**

 

**Item 1.      *LegalProceedings***

 

In the ordinary course of business, we are engagedin various litigation primarily including product liability and intellectualproperty disputes. However, management does not believe that any currentlitigation is material to our operations or financial position. In addition, weare not currently party to any environmental-related claims or legal matters.

 

**Item 1A.      *RiskFactors***

 

*The Company operates in an environmentthat involves numerous known and unknown risks and uncertainties.   Our business, prospects, financial conditionand operating results could be materially adversely affected by any of theserisks, as well as*

 

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*other risks not currently known to us or that wecurrently consider immaterial. The risks described below highlight some ofthe factors that have affected, and in the future could affect our operations.*

 

***Our results of operations depend primarily on the level, timing andlocation of snowfall. As a result, a decline in snowfall levels in multipleregions for an extended time could cause our results of operations to declineand adversely affect our ability to pay dividends.***

 

Asa manufacturer of snow and ice control equipment for light trucks, and relatedparts and accessories, our sales depend primarily on the level, timing andlocation of snowfall in the regions in which we offer our products. A low levelor lack of snowfall in any given year in any of the snowbelt regions in NorthAmerica (primarily the Midwest, East and Northeast regions of the United Statesas well as all provinces of Canada) will likely cause sales of our products todecline in such year as well as the subsequent year, which in turn mayadversely affect our results of operations and ability to pay dividends. See “Management’sDiscussion and Analysis of Financial Condition and Results of Operations—Seasonalityand Year-to-Year Variability.” A sustained period of reduced snowfall events inone or more of the geographic regions in which we offer our products couldcause our results of operations to decline and adversely affect our ability topay dividends.

 

***The year-to-year variability of our business can cause our results ofoperations and financial condition to be materially different fromyear-to-year; whereas the seasonality of our business can cause our results ofoperations and financial condition to be materially different fromquarter-to-quarter.***

 

Becauseour business depends on the level, timing and location of snowfall, our resultsof operations vary from year-to-year. Additionally, because the annual snowseason typically only runs from October 1 through March 31, ourdistributors typically purchase our products during the second and thirdquarters. As a result, we operate in a seasonal business. We not onlyexperience seasonality in our sales, but also experience seasonality in our workingcapital needs. Consequently, our results of operations and financial conditioncan vary from year-to-year, as well as from quarter-to-quarter, which couldaffect our ability to pay dividends. If we are unable to effectively manage theseasonality and year-to-year variability of our business, our results ofoperations, financial condition and ability to pay dividends may suffer.

 

***If economic conditions in the United States continue to remain weak ordeteriorate further, our results of operations, financial condition and abilityto pay dividends may be adversely affected.***

 

Historically,demand for snow and ice control equipment for light trucks has been influencedby general economic conditions in the United States, as well as local economicconditions in the snowbelt regions in North America. During the last few years,economic conditions throughout the United States have been extremely weak, andmay not improve in the foreseeable future. Weakened economic conditions maycause our end-users to delay purchases of replacement snow and ice controlequipment and instead repair their existing equipment, leading to a decrease inour sales of new equipment. Weakened economic conditions may also cause ourend-users to delay their purchases of new light trucks. Because our end-userstend to purchase new snow and ice control equipment concurrent with theirpurchase of new light trucks, their delay in purchasing new light trucks canalso result in the deferral of their purchases of new snow and ice controlequipment. The deferral of new equipment purchases during periods of weakeconomic conditions may negatively affect our results of operations, financialcondition and ability to pay dividends.

 

Weakened economic conditions may also cause ourend-users to consider price more carefully in selecting new snow and icecontrol equipment. Historically, considerations of quality and service haveoutweighed considerations of price, but in a weak economy, price may become amore important factor. Any refocus away from quality in favor of cheaperequipment could cause end-users to shift away from our products to lessexpensive competitor products, or to shift away from our more profitableproducts to our less profitable products, which in turn would adversely affectour results of operations and our ability to pay dividends.

 

***Our failure to maintain goodrelationships with our distributors, the loss or consolidation of ourdistributor base or the actions or inactions of our distributors could have anadverse effect on our results of operations and our ability to pay dividends.***

 

We depend on a network of truck equipmentdistributors to sell, install and service our products. Nearly all of thesesales and service relationships are at will, and less than 1% of ourdistributors have agreed not to offer products that compete with our products.As a result, almost all of our distributors could discontinue the sale andservice of our products at any time, and those distributors that primarily sellour products may choose to sell competing products at any time. Further,difficult economic or other circumstances could cause any of our distributorsto discontinue their businesses. Moreover, if our distributor base were toconsolidate or if any of our distributors were to discontinue their business,competition for the business of fewer distributors would intensify. If we donot maintain good relationships with our distributors, or if we do not provideproduct offerings and pricing that meet the needs of our

 

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distributors,we could lose a substantial amount of our distributor base. A loss of asubstantial portion of our distributor base could cause our sales to declinesignificantly, which would have an adverse effect on our results of operationsand ability to pay dividends.

 

In addition, our distributors may not provide timelyor adequate service to our end-users. If this occurs, our brand identity andreputation may be damaged, which would have an adverse effect on our results ofoperations and ability to pay dividends.

 

***Lack of available financing optionsfor our end-users or distributors may adversely affect our sales volumes.***

 

Our end-user base is highly concentrated amongprofessional snowplowers, who comprise over 50% of our end-users, many of whomare individual landscapers who remove snow during the winter and landscapeduring the rest of the year, rather than large, well-capitalized corporations.These end-users often depend upon credit to purchase our products. If credit isunavailable on favorable terms or at all, our end-users may not be able topurchase our products from our distributors, which would in turn reduce salesand adversely affect our results of operations and ability to pay dividends.

 

In addition, because our distributors, like ourend-users, rely on credit to purchase our products, if our distributors are notable to obtain credit, or access credit on favorable terms, we may experiencedelays in payment or nonpayment for delivered products. Further, if ourdistributors are unable to obtain credit or access credit on favorable terms,they could experience financial difficulties or bankruptcy and cease purchasesof our products altogether. Thus, if financing is unavailable on favorableterms or at all, our results of operations and ability to pay dividends wouldbe adversely affected.

 

***The price of steel, a commoditynecessary to manufacture our products, is highly variable. If the price ofsteel increases, our gross margins could decline.***

 

Steel is a significant raw material used tomanufacture our products. During 2007, 2008 and 2009, our steel purchases wereapproximately 12%, 15% and 18% of our revenue, respectively. The steel industry ishighly cyclical in nature, and steel prices have been volatile in recent yearsand may remain volatile in the future. Steel prices are influenced by numerousfactors beyond our control, including general economic conditions domesticallyand internationally, the availability of raw materials, competition, laborcosts, freight and transportation costs, production costs, import duties andother trade restrictions. After experiencing a downward trend in steel pricesthroughout most of 2009, steel prices may increase as a result of increaseddemand from the automobile and consumer durable sectors. If the price of steelincreases, our variable costs may increase. We may not be able to mitigatethese increased costs through the implementation of permanent price increasesor temporary invoice surcharges, especially if economic conditions remain weakand our distributors and end-users become more price sensitive. If we areunable to successfully mitigate such cost increases in the future, our grossmargins could decline.

 

***We depend on outside suppliers whomay be unable to meet our volume and quality requirements, and we may be unableto obtain alternative sources.***

 

We purchase certain components essential to oursnowplows and sand and salt spreaders from outside suppliers, includingoff-shore sources. Most of our key supply arrangements can be discontinued atany time. A supplier may encounter delays in the production and delivery ofsuch products and components or may supply us with products and components thatdo not meet our quality, quantity or cost requirements. Additionally, asupplier may be forced to discontinue operations. Any discontinuation orinterruption in the availability of quality products and components from one ormore of our suppliers may result in increased production costs, delays in thedelivery of our products and lost end-user sales, which could have an adverseeffect on our business and financial condition.

 

In addition, we have begun to increase the number ofour off-shore suppliers. Our increased reliance on off-shore sourcing may causeour business to be more susceptible to the impact of natural disasters, war andother factors that may disrupt the transportation systems or shipping linesused by our suppliers, a weakening of the dollar over an extended period oftime and other uncontrollable factors such as changes in foreign regulation oreconomic conditions. In addition, reliance on off-shore suppliers may make itmore difficult for us to respond to sudden changes in demand because of thelonger lead time to obtain components from off-shore sources. We may be unableto mitigate this risk by stocking sufficient materials to satisfy any sudden orprolonged surges in demand for our products. If we cannot satisfy demand forour products in a timely manner, our sales could suffer as distributors cancancel purchase orders without penalty until shipment.

 

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***We do not sell our products underlong-term purchase contracts, and sales of our products are significantlyimpacted by factors outside of our control; therefore, our ability to estimatedemand is limited.***

 

We do not enter into long-term purchase contractswith our distributors and the purchase orders we receive may be cancelledwithout penalty until shipment. Therefore, our ability to accurately predictfuture demand for our products is limited. Nonetheless, we attempt to estimatedemand for our products for purposes of planning our annual production levelsand our long-term product development and new product introductions. We baseour estimates of demand on our own market assessment, snowfall figures,quarterly field inventory surveys and regular communications with ourdistributors. Because wide fluctuations in the level, timing and location ofsnowfall, economic conditions and other factors may occur, each of which is outof our control, our estimates of demand may not be accurate. Underestimatingdemand could result in procuring an insufficient amount of materials necessaryfor the production of our products, which may result in increased productioncosts, delays in product delivery, missed sale opportunities and a decrease incustomer satisfaction. Overestimating demand could result in the procurement ofexcessive supplies, which could result in increased inventory and associatedcarrying costs.

 

***If we are unable to enforce,maintain or continue to build our intellectual property portfolio, or if othersinvalidate our intellectual property rights, our competitive position may beharmed.***

 

We rely on a combination of patents, trade secretsand trademarks to protect certain of the proprietary aspects of our businessand technology. We hold approximately 20 U.S. registered trademarks (includingthe trademarks WESTERN®, FISHER® and BLIZZARD®), 5 Canadian registeredtrademarks, 28 U.S. issued patents and 15 Canadian patents. Although we workdiligently to protect our intellectual property rights, monitoring theunauthorized use of our intellectual property is difficult, and the steps wehave taken may not prevent unauthorized use by others. In addition, in theevent a third party challenges the validity of our intellectual propertyrights, a court may determine that our intellectual property rights may not bevalid or enforceable. An adverse determination with respect to our intellectualproperty rights may harm our business prospects and reputation. Third partiesmay design around our patents or may independently develop technology similarto our trade secrets. The failure to adequately build, maintain and enforce ourintellectual property portfolio could impair the strength of our technology andour brands, and harm our competitive position. Although the Company has noreason to believe that its intellectual property rights are vulnerable,previously undiscovered intellectual property could be used to invalidate ourrights.

 

***If we are unable to develop newproducts or improve upon our existing products on a timely basis, it could havean adverse effect on our business and financial condition.***

 

We believe that our future success depends, in part,on our ability to develop on a timely basis new technologically advancedproducts or improve upon our existing products in innovative ways that meet orexceed our competitors’ product offerings. Continuous product innovationensures that our consumers have access to the latest products and features whenthey consider buying snow and ice control equipment. Maintaining our marketposition will require us to continue to invest in research and development andsales and marketing. Product development requires significant financial,technological and other resources. We may be unsuccessful in making thetechnological advances necessary to develop new products or improve ourexisting products to maintain our market position. Industry standards, end-userexpectations or other products may emerge that could render one or more of ourproducts less desirable or obsolete. If any of these events occur, it couldcause decreases in sales, a failure to realize premium pricing and an adverseeffect on our business and financial condition.

 

***We face competition from othercompanies in our industry, and if we are unable to compete effectively withthese companies, it could have an adverse effect on our sales andprofitability. Price competition among our distributors could negatively affectour market share.***

 

We primarily compete with regional manufacturers ofsnow and ice control equipment for light trucks. While we are the mostgeographically diverse company in our industry, we may face increasingcompetition in the markets in which we operate. In saturated markets, pricecompetition may lead to a decrease in our market share or a compression of ourmargins, both of which would affect our profitability. Moreover, current orfuture competitors may grow their market share and develop superior service andmay have or may develop greater financial resources, lower costs, superiortechnology or more favorable operating conditions than we maintain. As aresult, competitive pressures we face may cause price reductions for ourproducts, which would affect our profitability or result in decreased sales andoperating income. Additionally, saturation of the markets in which we competeor channel conflicts among our brands and shifts in consumer preferences mayincrease these competitive pressures or may result in increased competitionamong our

 

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distributorsand affect our sales and profitability. In addition, price competition amongthe distributors that sell our products could lead to significant margin erosionamong our distributors, which could in turn result in compressed margins orloss of market share for us. Management believes that after Douglas, the nextlargest competitors in the market for snow and ice control equipment for lighttrucks are BOSS and Meyer, respectively, and accordingly represent our primarycompetitors for market share.

 

***We are subject to complex laws andregulations, including environmental and safety regulations, that can adverselyaffect the cost, manner or feasibility of doing business.***

 

Our operations are subject to certain federal, stateand local laws and regulations relating to, among other things, the generation,storage, handling, emission, transportation, disposal and discharge ofhazardous and non-hazardous substances and materials into the environment, themanufacturing of motor vehicle accessories and employee health and safety. Wecannot be certain that existing and future laws and regulations and theirinterpretations will not harm our business or financial condition. We currentlymake and may be required to make large and unanticipated capital expendituresto comply with environmental and other regulations, such as:

 

·                  applicable motor vehiclesafety standards established by the National Highway Traffic SafetyAdministration;

·                  reclamation and remediationand other environmental protection; and

·                  standards for workplacesafety established by the Occupational Safety and Health Administration.

 

While we monitor our compliance with applicable lawsand regulations and attempt to budget for anticipated costs associated withcompliance, we cannot predict the future cost of such compliance. During 2009we expended approximately $450,000 related to compliance with such regulationsand could expend similar or greater amounts in the future in the event offuture legislation changes or unforeseen events, such as a workplace accidentor environmental discharge, or if we otherwise discover we are innon-compliance with an applicable regulation. In addition, under these laws andregulations, we could be liable for:

 

·                  product liability claims;

·                  personal injuries;

·                  investigation andremediation of environmental contamination and other governmental sanctionssuch as fines and penalties; and

·                  other environmental damages.

 

Our operations could be significantly delayed orcurtailed and our costs of operations could significantly increase as a resultof regulatory requirements, restrictions or claims. We are unable to predictthe ultimate cost of compliance with these requirements or their effect on ouroperations.

 

***Financial market conditions have hada negative impact on the return on plan assets for our pension plans, which mayrequire additional funding and negatively impact our cash flows.***

 

Our pension expense and required contributions toour pension plan are directly affected by the value of plan assets, theprojected rate of return on plan assets, the actual rate of return on plan assetsand the actuarial assumptions we use to measure the defined benefit pensionplan obligations. Due to the significant financial market downturn during 2008,the funded status of our pension plans has declined. As of December 31,2009, our pension plans were underfunded by approximately $9 million. In2009, contributions to our defined benefit pension plans were approximately$1.4 million. If plan assets continue to perform below expectations,future pension expense and funding obligations will increase, which would havea negative impact on our cash flows. Moreover, under the Pension Protection Actof 2006, it is possible that continued losses of asset values may necessitateaccelerated funding of our pension plans in the future to meet minimum federalgovernment requirements.

 

***The statements regarding our industry, marketpositions and market share in this report are based on our management’sestimates and assumptions. While we believe such statements are reasonable,such statements have not been independently verified.***

 

Information contained in this report concerning thesnow and ice control equipment industry for light trucks, our generalexpectations concerning this industry and our market positions and other marketshare data regarding the industry are based on estimates our managementprepared using end-user surveys, anecdotal data from our distributors anddistributors that carry our

 

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competitors’products, our results of operations and management’s past experience, and onassumptions made, based on our management’s knowledge of this industry, all ofwhich we believe to be reasonable. These estimates and assumptions areinherently subject to uncertainties, especially given the year-to-yearvariability of snowfall and the difficulty of obtaining precise informationabout our competitors, and may prove to be inaccurate. In addition, we have notindependently verified the information from any third-party source and thuscannot guarantee its accuracy or completeness, although management alsobelieves such information to be reasonable. Our actual operating results mayvary significantly if our estimates and outlook concerning the industry,snowfall patterns, our market positions or our market shares turn out to beincorrect.

 

***We are subject to product liabilityclaims, product quality issues, and other litigation from time to time thatcould adversely affect our operating results or financial condition.***

 

The manufacture, sale and usage of our productsexpose us to a risk of product liability claims. If our products are defectiveor used incorrectly by our end-users, injury may result, giving rise to productliability claims against us. If a product liability claim or series of claimsis brought against us for uninsured liabilities or in excess of our insurancecoverage, and it is ultimately determined that we are liable, our business andfinancial condition could suffer. Any losses that we may suffer from anyliability claims, and the effect that any product liability litigation may haveupon the reputation and marketability of our products, may divert management’sattention from other matters and may have a negative impact on our business andoperating results. Additionally, we could experience a material design ormanufacturing failure in our products, a quality system failure or other safetyissues, or heightened regulatory scrutiny that could warrant a recall of someof our products. A recall of some of our products could also result inincreased product liability claims. Any of these issues could also result inloss of market share, reduced sales, and higher warranty expense.

 

***We are heavily dependent on ourChief Executive Officer and management team.***

 

Our continued success depends on the retention,recruitment and continued contributions of key management, finance, sales andmarketing personnel, some of whom could be difficult to replace. Our success islargely dependent upon our senior management team, led by our Chief ExecutiveOfficer and other key managers. The loss of any one or more of such personscould have an adverse effect on our business and financial condition.

 

***Our indebtedness could adverselyaffect our operations, including our ability to perform our obligations and paydividends.***

 

As of March 31, 2010, as adjusted to giveeffect to the IPO and the application of the proceeds therefrom (including theredemption of our senior notes), we would have had approximately$122.7 million of senior secured indebtedness and $54 million ofborrowing availability under our revolving credit facility. We may also be ableto incur substantial indebtedness in the future, including senior indebtedness,which may or may not be secured. For example, concurrent with the IPO, weincreased our existing term loan facility by $40 million.

 

Our indebtedness could have important consequencesto our stockholders, including the following:

 

·                  we could have difficultysatisfying our debt obligations, and if we fail to comply with theserequirements, an event of default could result;

·                  we may be required todedicate a substantial portion of our cash flow from operations to requiredpayments on indebtedness, thereby reducing the cash flow available to paydividends or fund working capital, capital expenditures and other generalcorporate activities;

·                  covenants relating to ourindebtedness may restrict our ability to make dividends or distributions to ourstockholders;

·                  covenants relating to ourindebtedness may limit our ability to obtain additional financing for workingcapital, capital expenditures and other general corporate activities, which maylimit our flexibility in planning for, or reacting to, changes in our businessand the industry in which we operate;

·                  we may be more vulnerable togeneral adverse economic and industry conditions;

·                  we may be placed at acompetitive disadvantage compared to our competitors with less debt; and

·                  we may have difficultyrepaying or refinancing our obligations under our senior credit facilities ontheir respective maturity dates.

 

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If any of these consequences occur, our financialcondition, results of operations and ability to pay dividends could beadversely affected. This, in turn, could negatively affect the market price ofour common stock, and we may need to undertake alternative financing plans,such as refinancing or restructuring our debt, selling assets, reducing ordelaying capital investments or seeking to raise additional capital. We cannotassure you that any refinancing would be possible, that any assets could besold, or, if sold, of the timing of the sales and the amount of proceeds thatmay be realized from those sales, or that additional financing could beobtained on acceptable terms, if at all.

 

***Our variable rate indebtednesssubjects us to interest rate risk, which could cause our debt serviceobligations to increase significantly and could impose adverse consequences.***

 

Certain of our borrowings, including our term loanand any revolving borrowings under our senior credit facilities, are at variablerates of interest and expose us to interest rate risk. In addition, theinterest rate on any revolving borrowings is subject to an increase in theinterest rate if the average daily availability under our revolving creditfacility falls below a certain threshold. If interest rates increase, our debtservice obligations on the variable rate indebtedness would increase eventhough the amount borrowed remained the same, and our net income and cash flowswould correspondingly decrease.

 

***Our senior credit facilities imposerestrictions on us, which may also prevent us from capitalizing on businessopportunities and taking certain corporate actions. One of these facilitiesalso includes minimum availability requirements, which if unsatisfied, couldresult in liquidity events that may jeopardize our business.***

 

Our senior credit facilities contain, and futuredebt instruments to which we may become subject may contain, covenants thatlimit our ability to engage in activities that could otherwise benefit ourcompany, including restrictions on our ability to:

 

·                  incur, assume or permit toexist additional indebtedness or contingent obligations;

·                  incur liens and engage insale and leaseback transactions;

·                  make loans and investmentsin excess of agreed upon amounts;

·                  declare dividends, makepayments or redeem or repurchase capital stock in excess of agreed upon amountsand subject to certain other limitations;

·                  engage in mergers,acquisitions and other business combinations;

·                  prepay, redeem or purchasecertain indebtedness or amend or alter the terms of our indebtedness;

·                  sell assets;

·                  transact with affiliates orour stockholders; and

·                  alter the business that weconduct.

 

Our revolving credit facility also includeslimitations on capital expenditures and requires us to maintain at least$6 million of borrowing availability. Failure to maintain suchavailability would constitute a “liquidity event” under our revolving creditfacility, and as a result we would be required to comply with a fixed chargecoverage ratio test. In addition, if such a liquidity event (or an event ofdefault) occurs and is continuing, subject to certain limited cure rights, allproceeds of our accounts receivable and other collateral will be applied toreduce obligations under our revolving credit facility, jeopardizing ourability to meet other obligations. Our ability to comply with the covenantscontained in our senior credit facilities or in the agreements governing ourfuture indebtedness, and our ability to avoid liquidity events, may be affectedby events, or our future performance, which are subject to factors beyond ourcontrol, including prevailing economic, financial, industry and weatherconditions, such as the level, timing and location of snowfall and generaleconomic conditions in the snowbelt regions of North America. A failure tocomply with these covenants could result in a default under our senior creditfacilities, which could prevent us from paying dividends, borrowing additionalamounts and using proceeds of our inventory and accounts receivable, and alsopermit the lenders to accelerate the payment of such debt. If any of our debtis accelerated or if a liquidity event (or event of default) occurs thatresults in collateral proceeds being applied to reduce such debt, we may nothave sufficient funds available to repay such debt and our other obligations,in which case, our business could be halted and such lenders could proceedagainst any collateral securing that debt. Further, if the lenders acceleratethe payment of the indebtedness under our senior credit facilities, our assetsmay not be sufficient to repay in full the indebtedness under our senior creditfacilities and our other indebtedness, if any. We cannot assure you that thesecovenants will not adversely affect our ability to finance our futureoperations or capital needs to pursue available business opportunities or reactto changes in our business and the industry in which we operate.

 

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***The closure of our Johnson City,Tennessee manufacturing facility may entail risks to our business.***

 

As part of our lean manufacturing strategy to lowerour fixed costs, we plan to close our Johnson City, Tennessee manufacturingfacility in mid-2010, and thereby reduce our manufacturing facilities fromthree to two. In connection with this closure, we plan to relocate our JohnsonCity operations and equipment into our remaining two facilities. We cannotassure you that we will realize contemplated cost savings from the closure ofthis facility. In addition, there may be risks associated with this closure forwhich we are unprepared, such as labor and employment litigation, difficultiesimplementing a smooth transition and the possibility that this closure leavesus with insufficient manufacturing capacity. It is therefore possible that ourbusiness could be negatively affected by the closure of this facility.

 

***Our principal stockholders hold a significant portionof our common stock and may have different interests than us or you in thefuture.***

 

Our principalstockholders have the right to vote or direct the vote of approximately 45.5% of ourvoting power. Consequently, our principal stockholders will for the foreseeablefuture be able to influence the election and removal of our directors andinfluence our corporate and management policies, including virtually allmatters requiring stockholder approval, such as potential mergers oracquisitions, asset sales and other significant corporate transactions. Thisconcentration of ownership may delay or deter possible changes in control of the Company. We cannot assure you that the interests of our principal stockholderswill coincide with the interests of our other holders of common stock.

 

***Provisions of Delaware law and our charter documentscould delay or prevent an acquisition of us, even if the acquisition would bebeneficial to you.***

 

Provisions in our certificate of incorporation and bylaws may have theeffect of delaying or preventing a change of control or changes in ourmanagement. These provisions include:

 

·                  the absence of cumulative voting in theelection of our directors, which means that the holders of a majority of ourcommon stock may elect all of the directors standing for election;

·                  the ability of our Board of Directors toissue preferred stock with voting rights or with rights senior to those of ourcommon stock without any further vote or action by the holders of our commonstock;

·                  the division of our Board of Directorsinto three separate classes serving staggered three-year terms;

·                  the ability of our stockholders to removeour directors is limited to cause and only by the vote of at least 662/3% of theoutstanding shares of our common stock;

·                  the prohibition on our stockholders fromacting by written consent and calling special meetings;

·                  the requirement that our stockholdersprovide advance notice when nominating our directors or proposing business to beconsidered by the stockholders at an annual meeting of stockholders; and

·                  the requirement that our stockholders mustobtain a 662/3% vote to amend or repeal certain provisions of ourcertificate of incorporation.

 

We are also subject to Section 203 of the Delaware General CorporationLaw, which, subject to certain exceptions, prohibits us from engaging in anybusiness combination with any interested stockholder, as defined in thatsection, for a period of three years following the date on which that stockholderbecame an interested stockholder.  Thisprovision, together with the provisions discussed above, could also make itmore difficult for you and our other stockholders to elect directors and takeother corporate actions, and could limit the price that investors might bewilling to pay in the future for shares of our common stock.

 

***If we are unable to assess favorably the effectivenessof our internal control over financial reporting, or if our independentregistered public accounting firm is unable to provide an unqualifiedattestation report on our internal controls, our stock price could be adverselyaffected.***

 

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and therelated rules adopted by the SEC and the Public Company AccountingOversight Board, beginning with our Annual Report on Form 10-K for theyear ending 2011, our management will be required to report on, and ourindependent registered public accounting firm to attest to, the effectivenessof our internal control over financial reporting. We may encounter problems ordelays in completing the implementation of any changes necessary to make afavorable assessment of our internal control over financial reporting. Inaddition, in connection with the attestation process by

 

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our independentregistered public accounting firm, we may encounter problems or delays incompleting the implementation of any requested improvements and receiving afavorable attestation. If we cannot timely and favorably assess theeffectiveness of our internal control over financial reporting, or if ourindependent registered public accounting firm is unable to provide anunqualified attestation report on our internal control over financialreporting, investor confidence and our stock price could decline.

 

***Ourdividend policy may limit our ability to pursue growth opportunities.***

 

If we pay dividends at the level currently anticipated under our dividendpolicy, we may not retain a sufficient amount of cash to finance growthopportunities, meet any large unanticipated liquidity requirements or fund ouroperations in the event of a significant business downturn. In addition, becausea significant portion of cash available will be distributed to holders of ourcommon stock under our dividend policy, our ability to pursue any materialexpansion of our business, including through acquisitions, increased capitalspending or other increases of our expenditures, will depend more than itotherwise would on our ability to obtain third party financing. We cannotassure you that such financing will be available to us at all, or at anacceptable cost. If we are unable to take timely advantage of growthopportunities, our future financial condition and competitive position may beharmed, which in turn may adversely affect the market price of our commonstock.

 

**Item 2.      *UnregisteredSales of Equity Securities, Use of Proceeds******and Issuer Purchases of Equity Securities***

 

**Initial Public Offering**

 

On May 4, 2010 the SEC declared effective ourRegistration Statement on Form S-1 (File No. 333-164590) for ourinitial public offering. The offering commenced immediately thereafter and wascompleted on May 10, 2010 at a public offering price of $11.25 per share,less underwriting discounts, and on May 14, 2010, our selling stockholdersclosed the sale of 1,500,000 shares to our underwriters pursuant to theunderwriters’ exercise in full of their overallotment option.  Credit Suisse Securities (USA) LLC andOppenheimer & Co. Inc. acted as representatives of theseveral underwriters.

 

We registered and sold 6,500,000 shares ofcommon stock for an aggregate purchase price of $73.1 million. The sellingstockholders registered and sold 5,000,000 shares of common stock(including 1,500,000 shares sold pursuant to the underwriters’ exercise oftheir overallotment option) for an aggregate purchase price of$56.3 million. The net offering proceeds received by us after deductingtotal estimated expenses were $62.6 million. Our estimated expensesincurred of $10.5 million consisted of $4.9 million in underwritingdiscounts, fees and commissions and $5.6 million in other offeringexpenses. No payments for such expenses were made directly or indirectly to anyof our officers, directors or their associates, to any persons owning 10% ormore of any class of our equity securities or to any of our affiliates. We didnot receive any proceeds from the sale of shares of our common stock by theselling stockholders.

 

We used all proceeds received by us from the IPO,together with the increase in our term loan facility and cash on hand to redeemour $150 million of 7.75% senior notes due January 15, 2012, on June 9,2010.

 

**Dividend Payment Restrictions**

 

TheCompany’s senior credit facilities include certain restrictions on its abilityto pay dividends. The senior credit facilities also restrict the Company’ssubsidiaries from paying dividends and otherwise transferring assets to DouglasDynamics, Inc. For additional detail regarding these restrictions, see Note 5to the notes to the consolidated financial statements.

 

**Item 3.      *DefaultsUpon Senior Securities***

 

None.

 

**Item 4.      (*Removed and**Reserved)***

 

**Item 5.      *OtherInformation***

 

**Amendment No. 3 to Robert McCormick Employment Agreement**

 

On June 14, 2010, the Company and Mr. RobertMcCormick entered into the third amendment (the “Third Amendment”) to hisemployment agreement.  Pursuant to theThird Amendment, (i) Mr. McCormick’s title has been changed from “ChiefFinancial Officer and Vice President” of Douglas Dynamics, Inc. andDouglas Dynamics, L.L.C. to “ Chief Financial Officer and Executive VicePresident” of Douglas Dynamics, Inc. and Douglas Dynamics, LLC and (ii) hisannual base salary has been increased from $252,000 to $270,000.  This summary of the Third Amendment isqualified in its entirety by reference to the definitive Third Amendment, acopy of which is filed as an exhibit to this Quarterly Report on Form 10-Q.

 

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**Letter Agreement with Keith Hagelin**

 

On June 14, 2010, the Company entered into aletter agreement (the “Letter Agreement”) with Mr. Keith Hagelinmemorializing the terms of his employment as Vice President of Operations ofDouglas Dynamics, Inc. and Douglas Dynamics, L.L.C.  Pursuant to the Letter Agreement, (i) theCompany increased Mr. Hagelin’s annual base salary from $185,000 to$215,000, (ii) provided for Mr. Hagelin to participate in the Company’sinsurance programs and fringe benefit programs offered to executives of hislevel, and (iii) provided for accrued benefits and severance in an amountequal to 12 months of then base salary, payable in monthly pro ratainstallments commencing as of the date of termination, subject to Mr. Hagelin’sexecution of a release of claims in favor of Douglas Dynamics, Inc. andDouglas Dynamics, L.L.C, in the event of Mr. Hagelin’s termination withoutcause.

 

This summary of the Letter Agreement is qualified inits entirety by reference to the definitive Letter Agreement, a copy of whichis filed as an exhibit to this Quarterly Report on Form 10-Q.

 

**Item 6.      *Exhibits***

 

The following documentsare filed as Exhibits to this Quarterly Report on Form 10-Q:

** **
| **Exhibit  Numbers** | ** ** | **Description**                                                                                                                                           |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1                 |       | Amendment No. 3 to Employment Agreement between Robert McCormick  and Douglas Dynamics, Inc., dated as of June 14, 2010.                   |
|                 |       |                                                                                                                                                      |
| 10.2                 |       | Letter Agreement between Keith Hagelin and Douglas  Dynamics, Inc., dated as of June 14, 2010.                                                  |
|                 |       |                                                                                                                                                      |
| 31.1                 |       | Certification of the Company’s Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                              |
|                 |       |                                                                                                                                                      |
| 31.2                 |       | Certification of the Company’s Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                              |
|                 |       |                                                                                                                                                      |
| 32.1                 |       | Certification of the Company’s Chief Executive Officer and Chief  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002. |

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 
|                      | **DOUGLAS DYNAMICS, INC.** |
|---------------------------|---------------------------------|
|                      |                            |   |
|                      | By:                             | /s/ ROBERT MCCORMICK |
|                      |                            | Robert McCormick |
|                      |                            | Executive Vice President and Chief Financial Officer |
|                      |                            |
| Dated: June 17, 2010 |                            |

 

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