Tableof Contents

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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**Form 10-Q**

 

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**(MarkOne)**

 

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

 

**For the quarterly period endedJune 30, 2010**

 

**OR**

 

**o****              ****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition periodfrom                 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)

 

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

 

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

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting 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) |   |                             |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes £ No x

 

Numberof shares of registrant’s common shares outstanding as of August 13, 2010 was21,405,426

 

 

 

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Tableof Contents

 

**DOUGLASDYNAMICS, INC.**

** **

**Table ofContents**

 
| **PART I.  FINANCIAL INFORMATION**                                                                          | 1  |
|-------------------------------------------------------------------------------------------------------------|----|
| Item 1.  Financial Statements                                                                               | 1  |
| Unaudited  Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009                            | 1  |
| Unaudited  Consolidated Statements of Operations for the three and six months ended June  30, 2010 and 2009 | 2  |
| Unaudited  Consolidated Statements of Cash Flows for the six months ended June 30, 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         | 12 |
| Item 3. Quantitative and Qualitative Disclosures About  Market Risk                                         | 22 |
| Item 4. Controls and Procedures                                                                             | 22 |
| **PART  II. OTHER INFORMATION**                                                                             | 23 |
| Item  1. Legal Proceedings                                                                                  | 23 |
| Item  1A. Risk Factors                                                                                      | 23 |
| Item 2. Unregistered Sales of Equity Securities, Use  of Proceeds and Issuer Purchases of Equity Securities | 30 |
| Item 3. Defaults Upon Senior Securities                                                                     | 30 |
| Item 4. (Removed and Reserved)                                                                              | 30 |
| Item  5. Other Information                                                                                  | 30 |
| Item 6.  Exhibits                                                                                           | 31 |
| Signatures                                                                                                  | 32 |

 

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Tableof Contents

 

**PART I.FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

** **

**DouglasDynamics, Inc.**

** **

**Consolidated Balance Sheets**

** **

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

 
| ** **                                                                                                                                                                                                                                 | ** **   | ** **   | **June  30,**   | ** **   | **December  31,** | ** **   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|--------------|-----------------|--------------|-------------------|--------------|
| ** **                                                                                                                                                                                                                                 | ** **   | ** **   | **2010**        | ** **   | **2009**          | ** **   |
| ** **                                                                                                                                                                                                                                 | ** **   | ** **   | **(unaudited)** | ** **   | **(audited)**     | ** **   |
| *** ***                                                                                                                                                                                                                               | *** *** | *** *** | *** ***    | *** *** | *** ***      | *** *** |
| **Assets**                                                                                                                                                                                                                                 |         |         |            |         |              |         |
| Current  assets:                                                                                                                                                                                                                           |         |         |            |         |              |         |
| Cash  and cash equivalents                                                                                                                                                                                                                 |         |         | $               | 9,981        |              | $            | 69,073 |   |
| Accounts  receivable, net                                                                                                                                                                                                                  |         |         | 58,645          |         | 32,172            |         |
| Inventories                                                                                                                                                                                                                                |         |         | 25,624          |         | 26,697            |         |
| Deferred  income taxes                                                                                                                                                                                                                     |         |         | 3,729           |         | 3,729             |         |
| Prepaid  income taxes                                                                                                                                                                                                                      |         |         | 7,627           |         | --                |         |
| Prepaid  management fees-related party                                                                                                                                                                                                     |         |         | --              |         | 417               |         |
| Prepaid  and other current assets                                                                                                                                                                                                          |         |         | 964             |         | 1,446             |         |
| Total  current assets                                                                                                                                                                                                                      |         |         | 106,570         |         | 133,534           |         |
|                                                                                                                                                                                                                                       |         |         |            |         |              |         |
| Property,  plant, and equipment, net                                                                                                                                                                                                       |         |         | 24,951          |         | 26,661            |         |
| Goodwill                                                                                                                                                                                                                                   |         |         | 107,222         |         | 107,222           |         |
| Other  intangible assets, net                                                                                                                                                                                                              |         |         | 129,870         |         | 132,950           |         |
| Deferred  financing costs, net                                                                                                                                                                                                             |         |         | 1,214           |         | 3,311             |         |
| Other  long-term assets                                                                                                                                                                                                                    |         |         | 942             |         | 941               |         |
| Total  assets                                                                                                                                                                                                                              |         |         | $               | 370,769      |              | $            | 404,619 |   |
|                                                                                                                                                                                                                                       |         |         |            |         |              |         |
| **Liabilities, redeemable stock and stockholders' equity**                                                                                                                                                                                 |         |         |            |         |              |         |
| Current  liabilities:                                                                                                                                                                                                                      |         |         |            |         |              |         |
| Accounts  payable                                                                                                                                                                                                                          |         |         | $               | 6,437        |              | $            | 5,170 |   |
| Accrued  expenses and other current liabilities                                                                                                                                                                                            |         |         | 11,794          |         | 12,598            |         |
| Accrued  interest                                                                                                                                                                                                                          |         |         | 24              |         | 5,367             |         |
| Income  taxes payable                                                                                                                                                                                                                      |         |         | --              |         | 1,202             |         |
| Short-term  borrowings                                                                                                                                                                                                                     |         |         | 20,000          |         | --                |         |
| Current  portion of long-term debt                                                                                                                                                                                                         |         |         | 1,250           |         | 850               |         |
| Total  current liabilities                                                                                                                                                                                                                 |         |         | 39,505          |         | 25,187            |         |
|                                                                                                                                                                                                                                       |         |         |            |         |              |         |
| Retiree  health benefit obligation                                                                                                                                                                                                         |         |         | 7,661           |         | 7,848             |         |
| Pension  obligation                                                                                                                                                                                                                        |         |         | 8,775           |         | 8,957             |         |
| Deferred  income taxes                                                                                                                                                                                                                     |         |         | 21,209          |         | 18,913            |         |
| Deferred  compensation                                                                                                                                                                                                                     |         |         | 1,607           |         | 1,482             |         |
| Long-term  debt, less current portion                                                                                                                                                                                                      |         |         | 120,888         |         | 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 June 30, 2010 and December 31, 2009                                                                                           |         |         | --              |         | --                |         |
| Reedemable  preferred stock - Series B, par value $0.01, no shares outstanding at June  30, 2010 and one share outstanding at December 31, 2009                                                                                            |         |         | --              |         | 1                 |         |
| Reedemable  preferred stock - Series C, par value $0.01, no shares outstanding at June  30, 2010 and one share outstanding at December 31, 2009                                                                                            |         |         | --              |         | 1                 |         |
|                                                                                                                                                                                                                                       |         |         |            |         |              |         |
| Stockholders'  equity:                                                                                                                                                                                                                     |         |         |            |         |              |         |
| Common  Stock, par value $0.01, 200,000,000 shares authorized at June 30, 2010,  23,750,000 authorized at December 31, 2009, 21,310,426 and 14,421,736 shares  issued and outstanding at June 30, 2010 and December 31, 2009, respectively |         |         | 213             |         | 144               |         |
| Additional  paid-in capital                                                                                                                                                                                                                |         |         | 125,663         |         | 59,973            |         |
| Stockholders'  notes receivable                                                                                                                                                                                                            |         |         | (473            | )            | (1,013            | )            |
| Retained  earnings                                                                                                                                                                                                                         |         |         | 47,411          |         | 53,055            |         |
| Accumulated  other comprehensive loss, net of tax                                                                                                                                                                                          |         |         | (3,800          | )            | (3,937            | )            |
| Total  stockholders' equity                                                                                                                                                                                                                |         |         | 169,014         |         | 108,222           |         |
| Total  liabilities, redeemable stock and stockholders' equity                                                                                                                                                                              |         |         | $               | 370,769      |              | $            | 404,619 |   |

 

See theaccompanying notes to consolidated financial statements

 

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**Douglas Dynamics, Inc.**

** **

**Consolidated Statements ofOperations**

** **

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

** **
| ** **                                             | ** ** | ** ** | **Three  Months Ended** | ** ** | ** **         | ** ** | **Six  Months Ended** | ** ** |
|--------------------------------------------------------|------------|------------|-------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                             | ** ** | ** ** | ** **              | ** ** | ** **         | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                             | ** ** | ** ** | **June  30, 2010**      | ** ** | **June  30, 2009** | ** ** | ** **            | ** ** | **June  30, 2010** | ** ** | **June  30, 2009** | ** ** |
| ** **                                             | ** ** | ** ** | ** **              | ** ** | ** **         | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                             | ** ** | ** ** | **(unaudited)**         | ** ** | ** **         | ** ** | **(unaudited)**       | ** ** |
|                                                   |       |       |                    |       |               |       |                  |       |   |   |   |   |
|                                                   |       |       |                    |       |               |       |                  |       |   |   |   |   |
| Net  sales                                             |       |       | $                       | 66,243     |               | $          | 59,637                |       |   |   | $ | 80,890 |   | $ | 74,810 |   |
| Cost  of sales                                         |       |       | 41,182                  |       | 40,122             |       |                  |       | 53,849 |   | 52,282 |   |
| Gross  profit                                          |       |       | 25,061                  |       | 19,515             |       |                  |       | 27,041 |   | 22,528 |   |
|                                                   |       |       |                    |       |               |       |                  |       |   |   |   |   |
| Selling,  general, and administrative expense          |       |       | 7,900                   |       | 4,995              |       |                  |       | 13,708 |   | 10,527 |   |
| Intangibles  amortization                              |       |       | 1,540                   |       | 1,540              |       |                  |       | 3,080 |   | 3,080 |   |
| Management  fees-related party                         |       |       | 5,966                   |       | 330                |       |                  |       | 6,313 |   | 655 |   |
|                                                   |       |       |                    |       |               |       |                  |       |   |   |   |   |
| Income  from operations                                |       |       | 9,655                   |       | 12,650             |       |                  |       | 3,940 |   | 8,266 |   |
|                                                   |       |       |                    |       |               |       |                  |       |   |   |   |   |
| Interest  expense, net                                 |       |       | (2,989                  | )          | (3,942             | )          |                  |       | (6,704 | ) | (7,954 | ) |
| Loss  on extinguishment of debt                        |       |       | (7,967                  | )          | --                 |       |                  |       | (7,967 | ) | -- |   |
| Other  income (expense), net                           |       |       | (1                      | )          | (24                | )          |                  |       | 5 |   | (83 | ) |
| Income  (loss) before taxes                            |       |       | (1,302                  | )          | 8,684              |       |                  |       | (10,726 | ) | 229 |   |
|                                                   |       |       |                    |       |               |       |                  |       |   |   |   |   |
| Income  tax expense (benefit)                          |       |       | (1,377                  | )          | 3,019              |       |                  |       | (5,082 | ) | (974 | ) |
|                                                   |       |       |                    |       |               |       |                  |       |   |   |   |   |
| Net  income (loss)                                     |       |       | $                       | 75         |               | $          | 5,665                 |       |   |   | $ | (5,644 | ) | $ | 1,203 |   |
|                                                   |       |       |                    |       |               |       |                  |       |   |   |   |   |
| Weighted  average number of common shares outstanding: |       |       |                    |       |               |       |                  |       |   |   |   |   |
| Basic                                                  |       |       | 18,236,818              |       | 14,421,736         |       |                  |       | 16,339,816 |   | 14,425,674 |   |
| Diluted                                                |       |       | 18,520,117              |       | 14,747,041         |       |                  |       | 16,339,816 |   | 14,750,979 |   |
|                                                   |       |       |                    |       |               |       |                  |       |   |   |   |   |
| Earnings  (loss) per share:                            |       |       |                    |       |               |       |                  |       |   |   |   |   |
| Basic                                                  |       |       | $                       | 0.00       |               | $          | 0.39                  |       |   |   | $ | (0.35 | ) | $ | 0.08 |   |
| Diluted                                                |       |       | $                       | 0.00       |               | $          | 0.38                  |       |   |   | $ | (0.35 | ) | $ | 0.08 |   |

 

See theaccompanying notes to consolidated financial statements.

 

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**DouglasDynamics, Inc.**

 

**Consolidated Statements of Cash Flows**

 

**(inthousands)**

 
| ** **                                                                                           | ** **   | ** **   | **Six  Months Ended** | ** **   |
|------------------------------------------------------------------------------------------------------|--------------|--------------|-----------------------|--------------|
| ** **                                                                                           | ** **   | ** **   | ** **            | ** **   | ** ** | ** ** |
| ** **                                                                                           | ** **   | ** **   | **June  30, 2010**    | ** **   | **June  30, 2009** | ** ** |
| ** **                                                                                           | ** **   | ** **   | ** **            | ** **   | ** ** | ** ** |
| ** **                                                                                           | ** **   | ** **   | **(unaudited)**       | ** **   |
| *** ***                                                                                         | *** *** | *** *** | *** ***          | *** *** | *** *** | *** *** |
| **Operating activities**                                                                             |         |         |                  |         |   |   |
| Net  income (loss)                                                                                   |         |         | $                     | (5,644       | ) | $ | 1,203 |   |
| Adjustments  to reconcile net income (loss) to net cash provided by (used in) operating  activities: |         |         |                  |         |   |   |
| Depreciation  and amortization                                                                       |         |         | 6,644                 |         | 5,666 |   |
| Amortization  of deferred financing costs                                                            |         |         | 611                   |         | 568 |   |
| Loss  on extinguishement of debt                                                                     |         |         | 7,967                 |         | -- |   |
| Stock-based  compensation                                                                            |         |         | 1,821                 |         | 732 |   |
| Provision  for losses on accounts receivable                                                         |         |         | 167                   |         | 98 |   |
| Deferred  income taxes                                                                               |         |         | 2,216                 |         | 1,003 |   |
| Changes  in operating assets and liabilities:                                                        |         |         |                  |         |   |   |
| Accounts  receivable                                                                                 |         |         | (26,640               | )            | (25,291 | ) |
| Inventories                                                                                          |         |         | 1,073                 |         | (1,208 | ) |
| Prepaid  and other assets and prepaid income taxes                                                   |         |         | (6,729                | )            | (1,794 | ) |
| Accounts  payable                                                                                    |         |         | 1,267                 |         | (236 | ) |
| Accrued  expenses and other current liabilities                                                      |         |         | (7,349                | )            | (2,541 | ) |
| Deferred  compensation                                                                               |         |         | 125                   |         | 125 |   |
| Benefit  obligations and other long-term liabilities                                                 |         |         | (237                  | )            | 284 |   |
| Net  cash used in operating activities                                                               |         |         | (24,708               | )            | (21,391 | ) |
|                                                                                                 |         |         |                  |         |   |   |
| **Investing activities**                                                                             |         |         |                  |         |   |   |
| Capital  expenditures                                                                                |         |         | (1,854                | )            | (4,006 | ) |
| Net  cash used in investing activities                                                               |         |         | (1,854                | )            | (4,006 | ) |
|                                                                                                 |         |         |                  |         |   |   |
| **Financing activities**                                                                             |         |         |                  |         |   |   |
| Stock  repurchases                                                                                   |         |         | (2                    | )            | (1,010 | ) |
| Payment  of call premium and post payoff interest on senior notes redemption                         |         |         | (3,876                | )            | -- |   |
| Collection  of stockholders' notes receivable                                                        |         |         | 540                   |         | -- |   |
| Payments  of financing costs                                                                         |         |         | (2,605                | )            | -- |   |
| Revolver  borrowings                                                                                 |         |         | 20,000                |         | 5,000 |   |
| Proceeds  from initial public offering, net                                                          |         |         | 63,938                |         | -- |   |
| Borrowings  on long-term debt                                                                        |         |         | 40,000                |         | -- |   |
| Repayment  of long-term debt                                                                         |         |         | (150,525              | )            | (426 | ) |
| Net  cash provided by (used in) financing activities                                                 |         |         | (32,530               | )            | 3,565 |   |
| Change  in cash and cash equivalents                                                                 |         |         | (59,092               | )            | (21,832 | ) |
| Cash  and cash equivalents at beginning of period                                                    |         |         | 69,073                |         | 53,552 |   |
| Cash  and cash equivalents at end of period                                                          |         |         | $                     | 9,981        |   | $ | 31,720 |   |

 

See theaccompanying notes to consolidated financial statements.

 

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**DouglasDynamics, Inc.**

 

**Notes to Unaudited Consolidated FinancialStatements**

**(inthousands except share and per share data)**

 

**1.****             ****Description of business and basisof 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 is headquartered in Milwaukee, WIand as of June 30, 2010 had manufacturing facilities in Milwaukee, WI,Rockland, ME, and Johnson City, TN. While the Company continues to shipinventory from its Johnson City, TN facility, as of April 2, 2010 the Companyceased substantially all manufacturing at this facility and plans to completethe closure of this facility by August 31, 2010. The Company operates as asingle 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”).

 

***InitialPublic Offering***

 

On May 10,2010, the Company completed its IPO of 10,000,000 shares of common stock at apublic offering price of $11.25 per share, less underwriting discounts.  The 10,000,000 shares sold included 6,500,000shares sold by the Company and 3,500,000 shares sold by certain sellingstockholders.  In addition, on May 14,2010, the selling stockholders in the IPO closed the sale of an additional 1,500,000shares to the underwriters at the public offering price of $11.25 per share,less underwriting discounts, pursuant to the underwriters’ exercise in full oftheir overallotment option.  The Companyreceived $73,125 in gross proceeds from the issuance and sale of its commonstock in the IPO and $63,938 in net proceeds after deducting underwritingdiscounts and 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    |   |
| Shares issued for 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 June 30,  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.  Subsequent to the repurchaseof the preferred stock, the Company has no preferred stock outstanding.

 

***Summaryof Significant Accounting Policies***

 

***InterimConsolidated Financial Information***

 

Theaccompanying consolidated balance sheet as of June 30, 2010 and theconsolidated statements of operations for the three and six months ended June 30,2010 and 2009 and cash flows for the six months ended June 30, 2010 and2009 have been prepared by the Company and have not been audited.  In the opinion of management, alladjustments, consisting of only normal recurring adjustments necessary for thefair presentation of the financial position, results of operations and cashflows, have been made.  Pursuant to the rules andregulations of the Securities and Exchange Commission certain information andfootnote disclosures normally included in consolidated financial statementsprepared in accordance with U.S. generally accepted accounting principles havebeen condensed or omitted from the accompanying interim consolidated financialstatements.  These consolidated financialstatements should be read in conjunction with the audited consolidatedfinancial statements and notes thereto included in the consolidated financialstatements for the year ended December 31, 2009.

 

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Othercomprehensive income (loss) includes the net income (loss) of the Company plusthe Company’s adjustments for its defined benefit retirement plans based on themeasurement date as of the Company’s year end. Other comprehensive income (loss) was $212 and $(5,507) for the threeand six months ended June 30, 2010, respectively.  Other comprehensive income was the same asnet income for the three and six months ended June 30, 2009, respectively.

 

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.

 

***Fairvalue measurements***

 

TheCompany adopted the guidance originally issued in FASB statement No. 157, *Fair Value Measurements* (codified in Accounting StandardsCodification (“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 quotedprices in active markets;  (Level 2)inputs, other than the quoted prices in active markets, that are observableeither directly or indirectly; and (Level 3) unobservable inputs in which thereis little or no market data, which require the reporting entity to develop itsown assumptions.

 

Assetsand liabilities measured at fair value are based on the market approach, whichis prices and other relevant information generated by market transactionsinvolving identical or comparable assets or liabilities.  At June 30, 2010 and December 31,2009, the Company did not have any financial instruments accounted for at fairvalue.

 

***Principlesof 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.

 

***Useof estimates***

 

The preparation of the financial statements inconformity with U.S. generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting periods. Accordingly, actual results could differ from those estimates.

 

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

 

Thecarrying values of the Company’s cash and cash equivalents (Level 1), tradeaccounts receivable, accounts payable, accrued expenses and short termborrowings approximated fair value as of June 30, 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 ) of the Company’s long-term debt at June 30,2010 was $122,138 and $120,917, respectively.

 

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

 

Inventoriesconsist of the following:

 
|                               | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                         |       |                    |       |                        |       |
| Finished goods and work-in-process |       | $                       | 24,108     |                        | $          | 24,639 |   |
| Raw material and supplies          |       | 1,516                   |       | 2,058                       |       |
|                               |       | $                       | 25,624     |                        | $          | 26,697 |   |

 

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

 

Property,plant and equipment are summarized as follows:

 
|                                | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|-------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                          |       |                    |       |                        |       |
| Land                                |       | $                       | 1,150      |                        | $          | 1,000 |   |
| Land improvements                   |       | 2,480                   |       | 2,218                       |       |
| Buildings                           |       | 15,354                  |       | 13,766                      |       |
| Machinery and equipment             |       | 25,069                  |       | 23,092                      |       |
| Furniture and fixtures              |       | 7,176                   |       | 6,934                       |       |
| Mobile equipment and other          |       | 1,045                   |       | 969                         |       |
| Construction-in-process             |       | 1,810                   |       | 4,252                       |       |
| Total property, plant and equipment |       | 54,084                  |       | 52,231                      |       |
| Less accumulated depreciation       |       | (29,133                 | )          | (25,570                     | )          |
| Net property, plant and equipment   |       | $                       | 24,951     |                        | $          | 26,661 |   |

 

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

 

Long-termdebt is summarized below:

 
|                    | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|-------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **              |       |                    |       |                        |       |
| Term Loan               |       | $                       | 122,138    |                        | $          | 82,663 |   |
| Senior notes            |       | -                       |       | 150,000                     |       |
| Total long-term debt    |       | 122,138                 |       | 232,663                     |       |
| Less current maturities |       | 1,250                   |       | 850                         |       |
|                    |       | $                       | 120,888    |                        | $          | 231,813 |   |

 

As of December 31,2009, the Company’s senior credit facilities consisted of an $85,000 term loanfacility and a $60,000 revolving credit facility with a group of banks and theCompany also had outstanding $150,000 of 7.75% senior notes (the “Senior Notes”)due January 15, 2012. Concurrent with the consummation of the IPO, theCompany amended its senior credit facilities to allow, among other things, (i) itto redeem the Senior Notes, (ii) increase the size of its term loanfacility by $40,000 and (iii) amend certain of the provisions in itssenior credit facilities which govern the Company’s ability to paydividends.  Consequently, as of June 30,2010, the Company’s senior credit facilities consisted of a $125,000 term loanfacility and a $60,000 revolving credit facility with a group of banks. Inaddition, in connection with the amendments to the Company’s senior creditfacilities, the interest on the existing portion of the term loan facility wasincreased from an interest rate equal to (at the Company’s option) either thebase rate plus 1.25% or the eurodollar rate plus 2.25% to (at the Company’soption) either the base rate (which shall be no less than 3%) plus 3.5% or the eurodollarrate (which shall be no less than 2%) plus 4.5%.  The interest for the additional $40,000increase in the Company’s term loan facility is an interest rate equal to (atthe Company’s option) either the base rate (which shall be no less than 3%)plus 4% or the eurodollar rate (which shall be no less than 2%) plus 5%.  Under the revolving credit facility, themargin for base rate loans is either 0.25% or 0.50% and the margin for eurodollarrate loans is either 1.25% or 1.50%, in each case determined based on theCompany’s leverage ratio from time to time. The amendment of the term loan facility resulted in a significant modificationof the debt which resulted in the write off of 

 

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unamortized capitalizeddeferred financing costs of $995 and expenditures of $2,046  related to financing costs paid to existinglenders which was recorded as a loss on extinguishment of debt in theconsolidated statements of operations for the three and six months ended June 30,2010.

 

On June 9,2010, the Company completed the redemption of its Senior Notes.  The Company redeemed its Senior Notes withthe proceeds from the additional term loan, together with the net IPO proceedsand cash on hand for a total of $157,557 which includes $3,681 of interest thataccrued through the date of deposit with the trustee, $969 of interest thataccrued from the date of deposit with trustee to the date of redemption and$2,907 redemption call premium of 1.938%. In addition, the Company wrote off $1,050 of unamortized deferredfinancing costs related to the Senior Notes.

 

Aftereffecting the discharge of the Senior Notes, the maturity date for the Company’srevolving credit facility is May 21, 2012**,**andthe Company’s term loan amortizes in nominal amounts quarterly with the balancepayable on May 21, 2013 with respect to the existing term loans and May 21,2016 with respect to the additional term loans.

 

At June 30,2010 the Company had outstanding borrowings on the revolving credit facility of$20,000 and remaining borrowing availability of $39,976.

 

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 andrecorded by the Company’s subsidiaries significantly restrict its subsidiariesfrom paying dividends and otherwise transferring assets to Douglas Dynamics, Inc.The terms of the Company’s revolving credit facility specifically restrictsubsidiaries from paying dividends if a minimum availability under therevolving credit facility is not maintained (such event, a “liquidity event”),and both senior credit facilities restrict subsidiaries from paying dividends abovecertain levels 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 $10,000 in any calendar year and, during the occurrenceof a liquidity event, that the Company comply with a monthly minimum fixedcharge 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 June 30, 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 make additionalprincipal prepayments over the above scheduled payments under certainconditions. This includes, in the case of the term loan facility, 100% of thenet cash proceeds of certain asset sales, certain insurance or condemnationevents, certain debt issuances, and, within 150 days of the end of the fiscalyear, 50% of excess cash flow, as defined, including a deduction for alloweddistributions (which percentage is reduced to 25% or 0% upon the achievement ofcertain leverage ratio thresholds), for any fiscal year. Excess cash flow isdefined in the senior credit facilities as consolidated adjusted EBITDA plus aworking capital adjustment less the sum of repayments of debt and capitalexpenditures subject to certain adjustments, interest and taxes paid in cash,management fees and certain restricted payments (including dividends ordistributions). Working capital adjustment is defined in the senior creditfacilities as the change in working capital, defined as current assetsexcluding cash and cash equivalents less current liabilities excluding currentportion of long term debt.  As of June 30,2010 and December 31, 2009, the Company was not required to make an excesscash flow payment.

 

 

**6.****             ****Accrued Expenses and OtherLiabilities**

 

Accruedexpenses and other liabilities are summarized as follows:

 
|                      | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|---------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                |       |                    |       |                        |       |
| Payroll and related costs |       | $                       | 3,354      |                        | $          | 3,659 |   |
| Employee benefits         |       | 2,754                   |       | 2,534                       |       |
| Accrued warranty          |       | 2,489                   |       | 3,040                       |       |
| Other                     |       | 3,197                   |       | 3,365                       |       |
|                      |       | $                       | 11,794     |                        | $          | 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 

 

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snow and ice controlequipment, that all material and workmanship will be free from defect for a periodof two years after the date of purchase by the end-user, and with respect toits parts and accessories purchased separately, that such parts and accessorieswill be free from defect for a period of one year after the date of purchase bythe end-user.  Certain snowplows onlyprovide for a one year warranty.  TheCompany determines the amount of the estimated warranty costs (and itscorresponding 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 in AccruedExpenses and Other Current Liabilities in the accompanying consolidated balancesheets.

 

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

 
| ** **                              | ** ** | **Three  months ended**

** ** | ** ** | ** ** | ** ** | **Six  months ended**

** ** | ** ** |
|-----------------------------------------|------------|-------------------------------------|------------|------------|------------|-----------------------------------|------------|
| ** **                              | ** ** | **June 30,  2010**             | ** ** | ** ** | ** ** | **June 30,  2009**           | ** ** | ** ** | ** ** | **June 30,  2010** | ** ** | ** ** | ** ** | **June 30,  2009** | ** ** |
| ** **                              | ** ** | ** **                          | ** ** | ** ** | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                    |       |                                |       |       |       |                              |       |   |   |   |   |   |   |   |   |
| Balance  at the beginning of the period |       | $                                   | 1,933      |       |       |                              | $          | 1,263 |   |   |   | $ | 3,040 |   |   |   | $ | 2,272 |   |
| Warranty  provision                     |       | 825                                 |       |       |       | 965                               |       |   |   | 1,054 |   |   |   | 1,105 |   |
| Claims  paid/settlements                |       | (269                                | )          |       |       | (404                              | )          |   |   | (1,605 | ) |   |   | (1,553 | ) |
| Balance  at the end of the period       |       | $                                   | 2,489      |       |       |                              | $          | 1,824 |   |   |   | $ | 2,489 |   |   |   | $ | 1,824 |   |

 

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

 

The components of net periodic pension cost consistedof the following:

 
| ** **                               | ** ** | ** ** | **Three  months ended**

** ** | ** ** | ** ** | ** ** | **Six  months ended**

** ** | ** ** |
|------------------------------------------|------------|------------|-------------------------------------|------------|------------|------------|-----------------------------------|------------|
| ** **                               | ** ** | ** ** | **June 30,  2010**             | ** ** | ** ** | ** ** | **June 30,  2009**           | ** ** | ** ** | ** ** | **June 30,  2010** | ** ** | ** ** | ** ** | **June 30,  2009** | ** ** |
| ** **                               | ** ** | ** ** | ** **                          | ** ** | ** ** | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                     |       |       |                                |       |       |       |                              |       |   |   |   |   |   |   |   |   |
| Component  of net periodic pension cost: |       |       |                                |       |       |       |                              |       |   |   |   |   |   |   |   |   |
| Service  cost                            |       |       | $                                   | 200        |       |       |                              | $          | 205 |   |   |   | $ | 400 |   |   |   | $ | 410 |   |
| Interest  cost                           |       |       | 358                                 |       |       |       | 339                               |       |   |   | 716 |   |   |   | 678 |   |
| Expected  return on plan assets          |       |       | (290                                | )          |       |       | (246                              | )          |   |   | (580 | ) |   |   | (492 | ) |
| Amortization  of net loss                |       |       | 81                                  |       |       |       | 130                               |       |   |   | 162 |   |   |   | 260 |   |
| Net  periodic pension cost               |       |       | $                                   | 349        |       |       |                              | $          | 428 |   |   |   | $ | 698 |   |   |   | $ | 856 |   |

 

TheCompany estimates its total required minimum contributions to its pension plansin 2010 will be $1,050.  As of June 30,2010, the Company has made $514 of cash contributions to the pension plansversus $1,004 as of June 30, 2009.

 

In May 2010,in connection with the upcoming closure of the Company’s manufacturing facilityin Johnson City, TN substantially all the employees at this facility wereterminated.  This resulted in a cessationof all future benefit accruals for these employees under the Company’s pensionand other post employment benefit (“OPEB”) plans.  A curtailment gain of $366 was recognized asa reduction to the net actuarial loss, as the curtailment liability gain wasless than the unrecognized net actuarial loss prior to the curtailment for thepension plan.  Therefore, this did not impactthe consolidated statement of operations for the three and six months ended June 30,2010.

 

Components of netperiodic postretirement benefit cost consist of the following:

 
| ** **                                              | ** ** | ** ** | **Three months ended**

** ** | ** ** | ** ** | ** ** | ** **                  | **Six months ended**

** ** | ** ** |
|---------------------------------------------------------|------------|------------|----------------------------------------------|------------|------------|------------|-----------------------------|--------------------------------------------|------------|
| ** **                                              | ** ** | ** ** | **June 30, 2010**                  | ** ** | ** ** | ** ** | **June 30, 2009** | ** **                                 | ** ** | ** ** | ** ** | **June 30, 2010** | ** ** | ** ** | ** ** | **June 30, 2009** | ** ** |
| ** **                                              | ** ** | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** **                  | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                    |       |       |                                         |       |       |       |                        |                                       |       |   |   |   |   |   |   |   |   |
| Components  of net periodic postretirement benefit cost |       |       |                                         |       |       |       |                        |                                       |       |   |   |   |   |   |   |   |   |
| Service  cost                                           |       |       | $                                            | 83         |       |       |                        | $                                          | 76         |   |   |   |   | $ | 165 |   |   |   | $ | 153 |   |
| Interest  cost                                          |       |       | 121                                          |       |       |       | 105                         |                                       |       |   |   | 241 |   |   |   | 210 |   |
| Amortization  of net (gain)/loss                        |       |       | (3                                           | )          |       |       | (18                         | )                                          |       |   |   | (6 | ) |   |   | (37 | ) |
| Curtailment  gain - Johnson City location closing       |       |       | (667                                         | )          |       |       | —                      |                                       |       |   |   | (667 | ) |   |   | — |   |
| Net  periodic postretirement benefit cost               |       |       | $                                            | (467       | )          |       |                        | $                                          | 163        |   |   |   |   | $ | (267 | ) |   |   | $ | 326 |   |

 

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Thecurtailment gain for the OPEB plan, on the other hand, exceeded theunrecognized net actuarial loss prior to the curtailment and resulted in a gainof $1,031 of which $667 was recorded in selling, general and administrativeexpense in the consolidated statement of operations for the three and sixmonths ended June 30, 2010 and $364 (before taxes) was recognized as areduction to the net actuarial loss in accumulated other comprehensive loss at June 30,2010.

 

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

 

On January 23,2009, the Company entered into securities repurchase agreements with certainmembers of management.  Pursuant to theseagreements, the Company repurchased at fair value and subsequently retired27,004 shares of common stock and 89,371 stock options in exchange foraggregate consideration of $1,137, comprised of a cash payment of $1,000 andthe satisfaction of the remaining principal amount of $137 on promissory notesheld by the members of management.  As aresult of the repurchase of stock options, the Company recorded $732 ofcompensation expense in the six months ended June 30, 2009 whichrepresented the fair value of 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 shares of common stock and common stock equivalents and 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 299,408 shares excluded from diluted earnings per share forthe six months ended June 30, 2010 as the shares would be anti-dilutive for that period as the Companyincurred a net loss.

 

The following shares were used to calculate basicand diluted earnings per share for the periods presented.

 
| ** **                                                                  | **Three  months ended** | ** ** | **Six  months ended** | ** ** |
|-----------------------------------------------------------------------------|-------------------------|------------|-----------------------|------------|
| ** **                                                                  | **June 30,  2010**      | ** ** | **June 30,  2009**    | ** ** | **June 30,  2010** | ** ** | **June 30,  2009** | ** ** |
|                                                                        |                    |       |                  |       |   |   |   |   |
| Basic weighted average  common shares outstanding                           | 18,236,818              |       | 14,421,736            |       | 16,339,816 |   | 14,425,674 |   |
| Incremental shares  applicable to common stock options and restricted stock | 283,299                 |       | 325,305               |       | -- |   | 325,305 |   |
| Average diluted weighted  average common shares outstanding                 | 18,520,117              |       | 14,747,041            |       | 16,339,816 |   | 14,750,979 |   |

 

**11. Employee Stock Plans**

 

***Amended and Restated 2004 Stock Incentive Plan***

 

Inconnection with the IPO, in May 2010, the Company’s Board of Directors andstockholders amended and restated the Company’s 2004 Stock Incentive Plan (as amendedand restated, the “A&R 2004 Plan”) and certain outstanding award agreementsthereunder, to among other things, eliminate the ability of the holdersthereunder to use a promissory note to pay any portion of the exercise price ofthe options, to provide that the use of “net exercises” to pay any portion ofthe exercise price of the options shall be at the sole discretion of thecommittee administering the A&R 2004 Plan, and to effect certainministerial changes under the A&R 2004 Plan.  In addition, in connection with the IPO, theBoard of Directors also resolved not to issue any further awards under theA&R 2004 Plan.  As of June 30,2010, 530,615 shares of common stock are reserved for issuance upon theexercise of outstanding options under the A&R 2004 Plan.  All outstanding options are fully vestedexcept for 71,250 options which vest in three equal annual installmentscommencing on August 27, 2010.  Alloptions expire 10 years from the date of grant.

 

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***2010Stock Incentive Plan***

 

Inconnection with the IPO, in May 2010, the Company’s Board of Directors andstockholders adopted the 2010 Stock Incentive Plan (the “2010 Plan”).  The 2010 Plan provides for the issuance ofnonqualified stock options, incentive stock options, stock appreciation rights,restricted stock awards and restricted stock units, any of which may beperformance-based, and for incentive bonuses, which may be paid in cash orstock or a combination of both, to eligible employees, officers, non-employeedirectors and other service providers to the Company and its subsidiaries.  A maximum of 2,130,000 shares of common stockmay be issued pursuant to all awards under the 2010 Plan.

 

In May 2010,in connection with the IPO, an aggregate of 208,130 shares of restricted stockwere granted to certain officers and employees under the 2010 Plan.  The restricted stock awards were time-basedand vest over a five-year period in equal annual installments of 20% per year,commencing on the first anniversary of the grant date.  The restricted stock does not carry voting ordividend rights until the stock vests.

 

As of June 30,2010, the Company had 1,921,870 shares of common stock available for futureissuance of awards under the 2010 Plan. The shares of common stock to be issued under the 2010 Plan will be madeavailable from authorized and unissued Company common stock.

 

 

***StockOptions***

 

Thefollowing table summarizes information with respect to the Company’s stockoption activity under the A&R 2004 Plan for the six months ended June 30,2010. In connection with the IPO, certain of the Company’s selling stockholdersexercised their stock options and sold the underlying shares.  Such stockholders paid the exercise price ofsuch options through a net exercise. Because these options were granted under APB 25 with an exercise priceequal to fair value at date of grant, no compensation expense was recorded atthe time of grant.  As a result of thenet exercise mechanic, the optionholders did not bear the risk and rewards ofthe options.  As such, the Companyrecorded $1,748 of stock based compensation for the three and six months ended June 30,2010.  The following is a rollforward ofstock option activity for the three and six months ended June 30, 2010.

 
| ** **                           | ** ** | **Three Months ended  June 30, 2010** | ** ** | **Six months ended  June 30, 2010** | ** ** |
|--------------------------------------|------------|--------------------------------------------|------------|------------------------------------------|------------|
| Stock  options - beginning of period |       | 819,185                                    |       | 819,185                                  |       |
| Options  exercised                   |       | (288,570                                   | )          | (288,570                                 | )          |
| Stock  options – end of period  |       | 530,615                                    |       | 530,615                                  |       |

 

***RestrictedStock Awards***

 

A summary of restrictedstock activity for the six months ended June 30, 2010 is as follows:

 
| ** **                                            | ** ** | ** **          | ** ** | ** **      | ** **              | **Weighted**    | ** ** |
|-------------------------------------------------------|------------|---------------------|------------|-----------------|-------------------------|-----------------|------------|
| ** **                                            | ** ** | ** **          | ** ** | **Weighted**    | ** **              | **Average**     | ** ** |
| ** **                                            | ** ** | ** **          | ** ** | **Average**     | ** **              | **Remaining**   | ** ** |
| ** **                                            | ** ** | **Shares**          | ** ** | **Grant Date**  | ** **              | **Contractual** | ** ** |
| ** **                                            | ** ** | **(In  thousands)** | ** ** | **Fair  value** | ** **              | **Term**        | ** ** |
|                                                  |       |                |       |            |                    |            |       |
| Unvested  at December 31, 2009                   |       | —              |       | —          |                    |            |       |
| Granted                                               |       | 208,130             |       | $               | 11.25                   |            | 4.86 years |   |
| Vested                                                |       | —              |       | —          |                    |            |       |
| Cancelled  and forfeited                              |       | —              |       | —          |                    |            |       |
|                                                  |       |                |       |            |                    |            |       |
| Unvested  at June 30, 2010                       |       | 208,130             |       | $               |   11.25       |            | 4.86 years |   |
|                                                  |       |                |       |            |                    |            |       |
| Expected  to vest in the future at June 30, 2010 |       | 208,130             |       | $               |    11.25 |            | 4.86 years |   |

 

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Thefair value of the Company’s restricted stock awards is the stock price on thedate of grant or $11.25 per share. The Company recognized $73 of compensationexpense related to restricted stock awards granted for the three and six monthsended June 30, 2010.  Theunrecognized compensation expense calculated under the fair value method forshares expected to vest as of June 30, 2010 was approximately $2,269 andis expected to be recognized over a weighted average period of 4.86 years.

 

**12.****      ****Commitments and Contingencies**

 

In theordinary 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.

 

**13.****      ****Restructuring**

 

On April 27,2009, the Company announced a plan to close its Johnson City, TN manufacturingfacility and move production from this facility to its Milwaukee, WI andRockland, ME facilities by mid-2010.  Asof the date of filing of this Quarterly Report on Form 10-Q, the Companyexpects to complete the closure of this facility by August 31, 2010.  The Company expects to realize significantannual cost savings and improved customer delivery performance as aresult.  The closure has resulted in theelimination of approximately 100 positions in Johnson City and the addition ofapproximately 50 positions in Rockland and approximately 35 positions inMilwaukee.

 

Relatedto the facility closure, the Company recorded $61 and $124 of employeetermination costs and $328 and $705 for other closure costs for the three andsix months ended June 30, 2010, respectively.  Restructuring expenses of $25 were recordedfor the three and six months ended June 30, 2009, respectively.  The Company expects the total cost of thisrestructuring to be $2,288 consisting of employee termination costs of $824 andother costs of $1,464.  The other costsconsist principally of facility move preparation and equipment relocationcosts.  These costs are included in theselling, general and administrative expense line in the Company’s consolidatedstatements of operations.

 

Thefollowing represents a reconciliation of changes in the restructuring reservesrelated to this project through June 30, 2010.

 
|                                                         | ** ** | **Employee  Termination  Costs** | ** ** | **Other  Exit  Costs** | ** ** | **Total** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------|------------|------------------------|------------|-----------|------------|
| Accrued restructuring reserves as of  December 31, 2009 |       | $                                | 690        |                   | $          | —    |       | $ | 690 |   |
| Activity during six months ended June 30, 2010:         |       |                             |       |                   |       |      |       |
| Charges to earnings                                          |       | 124                              |       | 705                    |       | 829       |       |
| Payments                                                     |       |  (412)                      |       | (705                   | )          | (1,117    | )          |
| Accrued restructuring reserves as of June 30,  2010     |       | $                                | 402        |                   | —     |      | $          | 402 |   |
|                                                              |            |                                  |            |                        |            |           |            |  |  |  |

 

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 $480 and $1,430 for the three and six months ended June 30,2010, respectively.  This change inestimate reduced basic and diluted earnings per share by $0.01 and $0.05 forthe three and six months ended June 30, 2010, respectively.  The Company did not record any accelerateddepreciation for the three and six months ended June 30, 2009.

 

**14.****      ****Income Taxes**

 

Deferredincome taxes reflect the net tax effects of temporary differences between thecarrying amounts of assets and liabilities for financial reporting purposes andthe amounts used for income tax purposes. The largest item affecting deferred taxes is the difference between bookand tax amortization of goodwill and other intangibles amortization.  The Company estimates that the effectivecombined federal and state tax rate for 2010 will be approximately 46%.  The Company’s effective tax rate (benefit)was (105.8)%  and 34.8% for the threemonths ended June 30, 2010 and 2009, respectively.  The Company’s effective tax rate (benefit) forthe six months ended June 30, 2010 and 2009 was (47.4)% and (425)%,respectively.  The effective tax rate forthe three months ended June 30, 2010 was due to the anticipation of apermanent item related to compensation deductions that became probable in thesecond quarter of 2010.  The effectivetax rate (benefit) for the six months ended June 30, 2009 was higher thanthe corresponding period in 2010  due tothe release of a valuation allowance for Wisconsin net operating losses (NOLs)in the first quarter of 2009 due to a tax law change in the state of Wisconsinresulting in the ability to utilize the NOLs in future periods.

 

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**15.****      ****Related Party Transactions**

 

The Company is party to aJoint Management Services Agreement with Aurora Management Partners, LLC (“AMP”)and ACOF Management, LP (“ACOF”), affiliates of its principalstockholders.  Prior to the IPO, thisagreement obligated the Company to pay an annual management fee of $1,250 perannum, to AMP and ACOF, pro rata in accordance with their respective holdings,plus reimbursement of reasonable out-of-pocket expenses, in exchange forconsultation and advice in fields such as financial services, accounting,general business management, acquisitions, dispositions and banking.

 

In connection with theCompany’s IPO, the Company amended and restated the terms of its JointManagement Services Agreement to, among other things, (i) extend the termof service until the earlier of (A) the fifth anniversary of theconsummation of the Company’s IPO, (B) such time as AMP and ACOF, togetherwith their affiliates, collectively hold less than 5% of the Company’soutstanding common stock and (C) such time as all parties mutually agreein writing, while eliminating all other termination events (other thantermination for cause); (ii) eliminate the annual management fee, as wellas the provision obligating the Company to pay AMP and ACOF a transaction feein the event of an acquisition or any sale or disposition of the Company or anyof its divisions or any sale of substantially all Company assets or similartransactions in exchange for a one-time fee of $5,800 upon the consummation of the IPO, pro rata in accordance withtheir 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 resulted in an expense of $5,800 for the three and six months ended June 30,2010.

 

During the three and sixmonths ended June 30, 2010 and 2009, the Company recognized managementfees of $5,966 and $6,313 and related expenses of $330 and $655, respectively,relating to the Joint Management Services Agreement.

 

 

**Item2.    *Management’s Discussionand Analysis of Financial Condition and******Results of Operations***

 

*Thefollowing discussion and analysis of our financial condition and results ofoperations should be read in conjunction with our consolidated financialstatements and related notes which are included in Item 1 of this QuarterlyReport on Form 10-Q, as well as the information contained in theprospectus related to our initial public offering (“IPO”), dated May 4,2010, filed with the Securities and Exchange Commission (“SEC”) in accordancewith Rule 424(b) of the Securities Act of 1933, as amended (the “SecuritiesAct”) on May 6, 2010, which is accessible on the SEC’s website atwww.sec.gov.*

 

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

 

**Forward-Looking Statements**

 

*ThisQuarterly Report on Form 10-Q contains certain “forward-looking statements”within the meaning of Section 21E of the Securities Exchange Act of 1934,as amended (the “Exchange Act”).  Thesestatements include information relating to future events, product demand, thepayment of dividends, future financial performance, strategies, expectations,closure of our Johnson City manufacturing facility, competitive environment,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.*

 

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**Our Business**

 

We are the North Americanleader in the design, manufacture and sale of snow and ice control equipmentfor light trucks, which consists of snowplows and sand and salt spreaders, andrelated parts and accessories. We sell our products under the WESTERN®, FISHER®and BLIZZARD® brands which are among the most established and recognized in theindustry. We believe that in 2009 our share of the light truck snow and icecontrol equipment market was greater than 50%. We sell our products exclusivelythrough what we believe is the industry’s most extensive North Americandistributor network, which primarily consists of over 720 truck equipmentdistributors who purchase directly from us and are located throughout thesnowbelt regions in North America (primarily the Midwest, East and Northeastregions of the United States as well as all provinces of Canada). We havelongstanding relationships with many of our distributors, with an averagetenure of approximately 15 years. We continually seek to grow and optimize ournetwork by opportunistically adding high-quality, well-capitalized distributorsin select geographic areas and by cross-selling our industry-leading brandswithin our distribution network. Beginning in 2005, we began to extend ourreach to international markets, establishing distribution relationships inNorthern Europe and Asia, where we believe meaningful growth opportunitiesexist.

 

The annual demand forsnow and ice control equipment is driven primarily by the replacement cycle ofthe existing installed base, which is predominantly a function of the averagelife of a snowplow or spreader and is driven by usage and maintenance 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 salesdepend primarily on the level, timing and location of snowfall. Sales of ourproducts in any given year and region are most heavily influenced by localsnowfall levels in the prior snow season. Heavy snowfall during a given wintercauses usage of our equipment to increase, resulting in greater wear and tearand shortened life cycles, thereby creating a need for replacement equipmentand additional parts and accessories. In addition, when there is a heavysnowfall in a given winter, the increased income our professional snowplowersgenerate from their professional snowplow activities provides them withincreased 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 snowfallvaries from 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.

 

The demand for our snowand ice control equipment can also be influenced by general economic conditionsin the United States, as well as local economic conditions in the snowbeltregions in North America. In stronger economic conditions, our end-users maychoose to replace or upgrade existing equipment before its useful life hasended, while in weak economic conditions, our end-users may seek to extend theuseful 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.

 

***Costsof Sales and Selling, General and Administrative Expense***

 

Our costs of salesconsist primarily of variable costs, including labor, materials andmanufacturing 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 were lowand during periods in which sales are lower. Our selling, general andadministrative expenses can also be reduced temporarily in such periods tomaximize cash flow.

 

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Although steel is asignificant component of our cost of sales, we attempt to mitigate increases inthe price of steel by implementing corollary price increases for our productsin the form of a permanent price increase (in circumstances in which we believethe increase in the price of steel will be permanent) or temporary surcharges(in circumstances in which we believe the increase in the price of steel willbe temporary).

 

**Initial Public Offering**

 

On May 10, 2010, theCompany completed its IPO of 10,000,000 shares of common stock at a publicoffering price of $11.25 per share, less underwriting discounts.  The 10,000,000 shares sold included 6,500,000shares sold by the Company and 3,500,000 shares sold by certain sellingstockholders.  In addition, on May 14,2010, the selling stockholders in the IPO closed the sale of an additional1,500,000 shares to the underwriters at the public offering price of $11.25 pershare, less underwriter discounts, pursuant to the underwriters’ exercise infull of their overallotment option.  TheCompany received approximately $73.1 million in gross proceeds from theissuance and sale of its common stock in the IPO and approximately $63.9million in net proceeds after deducting underwriting discounts and totalexpenses related to the IPO.  The Companydid not receive any proceeds from the sale of its stock by the sellingstockholders in the IPO.  The Companyused the proceeds from the IPO, together with the increase in its term loanfacility and cash on hand, to redeem all of its outstanding $150.0 million,7.75% senior notes (“Senior Notes”) due January 15, 2012, includingaccrued and unpaid interest thereon and the related redemption premium.

 

**Closureof Johnson City, Tennessee Manufacturing Facility**

 

During the second quarter of 2010, theCompany continued to implement its plans to close its Johnson, City, Tennesseemanufacturing facility.  While theCompany continues to ship inventory from this facility, as of April 2,2010, the Company ceased substantially all manufacturing at this facility,effectively reducing its manufacturing facilities from three to two.  In connection with the cessation ofsubstantially all manufacturing at its Johnson City facility, in May 2010substantially all of the employees at the facility were terminated.  As of June 30, 2010, the closure hasresulted in the elimination of approximately 100 positions in Johnson City andthe addition of approximately 50 positions in Rockland and approximately 35positions in Milwaukee.  The Companyplans to complete the closure of, and cease shipping inventory from, thisfacility by August 31, 2010.  Following the closure, the Company will continue to own its Johnson City,Tennessee real property.

 

**Results of Operations**

 

*Overview*

 

During the three monthsended June 30, 2010 and 2009, we sold 16,760 and 15,069 units of snow andice control equipment, respectively, and during the six months ended June 30,2010 and 2009, we sold 19,406 and 17,468 units of snow and ice controlequipment, respectively.   The followingtable shows our sales of snow and ice control equipment and related parts andaccessories as a percentage of net sales for the three and six months ended June 30,2010 and 2009.

 

 
| ** **            | ** ** | **Three  months ended** | ** ** | **Six  months ended**   |
|-----------------------|------------|-------------------------|------------|-------------------------|
| ** **            | ** ** | **June 30,  2010** | ** ** | **June 30,  2009** | ** ** | **June 30,  2010** | ** ** | **June 30,  2009** |
| Equipment             |       | 90%                     |       | 88%                     |   | 85% |   | 82% |
|                  |       |                    |       |                    |   |   |   |   |
| Parts and accessories |       | 10%                     |       | 12%                     |   | 15% |   | 18% |

 

The following table setsforth, for the three and six months ended June 30, 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 and six months ended June 30,2010 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** | ** **   | ** **              | ** **   | **Six  Months Ended** | ** **   |
|-----------------------------------------------|--------------|--------------|-------------------------|--------------|-------------------------|--------------|-----------------------|--------------|
| ** **                                    | ** **   | ** **   | ** **              | ** **   | ** **              | ** **   | ** **            | ** **   | ** ** | ** ** | ** ** | ** ** |
| ** **                                    | ** **   | ** **   | **June 30,  2010** | ** **   | **June 30,  2009** | ** **   | ** **            | ** **   | **June 30,  2010** | ** ** | **June 30,  2009** | ** ** |
| ** **                                    | ** **   | ** **   | ** **              | ** **   | ** **              | ** **   | ** **            | ** **   | ** ** | ** ** | ** ** | ** ** |
| *** ***                                  | *** *** | *** *** | ***(unaudited)***       | *** *** | *** ***            | *** *** | ***(unaudited)***     | *** *** |
|                                          |         |         |                    |         | ***(in thousands)***    |         |                  |         |
|                                          |         |         |                    |         |                    |         |                  |         |   |   |   |   |
| Net  sales                                    |         |         | $                       | 66,243       |                    | $            | 59,637                |         |   |   | $ | 80,890 |   | $ | 74,810 |   |
| Cost  of sales                                |         |         | 41,182                  |         | 40,122                  |         |                  |         | 53,849 |   | 52,282 |   |
| Gross  profit                                 |         |         | 25,061                  |         | 19,515                  |         |                  |         | 27,041 |   | 22,528 |   |
|                                          |         |         |                    |         |                    |         |                  |         |   |   |   |   |
| Selling,  general, and administrative expense |         |         | 7,900                   |         | 4,995                   |         |                  |         | 13,708 |   | 10,527 |   |
| Intangibles  amortization                     |         |         | 1,540                   |         | 1,540                   |         |                  |         | 3,080 |   | 3,080 |   |
| Management  fees-related party                |         |         | 5,966                   |         | 330                     |         |                  |         | 6,313 |   | 655 |   |
|                                          |         |         |                    |         |                    |         |                  |         |   |   |   |   |
| Income  from operations                       |         |         | 9,655                   |         | 12,650                  |         |                  |         | 3,940 |   | 8,266 |   |
|                                          |         |         |                    |         |                    |         |                  |         |   |   |   |   |
| Interest  expense, net                        |         |         | (2,989                  | )            | (3,942                  | )            |                  |         | (6,704 | ) | (7,954 | ) |
| Loss  on extinguishment of debt               |         |         | (7,967                  | )            | --                      |         |                  |         | (7,967 | ) | -- |   |
| Other  income (expense), net                  |         |         | (1                      | )            | (24                     | )            |                  |         | 5 |   | (83 | ) |
| Income  (loss) before taxes                   |         |         | (1,302                  | )            | 8,684                   |         |                  |         | (10,726 | ) | 229 |   |
|                                          |         |         |                    |         |                    |         |                  |         |   |   |   |   |
| Income  tax (benefit) expense                 |         |         | (1,377                  | )            | 3,019                   |         |                  |         | (5,082 | ) | (974 | ) |
|                                          |         |         |                    |         |                    |         |                  |         |   |   |   |   |
| Net  income (loss)                            |         |         | $                       | 75           |                    | $            | 5,665                 |         |   |   | $ | (5,644 | ) | $ | 1,203 |   |

 

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The following table setsforth for the three and six months ended June 30, 2010 and 2009, thepercentage of certain items in our consolidated statement of operations,relative to net sales:

 
| ** **                                    | ** ** | ** ** | **Three  Months Ended** | ** ** | ** **         | ** ** | **Six  Months Ended** | ** ** |
|-----------------------------------------------|------------|------------|-------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                    | ** ** | ** ** | ** **              | ** ** | ** **         | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | ** ** | **June  30, 2010**      | ** ** | **June  30, 2009** | ** ** | ** **            | ** ** | **June 30,  2010** | ** ** | **June 30,  2009** | ** ** |
| ** **                                    | ** ** | ** ** | ** **              | ** ** | ** **         | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                          |       |       |                    |       |               |       |                  |       |   |   |   |   |
| Net  sales                                    |       |       | 100.0%                  |       | 100.0%             |       |                  |       | 100.0% |   | 100.0% |   |
| Cost  of sales                                |       |       | 62.2                    |       | 67.3               |       |                  |       | 66.6 |   | 69.9 |   |
| Gross  profit                                 |       |       | 37.8                    |       | 32.7               |       |                  |       | 33.4 |   | 30.1 |   |
|                                          |       |       |                    |       |               |       |                  |       |   |   |   |   |
| Selling,  general, and administrative expense |       |       | 11.9                    |       | 8.4                |       |                  |       | 16.9 |   | 14.1 |   |
| Intangibles  amortization                     |       |       | 2.3                     |       | 2.6                |       |                  |       | 3.8 |   | 4.1 |   |
| Management  fees-related party                |       |       | 9.0                     |       | 0.6                |       |                  |       | 7.8 |   | 0.9 |   |
|                                          |       |       |                    |       |               |       |                  |       |   |   |   |   |
| Income  from operations                       |       |       | 14.6                    |       | 21.2               |       |                  |       | 4.9 |   | 11.0 |   |
|                                          |       |       |                    |       |               |       |                  |       |   |   |   |   |
| Interest  expense, net                        |       |       | (4.5)                   |       | (6.6)              |       |                  |       | (8.3) |   | (10.6) |   |
| Loss  on extinguishment of debt               |       |       | (12.0)                  |       | -                  |       |                  |       | (9.8) |   | - |   |
| Other  income (expense), net                  |       |       | (0.0)                   |       | (0.0)              |       |                  |       | 0.0 |   | (0.1) |   |
| Income  (loss) before taxes                   |       |       | (2.0)                   |       | 14.6               |       |                  |       | (13.3) |   | 0.3 |   |
|                                          |       |       |                    |       |               |       |                  |       |   |   |   |   |
| Income  tax (benefit) expense                 |       |       | (2.1)                   |       | 5.1                |       |                  |       | (6.3) |   | (1.3) |   |
|                                          |       |       |                    |       |               |       |                  |       |   |   |   |   |
| Net  income (loss)                            |       |       | 0.1%                    |       | 9.5%               |       |                  |       | (7.0)% |   | 1.6% |   |

 

 

*Net Sales*

 

Net sales were $66.2 million for the three months ended June 30,2010 compared to $59.6 million in the three months ended June 30, 2009, anincrease of $6.6 million, or 11.1%. Net sales were $80.9 million for the sixmonths ended June 30, 2010 compared to $74.8 million in the six monthsended June 30, 2009, an increase of $6.1 million, or 8.1%.  The increase in net sales for the three andsix months ended June 30, 2010 was driven by an 11.2% and 11.1% increasein unit sales of snow and ice control equipment, respectively, due in part to ofabove average snowfall during the October 1, 2009 to March 31, 2010 snow seasonand improving retail sales in February and March of 2010.   Slightly offsetting this increase was areduction in parts and accessories sales for the three and six months ended June 30,2010 compared to the corresponding period in 2009 of $0.6 million or 8.3%, and$1.4 million or 9.5%, respectively, as end -users opted to purchase replacementequipment instead of repairing existing equipment.

 

 

*Cost of Sales*

 

Cost of sales were $41.2 million for the three months endedJune 30, 2010 compared to $40.1 million for the three months endedJune 30 2009, an increase of $1.1 million, or 2.6%. Cost of sales were$53.8 million for the six months ended June 30, 2010 compared to $52.3million for the six months ended June 30 2009, an increase of $1.5million, or 3.0%.  This increase in costof sales for the three and six months ended June 30, 2010 compared to thecorresponding periods in 2009 was driven by increased unit sales of snow andice control equipment as discussed above under “—Net Sales”, along withnon-recurring accelerated depreciation costs totaling $0.5 million and $1.4million, respectively, associated with reassessing the useful lives of theCompany’s manufacturing facilities and certain equipment at our Johnson Cityplant.  Cost of sales increased at alower rate than net sales due to lower material costs than in the priorcomparable periods.  As a percentage ofcost of sales, fixed and variable costs were approximately 18% and 82%,respectively, for the three months ended June 30, 2010 versusapproximately 16% and 84%, respectively, for the three months ended June 30,2009, and approximately 22% and 78%, respectively, for the six months ended June 30,2010 versus approximately 18% and 82%, respectively, for the six months ended June 30,2009.

 

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*Gross Profit*

 

Gross profit was $25.1 million for the three months ended June 30,2010 compared to $19.5 million in the three months ended June 30, 2009, anincrease of $5.6 million, or 28.4%. Gross profit was $27.0 million for the six months ended June 30,2010 compared to $22.5 million in the six months ended June 30, 2009, anincrease of $4.5 million, or 20.0%.  Theincrease in gross profit for the three and six months ended June 30, 2010was due primarily to the increased units sales of snow and ice controlequipment described above under “—Net Sales.” As a percentage of net sales, gross profit increased from 32.7% for thethree months ended June 30, 2009 to 37.8% for the corresponding period in2010 and from 30.1% for the six months ended June 30, 2009 to 33.4% forthe 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, includingintangible amortization and management fees, were $15.4 million for the threemonths ended June 30, 2010, compared to $6.9 million for the three monthsended June 30 2009, an increase of $8.5 million.  Selling, general and administrative expenseswere $23.1 million for the six months ended June 30, 2010, compared to$14.3 million for the six months ended June 30 2009, an increase of $8.8million.  This increase for the three andsix months ended June 30, 2010 was primarily attributable to non-recurringexpenses incurred at the time of the Company’s IPO totaling $8.5 million,comprised namely of the buyout of the management services agreement at $5.8million, compensation expense associated with net exercises of stock optionstotaling $1.7 million and the expense and payment of cash bonuses under theCompany’s liquidity bonus plan of $1.0 million. As a percentage of net sales,selling, general and administrative expenses increased to 23.2% for the threemonths ended June 30, 2010 compared to 11.6% for the corresponding periodin 2009, and from 19.1% for the six months ended June 30, 2009 to 28.5%for the corresponding period in 2010, due to the factors discussed above.

 

*Interest Expense*

 

Interest expense was $3.0 million for the three monthsended June 30, 2010 compared to $3.9 million in the corresponding periodin 2009, a decrease of $0.9 million. Interest expense was $6.7 million for thesix months ended June 30, 2010 compared to $8.0 million in thecorresponding period in 2009, a decrease of $1.3 million.   This decrease in interest expense for thethree and six months ended June 30, 2010 was due to less interest expenseas a result of the redemption of the Senior Notes with proceeds from the IPO,additional borrowings under the Company’s senior credit facilities and cash onhand.

 

*Loss On Extinguishment of Debt*

 

Loss on extinguishment of debt totaling $8.0 million forthe three and six months ended June 30, 2010 was entirely driven by costsassociated with the amendment of our senior credit facilities and the redemptionof the Senior Notes, including both the call premium on the redemption of ourSenior Notes, and the write-off of unamortized deferred financing costs relatingto the redemption of our Senior Notes and the amendment of our senior creditfacilities.

 

*Income Taxes*

 

Deferred income taxesreflect the net tax effects of temporary differences between the carryingamounts of assets and liabilities for financial reporting purposes and theamounts used for income tax purposes. The largest item affecting deferred taxes is the difference between bookand tax amortization of goodwill and other intangibles amortization.  The Company estimates that the Company’s effectivecombined federal and state tax rate for 2010 will be approximately 46%.  The Company’s effective tax rate (benefit)was (105.8)%  and 34.8% for the threemonths ended June 30, 2010 and 2009, respectively.  The Company’s effective tax rate for the six monthsended June 30, 2010 and 2009 was (47.4)% and (425)%, respectively.  The effective tax rate for the three monthsended June 30, 2010 is due to the anticipation of a permanent item relatedto compensation deductions that became probable in the second quarter of2010.  The effective tax rate (benefit)for the six months ended June 30, 2009 was higher than the correspondingperiod in 2010  due to the release of avaluation allowance for Wisconsin net operating losses (NOLs) in the firstquarter of 2009 due to a tax law change in the state of Wisconsin resulting inthe ability to utilize the NOLs in future periods.

 

*Net Income (Loss)*

 

Net income for the three months ended June 30, 2010was $0.08 million compared to net income of $5.7 million for the correspondingperiod in 2009, a decrease of $5.6 million. Net loss for the six months ended June 30,2010 was $5.6 million compared to net income of $1.2 million for thecorresponding period in 2009, a decrease of $6.8 million.  This decrease in net income was driven by thefactors described above and primarily by the impact of non -recurring costsincurred at the time of the Company’s IPO. See the reconciliation table of NetIncome (Loss) to Adjusted Net Income in “— Non-GAAP Financial Measures” belowfor more details regarding the non-recurring expenses. As a percentage of netsales, net income was 0.04% for the three months ended June 30, 2010compared to 9.5% for the three months ended June 30, 2009.  As a percentage of net sales, net loss was7.0% for the six months ended June 30, 2010 compared to net income of 1.6%for the six months ended June 30, 2009.

 

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*Adjusted EBITDA*

 

Adjusted EBITDA for the three months ended June 30,2010 was $21.7 million compared to $15.9 million in the corresponding period in2009, an increase of $5.8 million, or 36.4%. Adjusted EBITDA for the six months ended June 30, 2010 was $20.5million compared to $15.4 million in the corresponding period in 2009, anincrease of $5.1 million, or 33.1%.  As apercentage of net sales, Adjusted EBITDA increased from 26.6% for the threemonths ended June 30, 2009 to 32.7% for the three months ended June 30,2010, and increased from 20.6% for the six months ended June 30, 2009 to 25.3%for the six months ended June 30, 2010. The increase in Adjusted EBITDA is primarily attributable to increased unitsales of snow and ice control equipment, which resulted from stronger pre-seasonshipments during the second quarter of 2010 compared to the correspondingperiod in 2009.  Both above averagesnowfall in the October 1, 2009 to March 31, 2010 snow season and a slightimprovement in retail inventory activity drove the increase in pre-seasonorders in the second quarter of 2010. 

 

*Non-GAAP Financial Measures*

 

This Quarterly Report onForm 10-Q contains financial information calculated other than in accordancewith U.S. generally accepted accounting principles (“GAAP”). 

 

These non-GAAP measuresinclude:

 

·      Adjustednet income; and

·      AdjustedEBITDA.

 

These non-GAAP disclosuresshould not be construed as an alternative to the reported results determined inaccordance with GAAP.

 

Adjustednet income represents net income as determined under GAAP, excludingnon-recurring expenses incurred at the time of our IPO, namely the buyout ofour management services agreement, the loss on extinguishment of debt, stockbased compensation expense associated with the net exercise of stock optionsand the payment of cash bonuses under our liquidity bonus plan. We believe thatthe presentation of Adjusted net income for the three and six months ended June 30,2010 provides useful information to investors by facilitating comparisons toDouglas’ historical performance due to the non-recurring expenses incurred atthe time of the Company’s IPO in May 2010.

 

Thefollowing table presents a reconciliation of net income (loss), the mostcomparable GAAP financial measure, to adjusted net income for the three and sixmonths ended June 30, 2010. There were no such adjustments during thethree and six months ended June 30, 2009.

 
| ** **                                                                                                      | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                      | ** ** | ** **                       | ** ** | ** **                     | ** ** |
| **(in millions)**                                                                                          | ** ** | **June 30, 2010**      | ** ** | **June 30, 2010**    | ** ** |
| Net  Income (Loss) - (GAAP)                                                                                     |       | $0.08                            |       | ($5.6)                         |       |
|                                                                                                            |       |                             |       |                           |       |
| Addback  non-recurring expenses, net of tax at 45.6%, incurred at the time of the IPO:                          |       |                             |       |                           |       |
|                                                                                                            |       |                             |       |                           |       |
| -  Buyout of the Management Services Agreement                                                                  |       | $3.1                             |       | $3.1                           |       |
|                                                                                                            |       |                             |       |                           |       |
| -  Loss on extinquishment of debt                                                                               |       | $4.4                             |       | $4.4                           |       |
|                                                                                                            |       |                             |       |                           |       |
| -  Liquidity bonus payment                                                                                      |       | $0.5                             |       | $0.5                           |       |
|                                                                                                            |       |                             |       |                           |       |
| -  Stock based compensation expense associated with exercise and sale of stock  options concurrent with the IPO |       | $0.9                             |       | $0.9                           |       |
|                                                                                                            |       |                             |       |                           |       |
| Adjusted  Net Income - (non-GAAP)                                                                               |       | $9.0                             |       | $3.4                           |       |

 

Adjusted EBITDA represents netincome (loss) before interest, taxes, depreciation and amortization, as furtheradjusted for management fees paid by us to affiliates of our principalstockholders, stock-based compensation associated with the net exercise ofstock options, payment of cash bonus under our liquidity bonus plan, loss onextinguishment of debt, certain non-recurring charges related to the closure ofour Johnson City, Tennessee manufacturing facility and certain unrelated legalexpenses.   We use, and we believe ourinvestors benefit from the presentation of Adjusted EBITDA in evaluating ouroperating performance because it provides us and our investors with additionaltools to compare our operating performance on a consistent basis by removingthe impact of certain items that management believes do not directly reflectour core operations. In addition, we believe that Adjusted EBITDA is useful toinvestors and other external users of our consolidated financial statements inevaluating our operating performance as compared to that of other companies,because it allows them to measure a company’s operating performance withoutregard to items such as interest expense, taxes, depreciation and depletion,and amortization and accretion, which can vary substantially from company tocompany depending upon accounting methods and book value of assets andliabilities, capital structure and the method by which assets were acquired.Our management also uses Adjusted EBITDA for planning purposes, including thepreparation of our annual operating budget and financial projections.Management also uses Adjusted EBITDA to evaluate our ability to make certainpayments, including dividends, in compliance with our senior credit facilities,which is determined based on a calculation of “Consolidated Adjusted EBITDA”that is substantially similar to Adjusted EBITDA.

 

Adjusted EBITDA has limitations as an analytical tool. As aresult, you should not consider it in isolation, or as a substitute for netincome, operating income, cash flow from operating activities or any othermeasure of financial performance or liquidity presented in accordance withGAAP. Some of these limitations are:

 

·                  AdjustedEBITDA does not reflect our cash expenditures or future requirements forcapital expenditures or contractual commitments;

·                  AdjustedEBITDA does not reflect changes in, or cash requirements for, our workingcapital needs;

·                  AdjustedEBITDA does not reflect the interest expense, or the cash requirementsnecessary to service interest or principal payments, on our indebtedness;

·                  Althoughdepreciation and amortization are non-cash charges, the assets beingdepreciated and amortized will often have to be replaced in the future;

·                  Adjusted EBITDA does notreflect any cash requirements for such replacements;

·                  Othercompanies, including other companies in our industry, may calculate AdjustedEBITDA differently than we do, limiting its usefulness as a comparativemeasure; and

·                  AdjustedEBITDA does not reflect tax obligations whether current or deferred.

 

The following table presents areconciliation of net income (loss), the most comparable GAAP financialmeasure, to Adjusted EBITDA as well as the resulting calculation of AdjustedEBITDA for the three and six months ended June 30, 2010 and 2009:

 
| ** **                       | ** ** | ** ** | **Three months ended**

** ** | ** **         | **Six months ended**

** ** |
|----------------------------------|------------|------------|------------------------------------|--------------------|----------------------------------|
| ** **                       | ** ** | ** ** | ** **                         | **June  30, 2010** | ** **                       | ** ** | ** ** | **June  30, 2009**

** ** | ** ** | ** ** | ** ** | **June  30, 2010** | ** ** | ** ** | ** ** | **June  30, 2009** | ** ** |
|                             |       |       |                               |               |                             |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net  Income (Loss)**           |       |       |                               | $                  | 75                               |   |   |   | $ | 5,665 |   |   |   | $ | (5,644 | ) |   |   | $ | 1,203 |   |
|                             |       |       |                               |               |                             |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Expense - Net           |       |       |                               | 2,989              |                             |   |   | 3,942 |   |   |   | 6,704 |   |   |   | 7,954 |   |
| Income Taxes                     |       |       |                               | (1,377             | )                                |   |   | 3,019 |   |   |   | (5,082 | ) |   |   | (974 | ) |
| Depreciation Expense             |       |       |                               | 1,546              |                             |   |   | 1,293 |   |   |   | 3,564 |   |   |   | 2,586 |   |
| Amortization                     |       |       |                               | 1,540              |                             |   |   | 1,540 |   |   |   | 3,080 |   |   |   | 3,080 |   |
| **EBITDA**                       |       |       |                               | 4,773              |                             |   |   | 15,459 |   |   |   | 2,622 |   |   |   | 13,849 |   |
|                             |       |       |                               |               |                             |   |   |   |   |   |   |   |   |   |   |   |   |
| Management Fees                  |       |       |                               | 5,966              |                             |   |   | 330 |   |   |   | 6,313 |   |   |   | 655 |   |
| Stock Based  Compensation (1)    |       |       |                               | 1,748              |                             |   |   | - |   |   |   | 1,748 |   |   |   | 732 |   |
| Loss on Extinguishment  of Debt  |       |       |                               | 7,967              |                             |   |   |   |   |   |   | 7,967 |   |   |   | - |   |
| Liquidity Bonus Plan             |       |       |                               | 1,003              |                             |   |   |   |   |   |   | 1,003 |   |   |   | - |   |
| Other non-recurring  charges (2) |       |       |                               | 199                |                             |   |   | 93 |   |   |   | 818 |   |   |   | 148 |   |
|                             |       |       |                               |               |                             |   |   |   |   |   |   |   |   |   |   |   |   |
| **Adjusted  EBITDA**             |       |       |                               | $                  | 21,656                           |   |   |   | $ | 15,882 |   |   |   | $ | 20,471 |   |   |   | $ | 15,384 |   |

 

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(1) Reflects thestock-based compensation expense associated with the repurchase of stockoptions from certain of our executives.

 

(2) Reflectsseverance and one-time, non-recurring expenses for costs related to the closureof our Johnson City facility of $389 and $25 for the three months and $829 and$25 for the six months ended June 30, 2010 and 2009, respectively, $477and $68 of unrelated legal fees for the three months and $656 and $123 for thesix months ended June 30, 2010 and 2009 respectively, and $667 and $0 gainon other post employment benefit plan curtailment related to the Johnson Cityplant closure for the three and six months ended June 30, 2010 and 2009,respectively.

 

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**Discussion of Critical Accounting Policies**

 

For a discussion of our criticalaccounting policies, please see the disclosure included in the prospectusrelated to our IPO, filed with the SEC in accordance with Rule 424(b) ofthe Securities Act, under the heading “Management’s Discussion and Analysis ofFinancial Condition and Results of Operation — Critical Accounting Policies” onMay 6, 2010, which is accessible on the SEC’s website at www.sec.gov.

 

**New Accounting Pronouncements**

 

For the six months ended June 30, 2010, the Companydid not adopt any new accounting pronouncements that had a significant impactto the Company’s consolidated financial statements.

 

**Liquidity and Capital Resources**

 

Our principal sources of cash have been and we expect willcontinue to be cash from operations and borrowings under our senior creditfacilities.  As of June 30, 2010,our senior credit facilities consisted of a $60 million senior securedrevolving credit facility, entered into by our subsidiaries, Douglas Dynamics,L.L.C., Douglas Dynamics Finance Company and Fisher, LLC, as borrowers and an$125 million senior secured term loan facility, entered into by DouglasDynamics, L.L.C., as borrower, each on May 21, 2007, and as amended on April 16,2010 in connection with our IPO. 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 from $85 million to $125 million, which additional term loans willmature in May 2016 and (iii) amend certain of the provisions in oursenior credit facilities which govern our ability to pay dividends. On June 9,2010, we completed the redemption of our Senior Notes.  We redeemed the Senior Notes using theproceeds from our IPO, together with the increase in our term loan facility andcash on hand, for a total of $157.6 million including the accrued interestthereon and a redemption premium.

 

Weexpect that our primary uses of cash will be to provide working capital, meetdebt service requirements, finance capital expenditures, pay dividends underour dividend policy and support our growth, including through potentialacquisitions, and for other general corporate purposes.  For a description of the seasonality of ourworking capital rates see “—Seasonality and Year-To-Year Variability.”

 

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Asdiscussed in the prospectus relating to our IPO, in connection with our IPO,our Board of Directors adopted a dividend policy, reflecting an intentionto distribute to our stockholders a regular quarterly cash dividend, commencingin the third quarter of 2010 in equal quarterly installments at an initialannual rate of $0.73 per share.  Thedeclaration and payment of these dividends to holders of our common stock willbe at the discretion of our Board of Directors and will depend upon manyfactors, including our financial condition and earnings, legal requirements,taxes and other factors our Board of Directors may deem to be relevant. Theterms of our indebtedness also restricts us from paying cash dividends on ourcommon stock under certain circumstances. As a result of this dividend policy,we may not have significant cash available to meet any large unanticipatedliquidity requirements. As a result, we may not retain a sufficient amount ofcash to fund our operations or to finance unanticipated capital expenditures orgrowth opportunities, including acquisitions. Our Board of Directors may,however, amend, revoke or suspend our dividend policy at any time and for anyreason.

 

Asof June 30, 2010, we had $50.0 million of total liquidity, comprised of$10.0 million in cash and cash equivalents and borrowing availability of $40.0million under our revolving credit facility. Borrowing availability under our revolving credit facility is governedby a borrowing base, the calculation of which includes cash on hand.Accordingly, use of cash on hand may also result in a reduction in the amountavailable for borrowing under our revolving credit facility.  Furthermore, our revolving credit facilityrequires us to maintain at least $6 million of borrowing availability. Weexpect that cash on hand, generated from operations, as well as availablecredit under our senior credit facilities will provide adequate funds for thepurposes described above for at least the next 12 months.

 

Thefollowing table shows our cash and cash equivalents and inventories inthousands at June 30, 2010, December 31, 2009 and June 30, 2009.

 
| ** **                | ** ** | **As of**              | ** ** |
|---------------------------|------------|------------------------|------------|
| ** **                | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** | **June 30, 2009** | ** ** |
| Cash and cash equivalents |       | $                      | 9,981      |   | $ | 69,703 |   | $ | 31,720 |   |
| Inventories               |       | 25,624                 |       | 26,697 |   | 30,009 |   |
|                           |            |                        |            |  |  |  |  |  |  |  |

 

Wehad cash and cash equivalents of $10.0 million at June 30, 2010 comparedto cash and cash equivalents of $31.7 million at June 30, 2009.  The table below sets forth a summary of thesignificant sources and uses of cash for the periods presented in thousands.

 
| ** **                                                 | ** ** | **Six months ended June 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------------------|------------|------------------------------------|------------|------------|------------|------------|------------|
| **Cash Flows  (in thousands)**                             | ** ** | **2010**                           | ** ** | **2009**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| Net cash provided by (used in)  operating activities  |       | $                                  | (24,708    | )          | $          | (21,391    | )          | $ | (3,317 | ) | 15.5 | % |
| Net cash provided by (used in)  investing activities  |       | (1,854                             | )          | (4,006     | )          | 2,152      |       | (53.7 | )% |
| Net cash provided by (used in)  financing activities  |       | (32,530                            | )          | 3,565      |       | (36,095    | )          | (1,012.5 | )% |
|                                                       |       |                               |       |       |       |       |       |   |   |
| Increase (Decrease) in cash                                |       | $                                  | (59,092    | )          | $          | (21,832    | )          | $ | (37,260 | ) | 170.7 | % |

 

Net cash used in operating activities increased $3.3million from the six months ended June 30, 2009 to the six months ended June 30,2010.  This increase was driven mainly bynon-recurring costs incurred at the time of the Company’s IPO, namely the buyout of themanagement services agreement totaling $5.8 million, and the payment of cashbonuses under the Company’s liquidity bonus plan totaling $1.0 million.  Partially offsetting these cash outlays was ayear over year increase in pre-tax gross profit of $4.5 million driven byincreased unit shipments and improved unit margins.

 

Net cash used in investing activities decreased $2.2million for the six months ended June 30, 2010, compared to thecorresponding period in 2009.  Thisdecrease was driven largely by the purchase of a Milwaukee distributionfacility during the second quarter of 2009 to expand our Milwaukee facilitiesin anticipation of the closure of our Johnson City, TN manufacturing plant.

 

Net cash used in financing activities increased $36.1million for the six months ended June 30, 2010 compared to thecorresponding period in 2009, primarily as a result of the net impact offinancing activities associated with the Company’s IPO, namely the redemption ofthe Company’s Senior Notes, including the redemption premium and accruedinterest thereon totaling $153.9 million, partially offset by an increase inour term loan of $40.0 million, net proceeds from the IPO of $63.9 million, andrevolver borrowings of $20.0 million.

 

**Contractual Obligations**

 

There have been no material changesto our contractual obligations in the six months ended June 30, 2010, exceptfor (a) a reduction in long-term debt and related 

 

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interest obligations as a result of the redemption of ourSenior Notes on June 9, 2010 and (b) an increase in our term loan facility by$40 million to $125 million. For additional details regarding the changes toour long-term debt, see Note 5 to the notes our consolidated financialstatements.

 

**Off-Balance Sheet Arrangements**

 

We are not party to any off-balancesheet arrangements that have or are reasonably likely to have a materialcurrent or future effect on our financial condition, changes in financialcondition, revenues, expenses, results of operations, liquidity, capitalexpenditures or capital resources.

 

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

 

Our business is seasonal and alsovaries from year-to-year. Consequently, our results of operations and financialcondition vary from quarter-to-quarter and from year-to-year as well. Inaddition, because of this seasonality and variability, our results of operationsfor any quarter may not be indicative of results of operations that may beachieved for a subsequent quarter or the full year, and may not be similar toresults of operations experienced in prior years. That being the case, whilesnowfall levels vary within a given year and from year-to-year, snowfall, andthe corresponding replacement cycle of snow and ice control equipment, isrelatively consistent over multi-year periods.

 

Salesof our products are significantly impacted by the level, timing and location ofsnowfall, with sales in any given year and region most heavily influenced bysnowfall levels in the prior snow season (which we consider to begin in October andend in March) in that region. This is due to the fact that end-user demand forour products is driven primarily by the condition of their snow and ice controlequipment, and in the case of professional snowplowers, by their financialability to purchase new or replacement snow and ice control equipment, both ofwhich are significantly affected by snowfall levels. Heavy snowfall during agiven winter causes usage of our products to increase, resulting in greaterwear and tear to our products and a shortening of their life cycles, therebycreating a need for replacement snow and ice control equipment and relatedparts and accessories. In addition, when there is a heavy snowfall in a givenwinter, the increased income our professional snowplowers generate from theirprofessional snowplow activities provides them with increased purchasing powerto purchase replacement snow and ice controlequipment prior to the following winter. To a lesser extent, sales of ourproducts are influenced by the timing of snowfall in a given winter. Because anearly snowfall can be viewed as a sign of a heavy upcoming snow season, ourend-users may respond to an early snowfall by purchasing replacement snow andice control equipment during the current season rather than delaying purchasesuntil after the season is over when most purchases are typically made byend-users.

 

We attempt to manage the seasonalimpact of snowfall on our revenues in part through our pre-season salesprogram, which involves actively soliciting and encouraging pre-seasondistributor orders in the second and third quarters by offering our distributorsa combination of pricing, payment and freight incentives during this period.These pre-season sales incentives encourage our distributors to re-stock theirinventory during the second and third quarters in anticipation of the peakfourth quarter retail sales period by offering pre-season pricing and paymentdeferral until the fourth quarter. As a result, we tend to generate ourgreatest volume of sales (an average of over two-thirds over the last tenyears) during the second and third quarters, providing us with manufacturingvisibility for the remainder of the year. By contrast, our revenue andoperating results tend to be lowest during the first quarter as managementbelieves our end-users prefer to wait until the beginning of a snow season topurchase new equipment and as our distributors sell off inventory and wait forour pre-season sales incentive period to re-stock inventory. Fourth quartersales vary from year-to-year as they are primarily driven by the level, timingand location of snowfall during the quarter. This is because most of our fourthquarter sales and shipments consist of re-orders by distributors seeking torestock inventory to meet immediate customer needs caused by snowfall duringthe winter months.

 

Because of the seasonality of our sales,we experience 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 theimpact of seasonality and year-to-year variability on our business coststhrough the effective management of our assets. Our asset management and profitfocus strategies include:

 

·                  theemployment of a highly variable cost structure facilitated by a core group ofworkers that we supplement with a temporary workforce as sales volumes dictate,which allows us to adjust costs on an as-needed basis in response to changingdemand;

·                  ourenterprise-wide lean concept, which allows us to adjust production levels up ordown to meet demand;

 

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·                  thepre-season order program described above, which incentivizes distributors toplace orders prior to the retail selling season; and

·                  avertically integrated business model.

 

These asset management and profitfocus strategies, among other management tools, allow us to adjust fixedoverhead and sales, general and administrative expenditures to account for theyear-to-year variability of our sales volumes.

 

Additionally, although modest, ourannual capital expenditure requirements can be temporarily reduced by up toapproximately 40% in response to actual or anticipated decreases in salesvolumes. If we are unsuccessful in our asset management initiatives, theseasonality and year-to-year variability effects on our business may becompounded and in turn our results of operations and financial condition maysuffer.

 

**Item 3.     *Quantitative and Qualitative Disclosures AboutMarket Risk***

 

We do not use financial instrumentsfor speculative trading purposes, and do not hold any derivative financialinstruments that could expose us to significant market risk. Our primary marketrisk exposures are changes in interest rates and steel price fluctuations.

 

**Interest Rate Risk**

 

We are exposed to market risk primarily from changes ininterest 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.

 

As of June 30, 2010, we had outstanding borrowingsunder our term loan of $122.1 million.  Ahypothetical interest rate change of 1%, 1.5% and 2% on our term loan wouldhave changed interest incurred for the six months ended June 30, 2010 by$0. 3 million, $0.4 million and $0.6 million, respectively. As of June 30,2010, we had outstanding borrowings under our revolving credit facility of$20.0 million.  A hypothetical interestrate change of 1%, 1.5% and 2% on our revolving credit facility would have hadan immaterial effect on interest incurred for the six months ended June 30,2010.

 

**Commodity Price Risk**

 

In the normal course of business, we are exposed to marketrisk related to our purchase of steel, the primary commodity upon which ourmanufacturing depends. Our steel purchases as a percentage of revenue was 17.0%and 19.9% for the six months ended June 30, 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.     *Controls And Procedures***

 

**Evaluation of Disclosure Controls andProcedures**

 

Our management, with theparticipation of our Chief Executive Officer and Chief Financial Officer,evaluated the effectiveness of our disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934, as amended) as of the end of the period covered by thisQuarterly Report on Form 10-Q. Based on that evaluation, our ChiefExecutive Officer and Chief Financial Officer concluded that as of the end ofthe period covered by this Quarterly Report our disclosure controls andprocedures were effective to provide reasonable assurance that informationrequired to be disclosed by us in reports that we file or submit under theSecurities Exchange Act of 1934, as amended, is recorded, processed, summarizedand reported within the time periods specified in the SEC’s rules andforms, and include controls and procedures designed to ensure that theinformation required to be disclosed by us in such reports is accumulated andcommunicated to our management, including our

 

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Chief Executive Officer and Chief Financial Officer, asappropriate, to allow timely decisions regarding required disclosures.

 

**Changes in Internal Control Over FinancialReporting**

 

There have been no changes in the Company’sinternal control over financial reporting that occurred during the periodcovered by this Quarterly Report on Form 10-Q that have materially affected, orare reasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

 

 

**PART II. OTHERINFORMATION**

 

**Item 1.     *Legal Proceedings***

 

In the ordinary course of business,we are engaged in various litigation primarily including product liability andintellectual property disputes. However, management does not believe that anycurrent litigation is material to our operations or financial position. Inaddition, we are not currently party to any environmental-related claims orlegal matters.

 

**Item 1A.     *Risk Factors***

 

*The Company operates in an environment thatinvolves numerous known and unknown risks and uncertainties. Our business,prospects, financial condition and operating results could be materiallyadversely affected by any of these risks, as well as other risks not currentlyknown to us or that we currently consider immaterial. The risks described belowhighlight some of the factors that have affected, and in the future couldaffect our operations.*

 

***Our results of operations depend primarilyon the level, timing and location of snowfall. As a result, a decline insnowfall levels in multiple regions for an extended time could cause ourresults of operations to decline and adversely affect our ability to paydividends.***

 

As a manufacturer of snow and icecontrol equipment for light trucks, and related parts and accessories, oursales depend primarily on the level, timing and location of snowfall in theregions in which we offer our products. A low level or lack of snowfall in anygiven year in any of the snowbelt regions in North America (primarily theMidwest, East and Northeast regions of the United States as well as allprovinces of Canada) will likely cause sales of our products to decline in suchyear as well as the subsequent year, which in turn may adversely affect ourresults of operations and ability to pay dividends. See “Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Seasonality and Year-to-Year Variability.” A sustained period ofreduced snowfall events in one or more of the geographic regions in which weoffer our products could cause our results of operations to decline andadversely affect our ability to pay dividends.

 

***The year-to-year variability of our businesscan cause our results of operations and financial condition to be materiallydifferent from year-to-year; whereas the seasonality of our business can causeour results of operations and financial condition to be materially differentfrom quarter-to-quarter.***

 

Because our business depends on thelevel, timing and location of snowfall, our results of operations vary fromyear-to-year. Additionally, because the annual snow season typically only runsfrom October 1 through March 31, our distributors typically purchase ourproducts during the second and third quarters. As a result, we operate in aseasonal business. We not only experience seasonality in our sales, but alsoexperience seasonality in our working capital needs. Consequently, our resultsof operations and financial condition can vary from year-to-year, as well asfrom quarter-to-quarter, which could affect our ability to pay dividends. If weare unable to effectively manage the seasonality and year-to-year variabilityof our business, our results of operations, financial condition and ability topay dividends may suffer.

 

***If economic conditions in the United Statescontinue to remain weak or deteriorate further, our results of operations,financial condition and ability to pay dividends may be adversely affected.***

 

Historically, demand for snow andice control equipment for light trucks has been influenced by general economicconditions in the United States, as well as local economic conditions in thesnowbelt regions in North America. During the last few years, economicconditions throughout the United States have been extremely weak, and may notimprove in the foreseeable future. Weakened economic conditions may cause ourend-users to delay purchases of replacement snow and ice control equipment and

 

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instead repair their existing equipment, leading to adecrease in our sales of new equipment. Weakened economic conditions may alsocause our end-users to delay their purchases of new light trucks. Because ourend-users tend to purchase new snow and ice control equipment concurrent withtheir purchase of new light trucks, their delay in purchasing new light truckscan also 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 alsocause our end-users to consider price more carefully in selecting new snow andice control 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 good relationshipswith our distributors, the loss or consolidation of our distributor base or theactions or inactions of our distributors could have an adverse effect on ourresults of operations and our ability to pay dividends.***

 

We depend on a network of truckequipment distributors to sell, install and service our products. Nearly all ofthese sales 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 distributors, we couldlose a substantial amount of our distributor base. A loss of a substantialportion of our distributor base could cause our sales to decline significantly,which would have an adverse effect on our results of operations and ability topay dividends.

 

In addition, our distributors maynot provide timely or adequate service to our end-users. If this occurs, ourbrand identity and reputation may be damaged, which would have an adverseeffect on our results of operations and ability to pay dividends.

 

***Lack of available financing options for ourend-users or distributors may adversely affect our sales volumes.***

 

Our end-user base is highlyconcentrated among professional snowplowers, who comprise over 50% of ourend-users, many of whom are individual landscapers who remove snow during thewinter and landscape during the rest of the year, rather than large,well-capitalized corporations. These end-users often depend upon credit topurchase our products. If credit is unavailable on favorable terms or at all,our end-users may not be able to purchase our products from our distributors,which would in turn reduce sales and adversely affect our results of operationsand ability to pay dividends.

 

In addition, because ourdistributors, like our end-users, rely on credit to purchase our products, ifour distributors are not able to obtain credit, or access credit on favorableterms, we may experience delays in payment or nonpayment for deliveredproducts. Further, if our distributors are unable to obtain credit or accesscredit on favorable terms, they could experience financial difficulties orbankruptcy and cease purchases of our products altogether. Thus, if financingis unavailable on favorable terms or at all, our results of operations and abilityto pay dividends would be adversely affected.

 

***The price of steel, a commodity necessary tomanufacture our products, is highly variable. If the price of steel increases,our gross margins could decline.***

 

Steelis a significant raw material used to manufacture our products. During 2007,2008 and 2009, our steel purchases were approximately 12%, 15% and 18% of ourrevenue, 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 who may beunable to meet our volume and quality requirements, and we may be unable toobtain alternative sources.***

 

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We purchase certain componentsessential to our snowplows and sand and salt spreaders from outside suppliers,including off-shore sources. Most of our key supply arrangements can bediscontinued at any time. A supplier may encounter delays in the production anddelivery of such products and components or may supply us with products andcomponents that do not meet our quality, quantity or cost requirements.Additionally, a supplier may be forced to discontinue operations. Anydiscontinuation or interruption in the availability of quality products andcomponents from one or more of our suppliers may result in increased productioncosts, delays in the delivery of our products and lost end-user sales, whichcould have an adverse effect on our business and financial condition.

 

In addition, we have begun toincrease the number of our off-shore suppliers. Our increased reliance onoff-shore sourcing may cause our business to be more susceptible to the impactof natural disasters, war and other factors that may disrupt the transportationsystems or shipping lines used by our suppliers, a weakening of the dollar overan extended period of time and other uncontrollable factors such as changes inforeign regulation or economic conditions. In addition, reliance on off-shoresuppliers may make it more difficult for us to respond to sudden changes indemand because of the longer lead time to obtain components from off-shoresources. We may be unable to mitigate this risk by stocking sufficientmaterials to satisfy any sudden or prolonged surges in demand for our products.If we cannot satisfy demand for our products in a timely manner, our salescould suffer as distributors can cancel purchase orders without penalty untilshipment.

 

***We do not sell our products under long-termpurchase contracts, and sales of our products are significantly impacted byfactors outside of our control; therefore, our ability to estimate demand islimited.***

 

We do not enter into long-termpurchase contracts with our distributors and the purchase orders we receive maybe cancelled without penalty until shipment. Therefore, our ability toaccurately predict future demand for our products is limited. Nonetheless, weattempt to estimate demand for our products for purposes of planning our annualproduction levels and our long-term product development and new productintroductions. We base our estimates of demand on our own market assessment,snowfall figures, quarterly field inventory surveys and regular communicationswith our distributors. Because wide fluctuations in the level, timing andlocation of snowfall, economic conditions and other factors may occur, each ofwhich is out of our control, our estimates of demand may not be accurate.Underestimating demand could result in procuring an insufficient amount ofmaterials necessary for the production of our products, which may result inincreased production costs, delays in product delivery, missed saleopportunities and a decrease in customer satisfaction. Overestimating demandcould result in the procurement of excessive supplies, which could result in increasedinventory and associated carrying costs.

 

***If we are unable to enforce, maintain orcontinue to build our intellectual property portfolio, or if others invalidateour intellectual property rights, our competitive position may be harmed.***

 

We rely on a combination ofpatents, trade secrets and trademarks to protect certain of the proprietaryaspects of our business and technology. We hold approximately 20 U.S.registered trademarks (including the trademarks WESTERN®, FISHER® andBLIZZARD®), 5 Canadian registered trademarks, 28 U.S. issued patents and 15Canadian patents Although we work diligently to protect our intellectualproperty rights, monitoring the unauthorized use of our intellectual propertyis difficult, and the steps we have taken may not prevent unauthorized use byothers. In addition, in the event a third party challenges the validity of ourintellectual property rights, a court may determine that our intellectualproperty rights may not be valid or enforceable. An adverse determination with respectto our intellectual property rights may harm our business prospects andreputation. Third parties may design around our patents or may independentlydevelop technology similar to our trade secrets. The failure to adequatelybuild, maintain and enforce our intellectual property portfolio could impairthe strength of our technology and our brands, and harm our competitiveposition. Although the Company has no reason to believe that its intellectualproperty rights are vulnerable, previously undiscovered intellectual propertycould be used to invalidate our rights.

 

***If we are unable to develop new products orimprove upon our existing products on a timely basis, it could have an adverseeffect on our business and financial condition.***

 

We believe that our future successdepends, in part, on our ability to develop on a timely basis newtechnologically advanced products or improve upon our existing products ininnovative ways that meet or exceed our competitors’ product offerings.Continuous product innovation ensures that our consumers have access to thelatest products and features when they consider buying snow and ice controlequipment. Maintaining our market position will require us to continue toinvest in research and development and sales and marketing. Product developmentrequires significant financial, technological and other resources. We may beunsuccessful in making the technological advances necessary to develop newproducts or improve our existing products to maintain our market position. Industrystandards, end-user expectations or other products may emerge that could renderone or more of our products less desirable or obsolete. If any of these eventsoccur, it could cause decreases in sales, a failure to realize premium pricingand an adverse effect on our business and financial condition.

 

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***We face competition fromother companies in our industry, and if we are unable to compete effectivelywith these 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 regionalmanufacturers of snow and ice control equipment for light trucks. While we arethe most geographically 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 distributors and affect our sales and profitability. In addition,price competition among the distributors that sell our products could lead tosignificant margin erosion among our distributors, which could in turn resultin compressed margins or loss of market share for us. Management believes thatafter Douglas, the next largest competitors in the market for snow and icecontrol equipment for light trucks are BOSS and Meyer, respectively, andaccordingly represent our primary competitors 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 tocertain federal, state and local laws and regulations relating to, among otherthings, the generation, storage, handling, emission, transportation, disposaland discharge of hazardous and non-hazardous substances and materials into theenvironment, the manufacturing of motor vehicle accessories and employee healthand safety. We cannot be certain that existing and future laws and regulationsand their interpretations will not harm our business or financial condition. Wecurrently make and may be required to make large and unanticipated capitalexpenditures to comply with environmental and other regulations, such as:

 

·                  applicablemotor vehicle safety standards established by the National Highway TrafficSafety Administration;

 

·                  reclamationand remediation and other environmental protection; and

 

·                  standardsfor workplace safety established by the Occupational Safety and HealthAdministration.

 

While we monitor our compliancewith applicable laws and regulations and attempt to budget for anticipatedcosts associated with compliance, we cannot predict the future cost of suchcompliance. During 2009 we expended approximately $450,000 related tocompliance with such regulations and could expend similar or greater amounts inthe future in the event of future legislation changes or unforeseen events,such as a workplace accident or environmental discharge, or if we otherwisediscover we are in non-compliance with an applicable regulation. In addition,under these laws and regulations, we could be liable for:

 

·                  productliability claims;

 

·                  personalinjuries;

 

·                  investigationand remediation of environmental contamination and other governmental sanctionssuch as fines and penalties; and

 

·                  otherenvironmental damages.

 

Our operations could besignificantly delayed or curtailed and our costs of operations couldsignificantly increase as a result of regulatory requirements, restrictions orclaims. We are unable to predict the ultimate cost of compliance with theserequirements or their effect on our operations.

 

***Financial market conditions have had anegative 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 requiredcontributions to our pension plan are directly affected by the value of planassets, the projected rate of return on plan assets, the actual rate of returnon plan assets and the actuarial assumptions we use to measure the definedbenefit pension plan obligations. Due to the significant financial marketdownturn during 2008, the funded status of our pension plans has declined. Asof December 31, 2009, our pension plans were underfunded by approximately $9million. In 2009, contributions to our defined benefit pension plans wereapproximately $1.4 million.

 

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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 thisreport concerning the snow and ice control equipment industry for light trucks,our general expectations concerning this industry and our market positions andother market share data regarding the industry are based on estimates ourmanagement prepared using end-user surveys, anecdotal data from ourdistributors and distributors that carry our competitors’ products, our resultsof operations and management’s past experience, and on assumptions made, basedon our management’s knowledge of this industry, all of which we believe to bereasonable. These estimates and assumptions are inherently subject touncertainties, especially given the year-to-year variability of snowfall andthe difficulty of obtaining precise information about our competitors, and mayprove to be inaccurate. In addition, we have not independently verified theinformation from any third-party source and thus cannot guarantee its accuracyor completeness, although management also believes such information to bereasonable. Our actual operating results may vary significantly if ourestimates and outlook concerning the industry, snowfall patterns, our marketpositions or our market shares turn out to be incorrect.

 

***We are subject to product liability claims,product quality issues, and other litigation from time to time that couldadversely affect our operating results or financial condition.***

 

The manufacture, sale and usage ofour products expose us to a risk of product liability claims. If our productsare defective or used incorrectly by our end-users, injury may result, givingrise to product liability claims against us. If a product liability claim orseries of claims is brought against us for uninsured liabilities or in excessof our insurance coverage, and it is ultimately determined that we are liable, ourbusiness and financial condition could suffer. Any losses that we may sufferfrom any liability claims, and the effect that any product liability litigationmay have upon the reputation and marketability of our products, may divertmanagement’s attention from other matters and may have a negative impact on ourbusiness and operating results. Additionally, we could experience a materialdesign or manufacturing failure in our products, a quality system failure orother safety issues, or heightened regulatory scrutiny that could warrant arecall of some of our products. A recall of some of our products could alsoresult in increased product liability claims. Any of these issues could alsoresult in loss of market share, reduced sales, and higher warranty expense.

 

***We are heavily dependent on our ChiefExecutive Officer and management team.***

 

Our continued success depends onthe retention, recruitment and continued contributions of key management,finance, sales and marketing personnel, some of whom could be difficult toreplace. Our success is largely dependent upon our senior management team, ledby our Chief Executive Officer and other key managers. The loss of any one ormore of such persons could have an adverse effect on our business and financialcondition.

 

***Our indebtedness could adversely affect ouroperations, including our ability to perform our obligations and pay dividends.***

 

                As ofJune 30, 2010 we had approximately $122.1 million of senior securedindebtedness and $40.0 million of borrowing availability under our revolvingcredit facility. We may also be able to incur substantial indebtedness in thefuture, including senior indebtedness, which may or may not be secured.

 

Our indebtedness could haveimportant consequences to our stockholders, including the following:

 

·                  we couldhave difficulty satisfying our debt obligations, and if we fail to comply withthese requirements, an event of default could result;

 

·                  we may berequired to dedicate a substantial portion of our cash flow from operations torequired payments on indebtedness, thereby reducing the cash flow available topay dividends or fund working capital, capital expenditures and other generalcorporate activities;

 

·                  covenantsrelating to our indebtedness may restrict our ability to make dividends ordistributions to our stockholders;

 

·                  covenantsrelating to our indebtedness may limit our ability to obtain additionalfinancing for working capital, capital expenditures and other general corporateactivities, which may limit our flexibility in planning for, or reacting to,changes in our business and the industry in which we operate;

 

·                  we may bemore vulnerable to general adverse economic and industry conditions;

 

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·                  we may beplaced at a competitive disadvantage compared to our competitors with lessdebt; and

 

·                  we may havedifficulty repaying or refinancing our obligations under our senior creditfacilities on their respective maturity dates.

 

If any of these consequences occur,our financial condition, results of operations and ability to pay dividendscould be adversely affected. This, in turn, could negatively affect the marketprice of our common stock, and we may need to undertake alternative financingplans, such as refinancing or restructuring our debt, selling assets, reducingor delaying capital investments or seeking to raise additional capital. Wecannot assure you that any refinancing would be possible, that any assets couldbe sold, or, if sold, of the timing of the sales and the amount of proceedsthat may be realized from those sales, or that additional financing could beobtained on acceptable terms, if at all.

 

***Our variable rate indebtedness subjects usto interest rate risk, which could cause our debt service obligations toincrease significantly and could impose adverse consequences.***

 

Certain of our borrowings,including our term loan and any revolving borrowings under our senior creditfacilities, are at variable rates of interest and expose us to interest raterisk. In addition, the interest rate on any revolving borrowings is subject toan increase in the interest rate if the average daily availability under ourrevolving credit facility falls below a certain threshold. If interest ratesincrease, our debt service obligations on the variable rate indebtedness wouldincrease even though the amount borrowed remained the same, and our net incomeand cash flows would 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 facilitiescontain, and future debt instruments to which we may become subject maycontain, covenants that limit our ability to engage in activities that couldotherwise benefit our company, including restrictions on our ability to:

 

·                  incur,assume or permit to exist additional indebtedness or contingent obligations;

 

·                  incur liensand engage in sale and leaseback transactions;

 

·                  make loansand investments in excess of agreed upon amounts;

 

·                  declaredividends, make payments or redeem or repurchase capital stock in excess ofagreed upon amounts and subject to certain other limitations;

 

·                  engage inmergers, acquisitions and other business combinations;

 

·                  prepay,redeem or purchase certain indebtedness or amend or alter the terms of ourindebtedness;

 

·                  sellassets;

 

·                  transactwith affiliates or our stockholders; and

 

·                  alter thebusiness that we conduct.

 

Our revolving credit facility alsoincludes limitations on capital expenditures and requires us to maintain atleast $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 that resultsin collateral proceeds being applied to reduce such debt, we may not havesufficient funds available to repay such debt and our other obligations, inwhich case, our business could be halted and such lenders could proceed againstany collateral securing that debt. Further, if the lenders accelerate thepayment of the indebtedness under our senior credit facilities, our assets maynot be sufficient to repay in full the indebtedness

 

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under our senior credit facilities and our otherindebtedness, if any. We cannot assure you that these covenants will notadversely affect our ability to finance our future operations or capital needsto pursue available business opportunities or react to changes in our businessand the industry in which we operate.

 

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

 

As part of our lean manufacturing strategy to lower ourfixed costs, we plan to close our Johnson City, Tennessee manufacturingfacility by August 31, 2010 and thereby reduce our manufacturingfacilities from three to two. In connection with this closure, we arerelocating our Johnson City operations and equipment into our remaining twofacilities. We cannot assure you that we will realize contemplated cost savingsfrom the closure of this facility. In addition, there may be risks associatedwith this closure for which we are unprepared, such as labor and employmentlitigation, difficulties implementing a smooth transition and the possibilitythat this closure leaves us with insufficient manufacturing capacity. It istherefore possible that our business could be negatively affected by theclosure of this facility.

 

***Our principal stockholders hold asignificant portion of our common stock and may have different interests thanus or you in the future.***

 

Our principal stockholders have the rightto vote or direct the vote of approximately 46% of our voting power.Consequently, our principal stockholders will for the foreseeable future beable to influence the election and removal of our directors and influence ourcorporate and management policies, including virtually all matters requiringstockholder approval, such as potential mergers or acquisitions, asset salesand other significant corporate transactions. This concentration of ownershipmay delay or deter possible changes in control of the Company. We cannot assureyou that the interests of our principal stockholders will coincide with theinterests of our other holders of common stock.

 

***Provisions of Delaware law and our charterdocuments could delay or prevent an acquisition of us, even if the acquisitionwould be beneficial to you.***

 

Provisions in our certificate ofincorporation and bylaws may have the effect of delaying or preventing a changeof control or changes in our management. These provisions include:

 

·                  theabsence of cumulative voting in the election of our directors, which means thatthe holders of a majority of our common stock may elect all of the directorsstanding for election;

·                  theability of our Board of Directors to issue preferred stock with voting rightsor with rights senior to those of our common stock without any further vote oraction by the holders of our common stock;

·                  thedivision of our Board of Directors into three separate classes servingstaggered three-year terms;

·                  theability of our stockholders to remove our directors is limited to cause andonly by the vote of at least 662/3% ofthe outstanding shares of our common stock;

·                  theprohibition on our stockholders from acting by written consent and callingspecial meetings;

·                  the requirementthat our stockholders provide advance notice when nominating our directors orproposing business to be considered by the stockholders at an annual meeting ofstockholders; and

·                  therequirement that our stockholders must obtain a 662/3%vote to amend or repeal certain provisions of our certificate of incorporation.

 

We are also subject to Section 203 ofthe Delaware General Corporation Law, which, subject to certain exceptions,prohibits us from engaging in any business combination with any interestedstockholder, as defined in that section, for a period of three years followingthe date on which that stockholder became an interested stockholder.  This provision, together with the provisionsdiscussed above, could also make it more difficult for you and our otherstockholders to elect directors and take other corporate actions, and couldlimit the price that investors might be willing to pay in the future for sharesof our common stock.

 

***If we are unable to assess favorably 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 controls, our stock price couldbe adversely affected.***

 

Pursuant to Section 404 of theSarbanes-Oxley Act of 2002 and the related rules adopted by the SEC andthe Public Company Accounting Oversight Board, beginning with our Annual Reporton Form 10-K for the year ending 2011, our management will be required toreport on, and our independent registered public accounting firm to attest to,the effectiveness of our internal control over financial reporting. We mayencounter problems or delays in completing the implementation of any changesnecessary to make a favorable assessment of our internal control over financialreporting. In addition, in connection with the attestation process by ourindependent registered public accounting firm, we may encounter problems ordelays in completing the implementation of any

 

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requested improvements and receiving a favorable attestation. Ifwe cannot timely and favorably assess the effectiveness of our internal controlover financial reporting, or if our independent registered public accountingfirm is unable to provide an unqualified attestation report on our internalcontrol over financial reporting, investor confidence and our stock price coulddecline.

 

***Our dividend policy may limit our ability to pursuegrowth opportunities.***

 

If we pay dividends at the level currentlyanticipated under our dividend policy, we may not retain a sufficient amount ofcash to finance growth opportunities, meet any large unanticipated liquidityrequirements or fund our operations in the event of a significant businessdownturn. In addition, because a significant portion of cash available will bedistributed to holders of our common stock under our dividend policy, ourability to pursue any material expansion of our business, including throughacquisitions, increased capital spending or other increases of ourexpenditures, will depend more than it otherwise would on our ability to obtainthird party financing. We cannot assure you that such financing will beavailable to us at all, or at an acceptable cost. If we are unable to taketimely advantage of growth opportunities, our future financial condition andcompetitive position may be harmed, which in turn may adversely affect themarket price of our common stock.

 

**Item 2.     *Unregistered Sales of Equity Securities, Use ofProceeds******and Issuer Purchases ofEquity Securities***

 

**UnregisteredSales of Equity Securities**

 

During the three months ended June 30, 2010, the Company soldthe following securities that were not registered under the Securities Act of1933, as amended (the “Securities Act”).

 

On May 4, 2010, in connection with the Company’s initialpublic offering, the Company issued an aggregate of 208,130 shares ofrestricted stock to certain of its executive officers and employees pursuant tothe Douglas Dynamics, Inc. 2010 Stock Incentive Plan.

 

On May 10, 2010, in connection with the Company’s initialpublic offering, certain of the Company’s directors, executive officers,current and former members of the Advisory Committee of Aurora Capital Group,and Ares Corporate Opportunities Fund, L.P. (collectively, the “Optionholders”)exercised stock options granted pursuant to the Douglas Dynamics, Inc.Amended and Restated 2004 Stock Incentive Plan, to purchase an aggregate of201,994.15 shares of common stock for an aggregate exercise price of$850,501.68.  The exercise price of thestock options was satisfied through the net exercise of the stock options, withan aggregate of 75,600.15 shares applied to the payment of the aggregateexercise price and 126,394 shares issued to the Optionholders.

 

On May 13, 2010, in connection with the underwriters’exercise of their over-allotment option in respect of the Company’s initialpublic offering, the Optionholders exercised stock options granted pursuant tothe Douglas Dynamics, Inc. Amended and Restated 2004 Stock Incentive Plan,to purchase an aggregate of 86,575.54 shares of common stock for an aggregateexercise price of $364,528.60.  Theexercise price of the stock options was satisfied through the net exercise ofthe stock options, with an aggregate of 32,402.54 shares applied to the paymentof the aggregate exercise price and 54,173 shares issued to the Optionholders.

 

No underwriters were involved in the foregoing sales of securitiesother than in their role as underwriters in the Company’s initial publicoffering.  The sales of the abovesecurities were exempt from registration under the Securities Act in relianceon Section 4(2) of the Securities Act or Rule 701 under theSecurities Act.

 

**Dividend Payment Restrictions**

 

The Company’s senior credit facilities include certainrestrictions on its ability to pay dividends. The senior credit facilities alsorestrict the Company’s subsidiaries from paying dividends and otherwisetransferring assets to Douglas Dynamics, Inc. For additional detailregarding these restrictions, see Note 5 to the notes to the consolidatedfinancial statements.

 

**Item 3.     *Defaults Upon Senior Securities***

 

None.

 

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

 

**Item 5.     *Other Information***

 

None.

 

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**Item 6.     *Exhibits***

 

The following documents are filed asExhibits 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 (incorporated by reference to exhibit 10.1 to the  Registrant’s Form 10-Q for the quarterly period ended March 31, 2010). |
|                 |       |                                                                                                                                                                                                                                                    |
| 10.2                 |       | Letter Agreement  between Keith Hagelin and Douglas Dynamics, Inc., dated as of June 14, 2010  (incorporated by reference to exhibit 10.2 to the Registrant’s Form 10-Q for  the quarterly period ended March 31, 2010).                           |
|                 |       |                                                                                                                                                                                                                                                    |
| 10.3*                |       | Douglas  Dynamics, Inc. Annual Incentive Plan.                                                                                                                                                                                                     |
|                 |       |                                                                                                                                                                                                                                                    |
| 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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*              Filed herewith.

 

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**SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on 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: August 13, 2010 |       |                            |   |

 

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