Table ofContents

 

 

 

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**Form 10-Q**

 

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**(Mark One)**

 

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

 

**For the quarterly period ended September 30,2010**

 

**OR**

 

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

 

**For the transition period from                 to                 .**

 

**Commissionfile number: 001-34728**

 

**DOUGLASDYNAMICS, INC.**

(Exact name ofregistrant as specified in its charter)

 

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

 

**7777 North73rd Street**

**Milwaukee,Wisconsin 53223**

(Address ofprincipal executive offices) (Zip code)

 

**(414)354-2310**

(Registrant’stelephone number, including area code)

 

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

 

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

 

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

 

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

 

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

 

Number of shares ofregistrant’s common shares outstanding as of November 8, 2010 was21,405,426

 

 

 

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Table of Contents

 

**DOUGLAS DYNAMICS, INC.**

 

**Table of Contents**

 
| PART I. FINANCIAL INFORMATION                                                                          |       | 1  |
|-----------------------------------------------------------------------------------------------------------------------|------------|----|
| Item 1. Financial Statements                                                                                          |       | 1  |
| Unaudited Consolidated Balance Sheets as of  September 30, 2010 and December 31, 2009                       |       | 1  |
| Unaudited Consolidated Statements of Operations for  the three and nine months ended September 30, 2010 and 2009 |       | 2  |
| Unaudited Consolidated Statements of Cash Flows for  the nine months ended September 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                   |       | 13 |
| Item 3. Quantitative and Qualitative Disclosures About  Market Risk                                                   |       | 24 |
| Item 4. Controls and Procedures                                                                                       |       | 25 |
| **PART II.  OTHER INFORMATION**                                                                                  | ** ** | 25 |
| Item  1. Legal Proceedings                                                                                            |       | 25 |
| Item  1A. Risk Factors                                                                                                |       | 25 |
| Item 2. Unregistered Sales of Equity Securities, Use  of Proceeds and Issuer Purchases of Equity Securities           |       | 32 |
| Item 3. Defaults Upon Senior Securities                                                                               |       | 33 |
| Item 4. (Removed and Reserved)                                                                                        |       | 33 |
| Item  5. Other Information                                                                                            |       | 33 |
| Item 6.  Exhibits                                                                                                     |       | 33 |
| Signatures                                                                                                            |       | 34 |

 

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Table ofContents

** **

**PART I. FINANCIAL INFORMATION**

**Item 1. Financial Statements**

 

**Douglas Dynamics, Inc.**

**Consolidated Balance Sheets**

**(In thousands except share data)**

** **
| ** **                                                                                                                                                                                                                                                                | ** **   | ** **   | **September 30,** | ** **   | **December 31,** | ** **   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|--------------|------------------------|--------------|-----------------------|--------------|
| ** **                                                                                                                                                                                                                                                                | ** **   | ** **   | **2010**               | ** **   | **2009**              | ** **   |
| ** **                                                                                                                                                                                                                                                                | ** **   | ** **   | **(unaudited)**        | ** **   | **(audited)**         | ** **   |
| *** ***                                                                                                                                                                                                                                                              | *** *** | *** *** | *** ***           | *** *** | *** ***          | *** *** |
| **Assets**                                                                                                                                                                                                                                                                |         |         |                   |         |                  |         |
| Current  assets:                                                                                                                                                                                                                                                          |         |         |                   |         |                  |         |
|                                                                                                                                                                                                                                                                      |         |         |                   |         |                  |         |
| Cash  and cash equivalents                                                                                                                                                                                                                                                |         |         | $                      | 8,721        |                  | $            | 69,073 |   |
| Accounts  receivable, net                                                                                                                                                                                                                                                 |         |         | 82,397                 |         | 32,172                |         |
| Inventories                                                                                                                                                                                                                                                               |         |         | 24,475                 |         | 26,697                |         |
| Deferred  income taxes                                                                                                                                                                                                                                                    |         |         | 3,729                  |         | 3,729                 |         |
| Prepaid  income taxes                                                                                                                                                                                                                                                     |         |         | 6,596                  |         | -                     |         |
| Prepaid  management fees-related party                                                                                                                                                                                                                                    |         |         | -                      |         | 417                   |         |
| Prepaid  and other current assets                                                                                                                                                                                                                                         |         |         | 1,336                  |         | 1,446                 |         |
| Total  current assets                                                                                                                                                                                                                                                     |         |         | 127,254                |         | 133,534               |         |
|                                                                                                                                                                                                                                                                      |         |         |                   |         |                  |         |
| Property,  plant, and equipment, net                                                                                                                                                                                                                                      |         |         | 22,183                 |         | 26,661                |         |
| Assets  held for sale                                                                                                                                                                                                                                                     |         |         | 1,854                  |         | --                    |         |
| Goodwill                                                                                                                                                                                                                                                                  |         |         | 107,222                |         | 107,222               |         |
| Other  intangible assets, net                                                                                                                                                                                                                                             |         |         | 128,328                |         | 132,950               |         |
| Deferred  financing costs, net                                                                                                                                                                                                                                            |         |         | 1,084                  |         | 3,311                 |         |
| Other  long-term assets                                                                                                                                                                                                                                                   |         |         | 941                    |         | 941                   |         |
| Total  assets                                                                                                                                                                                                                                                             |         |         | $                      | 388,866      |                  | $            | 404,619 |   |
|                                                                                                                                                                                                                                                                      |         |         |                   |         |                  |         |
| **Liabilities, redeemable stock and stockholders’ equity**                                                                                                                                                                                                           |         |         |                   |         |                  |         |
| Current  liabilities:                                                                                                                                                                                                                                                     |         |         |                   |         |                  |         |
|                                                                                                                                                                                                                                                                      |         |         |                   |         |                  |         |
| Accounts  payable                                                                                                                                                                                                                                                         |         |         | $                      | 6,545        |                  | $            | 5,170 |   |
| Accrued  expenses and other current liabilities                                                                                                                                                                                                                           |         |         | 12,097                 |         | 12,598                |         |
| Accrued  interest                                                                                                                                                                                                                                                         |         |         | 30                     |         | 5,367                 |         |
| Income  taxes payable                                                                                                                                                                                                                                                     |         |         | -                      |         | 1,202                 |         |
| Short-term  borrowings                                                                                                                                                                                                                                                    |         |         | 37,000                 |         | --                    |         |
| Current  portion of long-term debt                                                                                                                                                                                                                                        |         |         | 1,250                  |         | 850                   |         |
| Total  current liabilities                                                                                                                                                                                                                                                |         |         | 56,922                 |         | 25,187                |         |
|                                                                                                                                                                                                                                                                      |         |         |                   |         |                  |         |
| Retiree  health benefit obligation                                                                                                                                                                                                                                        |         |         | 7,801                  |         | 7,848                 |         |
| Pension  obligation                                                                                                                                                                                                                                                       |         |         | 8,926                  |         | 8,957                 |         |
| Deferred  income taxes                                                                                                                                                                                                                                                    |         |         | 22,367                 |         | 18,913                |         |
| Deferred  compensation                                                                                                                                                                                                                                                    |         |         | 1,669                  |         | 1,482                 |         |
| Long-term  debt, less current portion                                                                                                                                                                                                                                     |         |         | 120,575                |         | 231,813               |         |
| Other  long-term liabilities                                                                                                                                                                                                                                              |         |         | 2,110                  |         | 2,195                 |         |
|                                                                                                                                                                                                                                                                      |         |         |                   |         |                  |         |
| Redeemable  preferred stock - Series A, par value $0.01, 65,000 shares authorized,  no shares outstanding at September 30, 2010 and December 31, 2009                                                                                                      |         |         | -                      |         | -                     |         |
| Redeemable  preferred stock - Series B, par value $0.01, no shares outstanding at  September 30, 2010 and one share outstanding at December 31, 2009                                                                                                       |         |         | -                      |         | 1                     |         |
| Redeemable  preferred stock - Series C, par value $0.01, no shares outstanding at  September 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 September 30,  2010, 23,750,000 authorized at December 31, 2009, 21,405,426 and  14,421,736 shares issued and outstanding at September 30, 2010 and  December 31, 2009, respectively |         |         | 214                    |         | 144                   |         |
| Additional  paid-in capital                                                                                                                                                                                                                                               |         |         | 126,831                |         | 59,973                |         |
| Stockholders’  notes receivable                                                                                                                                                                                                                                      |         |         | (478                   | )            | (1,013                | )            |
| Retained  earnings                                                                                                                                                                                                                                                        |         |         | 45,729                 |         | 53,055                |         |
| Accumulated  other comprehensive loss, net of tax                                                                                                                                                                                                                         |         |         | (3,800                 | )            | (3,937                | )            |
| Total  stockholders’ equity                                                                                                                                                                                                                                          |         |         | 168,496                |         | 108,222               |         |
| Total  liabilities, redeemable stock and stockholders’ equity                                                                                                                                                                                                        |         |         | $                      | 388,866      |                  | $            | 404,619 |   |

 

See the accompanying notes to consolidated financial statements

 

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**Douglas Dynamics, Inc.**

 

**Consolidated Statements ofOperations**

 

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

** **
| ** **                                             | ** ** | ** ** | **Three Months Ended** | ** ** | ** **                   | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------|------------|------------|----------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                                             | ** ** | ** ** | ** **                       | ** ** | ** **                   | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                             | ** ** | ** ** | **September 30,  2010**     | ** ** | **September 30,  2009** | ** ** | ** **                      | ** ** | **September 30,  2010** | ** ** | **September 30,  2009** | ** ** |
| ** **                                             | ** ** | ** ** | **(unaudited)**                  | ** ** | ** **                   | ** ** | **(unaudited)**                 | ** ** |
| ** **                                             | ** ** | ** ** | ** **                       | ** ** | ** **                   | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  sales                                             |       |       | $                                | 47,448     |                         | $          | 50,396                          |       |   |   | $ | 128,338 |   | $ | 125,206 |   |
| Cost  of sales                                         |       |       | 32,221                           |       | 35,241                       |       |                            |       | 86,070 |   | 87,523 |   |
| Gross  profit                                          |       |       | 15,227                           |       | 15,155                       |       |                            |       | 42,268 |   | 37,683 |   |
|                                                   |       |       |                             |       |                         |       |                            |       |   |   |   |   |
| Selling,  general, and administrative expense          |       |       | 6,819                            |       | 4,916                        |       |                            |       | 20,527 |   | 15,443 |   |
| Intangibles  amortization                              |       |       | 1,541                            |       | 1,541                        |       |                            |       | 4,621 |   | 4,621 |   |
| Management  fees-related party                         |       |       | 57                               |       | 411                          |       |                            |       | 6,370 |   | 1,066 |   |
|                                                   |       |       |                             |       |                         |       |                            |       |   |   |   |   |
| Income  from operations                                |       |       | 6,810                            |       | 8,287                        |       |                            |       | 10,750 |   | 16,553 |   |
|                                                   |       |       |                             |       |                         |       |                            |       |   |   |   |   |
| Interest  expense, net                                 |       |       | (2,334                           | )          | (3,802                       | )          |                            |       | (9,038 | ) | (11,756 | ) |
| Loss  on extinguishment of debt                        |       |       | -                                |       | -                            |       |                            |       | (7,967 | ) | -- |   |
| Other  expense, net                                    |       |       | (12                              | )          | (22                          | )          |                            |       | (7 | ) | (105 | ) |
| Income  (loss) before taxes                            |       |       | 4,464                            |       | 4,463                        |       |                            |       | (6,262 | ) | 4,692 |   |
|                                                   |       |       |                             |       |                         |       |                            |       |   |   |   |   |
| Income  tax expense (benefit)                          |       |       | 2,279                            |       | 1,725                        |       |                            |       | (2,803 | ) | 751 |   |
|                                                   |       |       |                             |       |                         |       |                            |       |   |   |   |   |
|                                                   |       |       |                             |       |                         |       |                            |       |   |   |   |   |
| Net  income (loss)                                     |       |       | $                                | 2,185      |                         | $          | 2,738                           |       |   |   | $ | (3,459 | ) | $ | 3,941 |   |
|                                                   |       |       |                             |       |                         |       |                            |       |   |   |   |   |
| Weighted  average number of common shares outstanding: |       |       |                             |       |                         |       |                            |       |   |   |   |   |
| Basic                                                  |       |       | 21,158,573                       |       | 14,421,736                   |       |                            |       | 17,963,720 |   | 14,424,347 |   |
| Diluted                                                |       |       | 21,546,767                       |       | 14,747,041                   |       |                            |       | 17,963,720 |   | 14,749,652 |   |
|                                                   |       |       |                             |       |                         |       |                            |       |   |   |   |   |
| Earnings  (loss) per share:                            |       |       |                             |       |                         |       |                            |       |   |   |   |   |
| Basic                                                  |       |       | $                                | 0.10       |                         | $          | 0.19                            |       |   |   | $ | (0.19 | ) | $ | 0.27 |   |
| Diluted                                                |       |       | $                                | 0.10       |                         | $          | 0.19                            |       |   |   | $ | (0.19 | ) | $ | 0.27 |   |
| Cash  dividends declared & paid per share     |       |       | $                                | 0.18       |                         | $          | 0.00                            |       |   |   | $ | 0.18 |   | $ | 0.00 |   |

 

See the accompanying notes to consolidated financial statements.

 

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**Douglas Dynamics, Inc.**

 

**Consolidated Statements of CashFlows**

 

**(in thousands)**

 
| ** **                                                                                           | ** **   | ** **   | **Nine Months Ended** | ** **   |
|------------------------------------------------------------------------------------------------------|--------------|--------------|---------------------------------|--------------|
| ** **                                                                                           | ** **   | ** **   | ** **                      | ** **   | ** ** | ** ** |
| ** **                                                                                           | ** **   | ** **   | **September 30,  2010**    | ** **   | **September 30,  2009** | ** ** |
| ** **                                                                                           | ** **   | ** **   | **(unaudited)**                 | ** **   |
| *** ***                                                                                         | *** *** | *** *** | *** ***                    | *** *** | *** *** | *** *** |
| **Operating activities**                                                                             |         |         |                            |         |   |   |
| Net  income (loss)                                                                                   |         |         | $                               | (3,459       | ) | $ | 3,941 |   |
| Adjustments  to reconcile net income (loss) to net cash provided by (used in) operating  activities: |         |         |                            |         |   |   |
| Depreciation  and amortization                                                                       |         |         | 9,448                           |         | 8,498 |   |
| Amortization  of deferred financing costs                                                            |         |         | 741                             |         | 853 |   |
| Loss  on extinguishment of debt                                                                      |         |         | 7,967                           |         | -- |   |
| Stock-based  compensation                                                                            |         |         | 3,158                           |         | 738 |   |
| Provision  for losses on accounts receivable                                                         |         |         | 281                             |         | 116 |   |
| Deferred  income taxes                                                                               |         |         | 3,374                           |         | 133 |   |
| Changes  in operating assets and liabilities:                                                        |         |         |                            |         |   |   |
| Accounts  receivable                                                                                 |         |         | (50,446                         | )            | (53,901 | ) |
| Inventories                                                                                          |         |         | 2,222                           |         | 1,949 |   |
| Prepaid  and other assets and prepaid income taxes                                                   |         |         | (6,069                          | )            | (245 | ) |
| Accounts  payable                                                                                    |         |         | 1,375                           |         | (43 | ) |
| Accrued  expenses and other current liabilities                                                      |         |         | (7,268                          | )            | (2,742 | ) |
| Deferred  compensation                                                                               |         |         | 187                             |         | 187 |   |
| Benefit  obligations and other long-term liabilities                                                 |         |         | 54                              |         | 633 |   |
| Net  cash used in operating activities                                                               |         |         | (38,435                         | )            | (39,883 | ) |
|                                                                                                 |         |         |                            |         |   |   |
| **Investing activities**                                                                             |         |         |                            |         |   |   |
| Capital  expenditures                                                                                |         |         | (2,414                          | )            | (4,821 | ) |
| Proceeds  from sale of equipment                                                                     |         |         | 212                             |         | -- |   |
| Net  cash used in investing activities                                                               |         |         | (2,202                          | )            | (4,821 | ) |
|                                                                                                 |         |         |                            |         |   |   |
| **Financing activities**                                                                             |         |         |                            |         |   |   |
| Stock  repurchases                                                                                   |         |         | (2                              | )            | (1,000 | ) |
| Payment  of call premium and post payoff interest on senior notes redemption                         |         |         | (3,876                          | )            | -- |   |
| Collection  of stockholders’ notes receivable                                                   |         |         | 535                             |         | -- |   |
| Payments  of financing costs                                                                         |         |         | (2,605                          | )            | -- |   |
| Revolver  borrowings                                                                                 |         |         | 37,000                          |         | 10,000 |   |
| Proceeds  from initial public offering, net                                                          |         |         | 63,938                          |         | -- |   |
| Borrowings  on long-term debt                                                                        |         |         | 40,000                          |         | -- |   |
| Dividends  paid                                                                                      |         |         | (3,867                          | )            | -- |   |
| Repayment  of long-term debt                                                                         |         |         | (150,838                        | )            | (638 | ) |
| Net  cash provided by (used in) financing activities                                                 |         |         | (19,715                         | )            | 8,362 |   |
| Change  in cash and cash equivalents                                                                 |         |         | (60,352                         | )            | (36,342 | ) |
| Cash  and cash equivalents at beginning of period                                                    |         |         | 69,073                          |         | 53,552 |   |
| Cash  and cash equivalents at end of period                                                          |         |         | $                               | 8,721        |   | $ | 17,210 |   |

 

See the accompanying notes to consolidated financial statements.

 

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**Douglas Dynamics, Inc.**

 

**Notes to Unaudited ConsolidatedFinancial Statements**

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

 

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

 

Douglas Dynamics, Inc., is the North Americanleader in the design, manufacture and sale of snow and ice control equipmentfor light trucks, which is comprised of snowplows and sand and salt spreaders,and related parts and accessories.  TheCompany’s snow and ice control products are sold through a network of over 720truck equipment distributors that purchase directly from the Company and arelocated throughout the snowbelt regions in North America (primarily theMidwest, East and Northeast regions of the United States as well as allprovinces of Canada). The Company sells its products under the WESTERN®,FISHER®, and BLIZZARD® brands.  TheCompany is headquartered in Milwaukee, WI and as of September 30, 2010 hadmanufacturing facilities in Milwaukee WI, and Rockland, ME. The Companycompleted the closure of its Johnson City, TN facility, in the quarter ending September 30,2010. The Company operates as a single segment.

 

All share and per share data reported herein havebeen retrospectively restated to reflect the 23.75-for-one stock split of theCompany’s common stock that occurred on May 7, 2010, immediately prior tothe consummation of the Company’s initial public offering (“IPO”).

 

***Initial Public Offering***

 

On May 10, 2010, the Company completed its IPOof 10,000,000 shares of common stock at a public offering price of $11.25 pershare, less underwriting discounts.  The10,000,000 shares sold included 6,500,000 shares sold by the Company and 3,500,000shares sold by certain selling stockholders. In addition, on May 14, 2010, the selling stockholders in the IPOclosed the sale of an additional 1,500,000 shares to the underwriters at thepublic offering price of $11.25 per share, less underwriting discounts,pursuant to the underwriters’ exercise in full of their overallotmentoption.  The Company received $73,125 ingross proceeds from the issuance and sale of its common stock in the IPO and$63,938 in net proceeds after deducting underwriting discounts and totalexpenses related to the offering.  TheCompany did not receive any proceeds from the sale of its stock by the sellingstockholders in the IPO.

 

Capitalization summary 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 upon closing of IPO          |   | 21,310,426 |   |

 

Concurrent with the closing of the IPO, the Companyrepurchased its one issued and outstanding share of Series B preferredstock and one issued and outstanding share of Series C preferred stock,each at a price of $1,000 per share. Subsequent to the repurchase of the preferred stock, the Company has nopreferred stock outstanding.

 

***Summary of Significant Accounting Policies***

 

The Company’s significant accounting policies aredisclosed in its audited consolidated financial statements for the year endedDecember 31, 2009, included in the Prospectus dated May 6, 2010 andhave not changed materially as of September 30, 2010.

 

***Interim Consolidated Financial Information***

 

The accompanying consolidated balance sheet as ofSeptember 30, 2010 and the consolidated statements of operations for thethree and nine months ended September 30, 2010 and 2009 and cash flows forthe nine months ended September 30, 2010 and 2009 have been prepared bythe Company and have not been audited. In the opinion of management, all adjustments, consisting of only normalrecurring adjustments necessary for the fair presentation of the financialposition, results of operations and cash flows, have been made.  Pursuant to the rules and regulations ofthe Securities and Exchange Commission certain information and footnotedisclosures normally included in consolidated financial statements prepared inaccordance with U.S. generally accepted accounting principles have beencondensed 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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Other comprehensive income (loss) includes the netincome (loss) of the Company plus the Company’s adjustments for its definedbenefit retirement plans based on the measurement date as of the Company’s yearend.  Other comprehensive income (loss)was $2,185 and $(3,322) for the three and nine months ended September 30,2010, respectively.  Other comprehensiveincome was the same as net income for the three and nine months endedSeptember 30, 2009, respectively.

 

The Company’s business is seasonal and consequentlyits results of operations and financial condition vary fromquarter-to-quarter.  In addition, becauseof this seasonality, the Company’s results of operations for any quarter maynot be indicative of results of operations that may be achieved for asubsequent quarter or the full year, and may not be similar to results ofoperations experienced in prior years. The Company attempts to manage theseasonal impact of snowfall on its revenues in part through its pre-seasonsales program. This pre-season sales program encourages the Company’sdistributors to re-stock their inventory during the second and third quartersin anticipation of the peak fourth quarter retail sales period by offeringfavorable pre-season pricing and payment deferral until the fourth quarter. Asa result, the Company tends to generate its greatest volume of sales during thesecond and third quarters. By contrast, its revenue and operating results tendto be lowest during the first quarter as management believes the Company’send-users prefer to wait until the beginning of a snow season to purchase newequipment and as the Company’s distributors sell off inventory and wait for thepre-season sales incentive period to re-stock inventory. Fourth quarter salesvary from year-to-year as they are primarily driven by the level, timing and locationof snowfall during the quarter. This is because most of the Company’s fourthquarter sales and shipments consist of re-orders by distributors seeking torestock inventory to meet immediate customer needs caused by snowfall duringthe winter months.

 

***Fair value measurements***

 

The Company adopted the guidance originally issuedin FASB statement No. 157, *Fair Value Measurements*(codified in Accounting Standards Codification (“ASC”) 820-10, *Fair Value Measurements and Disclosures*) (“ASC 820-10”) onJanuary 1, 2008.  ASC 820-10, amongother things, defines fair value, establishes a consistent framework formeasuring fair value, and expands disclosure for each major asset and liabilitycategory measured at fair value on either a recurring basis or nonrecurringbasis.  ASC 820-10 clarifies that fairvalue is an exit price, representing the amount that would be received to sellan asset or paid to transfer a liability in an orderly transaction betweenmarket participants.  As such, fair valueis a market-based measurement that should be determined based on assumptionsthat market 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.

 

Assets and liabilities measured at fair value arebased on the market approach, which is prices and other relevant informationgenerated by market transactions involving identical or comparable assets orliabilities.  At September 30, 2010and December 31, 2009, the Company did not have any financial instrumentsaccounted for at fair value.

 

***Principles of consolidation***

 

The accompanying consolidated financial statementsinclude the accounts of Douglas Dynamics, Inc. and its direct wholly-ownedsubsidiary, Douglas Dynamics, L.L.C., and its indirect wholly-ownedsubsidiaries, Douglas Dynamics Finance Company and Fisher, L.L.C. (hereinaftercollectively referred to as the “Company”). All intercompany balances and transactions have been eliminated inconsolidation.

 

***Use of estimates***

 

The preparation of thefinancial statements in conformity with U.S. generally accepted accounting principlesrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting periods.  Accordingly, actual results could differ fromthose estimates.

 

***Reclassifications***

 

Certain reclassifications have been made to prior year financialstatements to conform to the current year presentation.

 

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**2.****             ****FairValue**

 

The carrying values of the Company’s cash and cashequivalents (Level 1), trade accounts receivable, accounts payable, accruedexpenses and short term borrowings approximated fair value as ofSeptember 30, 2010.  The fair valueof the Company’s long-term debt, including current maturities, is estimatedusing discounted cash flows based on the Company’s current incrementalborrowing rates for similar types of borrowing arrangements.  The carrying value and fair value (Level 2 )of the Company’s long-term debt at September 30, 2010 was $121,825 and$120,607, respectively.

 

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

 

Inventories consist of the following:

 
| ** **                          | ** ** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------|------------|------------|------------------------|------------|-----------------------|------------|
| ** **                          | ** ** | ** ** | **2010**               | ** ** | **2009**              | ** ** |
|                                |       |       |                   |       |                  |       |
| Finished  goods and work-in-process |       |       | $                      | 23,087     |                  | $          | 24,639 |   |
| Raw  material and supplies          |       |       | 1,388                  |       | 2,058                 |       |
|                                |       |       | $                      | 24,475     |                  | $          | 26,697 |   |

 

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

 

Property, plant and equipment are summarized asfollows:

 
| ** **                           | ** ** | ** ** | **September 30,** | ** ** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|------------|------------------------|------------|------------|-----------------------|------------|
| ** **                           | ** ** | ** ** | **2010**               | ** ** | ** ** | **2009**              | ** ** |
|                                 |       |       |                   |       |       |                  |       |
| Land                                 |       |       | $                      | 960        |       |                  | $          | 1,000 |   |
| Land  improvements                   |       |       | 1,768                  |       |       | 2,218                 |       |
| Buildings                            |       |       | 11,030                 |       |       | 13,766                |       |
| Machinery  and equipment             |       |       | 21,662                 |       |       | 23,092                |       |
| Furniture  and fixtures              |       |       | 6,128                  |       |       | 6,934                 |       |
| Mobile  equipment and other          |       |       | 982                    |       |       | 969                   |       |
| Construction-in-process              |       |       | 2,374                  |       |       | 4,252                 |       |
| Total  property, plant and equipment |       |       | 44,904                 |       |       | 52,231                |       |
| Less  accumulated depreciation       |       |       | (22,721                | )          |       | (25,570               | )          |
| Net  property, plant and equipment   |       |       | $                      | 22,183     |       |                  | $          | 26,661 |   |

 

**5.****             ****Long-TermDebt**

 

Long-term debt is summarized below:

 
| ** **               | ** ** | ** ** | **September 30,** | ** ** | ** ** | **December 31,** | ** ** |
|--------------------------|------------|------------|------------------------|------------|------------|-----------------------|------------|
| ** **               | ** ** | ** ** | **2010**               | ** ** | ** ** | **2009**              | ** ** |
|                     |       |       |                   |       |       |                  |       |
| Term  Loan               |       |       | $                      | 121,825    |       |                  | $          | 82,663 |   |
| Senior  notes            |       |       | -                      |       |       | 150,000               |       |
| Total  long-term debt    |       |       | 121,825                |       |       | 232,663               |       |
| Less  current maturities |       |       | 1,250                  |       |       | 850                   |       |
|                     |       |       | $                      | 120,575    |       |                  | $          | 231,813 |   |

 

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As of December 31, 2009, the Company’s seniorcredit facilities consisted of an $85,000 term loan facility and a $60,000revolving credit facility with a group of banks and the Company also hadoutstanding $150,000 of 7.75% senior notes (the “Senior Notes”) dueJanuary 15, 2012. Concurrent with the consummation of the IPO, the Companyamended its senior credit facilities to, among other things, (i) allow 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, at September 30,2010, the Company’s senior credit facilities consist of a $125,000 term loanfacility and a $60,000 revolving credit facility with a group of banks. Inconnection with the amendments to the Company’s senior credit facilities, theinterest on the existing portion of the term loan facility was revised.   The change consisted of an increase from aninterest rate equal to (at the Company’s option) either the base rate plus1.25% or the eurodollar rate plus 2.25% to (at the Company’s option) either thebase rate (which shall be no less than 3%) plus 3.5% or the eurodollar rate(which shall be no less than 2%) plus 4.5%. The interest for the additional $40,000 increase in the Company’s termloan facility is an interest rate equal to (at the Company’s option) either thebase 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, the margin for base rate loans iseither 0.25% or 0.50% and the margin for eurodollar rate loans is either 1.25%or 1.50%, in each case determined based on the Company’s leverage ratio fromtime to time.  The amendment of the termloan facility resulted in a significant modification of the debt which resultedin the write off of unamortized capitalized deferred financing costs of $995and expenditures of $2,046 related to financing costs paid to existing lenderswhich was recorded as a loss on extinguishment of debt in the consolidatedstatements of operations for the nine months ended September 30,2010.   As the amendment of the term loanfacility occurred in the three month period ended June 30, 2010, there wasno additional write off of deferred financing costs or expenditures relating tofinancing costs in the three month period ended September 30, 2010.

 

On June 9, 2010, the Company completed theredemption of its Senior Notes.  TheCompany redeemed its Senior Notes with the proceeds from the additional termloan, together with the net IPO proceeds and cash on hand for a total of$157,557, which includes $3,681 of interest that accrued through the date ofdeposit with the trustee, $969 of interest that accrued from the date ofdeposit with the trustee to the date of redemption and a $2,907 redemption callpremium of 1.938%.  In addition, theCompany wrote off $1,050 of unamortized deferred financing costs related to theSenior Notes.

 

After effecting the discharge of the Senior Notes,the maturity date for the Company’s revolving credit facility is May 21,2012**,**and the Company’s term loan amortizesin nominal amounts quarterly with the balance payable on May 21, 2013 withrespect to the existing term loans and May 21, 2016 with respect to theadditional term loans.

 

At September 30, 2010 the Company hadoutstanding borrowings on the revolving credit facility of $37,000 andremaining borrowing availability of $22,976.

 

The Company’s senior credit facilities includecertain negative and operating covenants, including restrictions on its abilityto pay dividends, and other customary covenants, representations and warrantiesand events of default.  The senior creditfacilities entered into and recorded by the Company’s subsidiariessignificantly restrict its subsidiaries from paying dividends and otherwisetransferring assets to Douglas Dynamics, Inc. The terms of the Company’srevolving credit facility specifically restrict subsidiaries from payingdividends if a minimum availability under the revolving credit facility is notmaintained (such event, a “liquidity event”), and both senior credit facilitiesrestrict subsidiaries from paying dividends above certain levels or at all ifan event of default has occurred.  Inaddition, the Company’s revolving credit facility includes a requirement that,subject to certain exceptions, capital expenditures may not exceed $10,000 inany calendar year and, during the occurrence of a liquidity event, that theCompany comply with a monthly minimum fixed charge coverage ratio test of1.0:1.0.  Compliance with the fixedcharge coverage ratio test is subject to certain cure rights under the Company’srevolving credit facility.  AtSeptember 30, 2010, the Company was in compliance with the respectivecovenants.  The credit facilities arecollateralized by substantially all assets of the Company.

 

In accordance with the senior credit facilities, theCompany is required to make additional principal prepayments over the abovescheduled payments under certain conditions. This includes, in the case of the termloan facility, 100% of the net cash proceeds of certain asset sales, certaininsurance or condemnation events, certain debt issuances, and, within 150 daysof the end of the fiscal year, 50% of excess cash flow, as defined, including adeduction for allowed distributions (which percentage is reduced to 25% or 0%upon the achievement of certain leverage ratio thresholds), for any fiscalyear. Excess cash flow is defined in the senior credit facilities asconsolidated adjusted EBITDA (earnings before interest, taxes, depreciation andamortization) plus a working capital adjustment less the sum of repayments ofdebt and capital expenditures subject to certain adjustments, interest andtaxes paid in cash, management fees and certain restricted payments (includingdividends or distributions). Working capital adjustment is defined in thesenior credit facilities as the change in working capital, defined as currentassets excluding cash and cash equivalents less current liabilities excludingcurrent portion of long term debt.  As ofSeptember 30, 2010 and December 31, 2009, the Company was notrequired to make an excess cash flow payment.

 

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**6.****             ****AccruedExpenses and Other Liabilities**

 

Accrued expenses and other liabilities aresummarized as follows:  

 
| ** **                 | ** ** | ** ** | **September 30,** | ** ** | ** ** | **December 31,** | ** ** |
|----------------------------|------------|------------|------------------------|------------|------------|-----------------------|------------|
| ** **                 | ** ** | ** ** | **2010**               | ** ** | ** ** | **2009**              | ** ** |
|                       |       |       |                   |       |       |                  |       |
| Payroll  and related costs |       |       | $                      | 2,847      |       |                  | $          | 3,659 |   |
| Employee  benefits         |       |       | 2,699                  |       |       | 2,534                 |       |
| Accrued  warranty          |       |       | 3,039                  |       |       | 3,040                 |       |
| Other                      |       |       | 3,512                  |       |       | 3,365                 |       |
|                       |       |       | $                      | 12,097     |       |                  | $          | 12,598 |   |

 

**7.****             ****WarrantyLiability**

 

The Company accrues for estimated warranty costs assales are recognized and periodically assesses the adequacy of its recorded warrantyliability and adjusts the amount as necessary. The Company’s warranties generally provide, with respect to its snow andice control equipment, that all material and workmanship will be free fromdefect for a period of two years after the date of purchase by the end-user,and with respect to its parts and accessories purchased separately, that suchparts and accessories will be free from defect for a period of one year afterthe date of purchase by the end-user. Certain snowplows only provide for a one year warranty.  The Company determines the amount of theestimated warranty costs (and its corresponding warranty reserve) based on theCompany’s prior five years of warranty history utilizing a formula driven byhistorical warranty expense and applying management’s judgment.  The Company adjusts its historical warrantycosts to take into account unique factors such as the introduction of newproducts into the marketplace that do not provide a historical warranty recordto assess.  The warranty reserve isincluded in Accrued Expenses and Other Current Liabilities in the accompanyingconsolidated balance sheets.

 

The following is a rollforward of the Company’swarranty liability:

 
| ** **                                  | ** ** | ** ** | **Three months ended** | ** ** | ** **                   | **Nine months ended** | ** ** |
|---------------------------------------------|------------|------------|----------------------------------|------------|------------------------------|---------------------------------|------------|
| ** **                                  | ** ** | ** ** | **September 30,  2010**     | ** ** | **September 30,  2009** | ** **                      | ** ** | ** ** | **September 30,  2010** | ** ** | **September 30,  2009** | ** ** |
|                                        |       |       |                             |       |                         |                            |       |   |   |   |   |   |
| Balance at the beginning of the period |       |       | $                                | 2,489      |                         | $                               | 1,824      |   |   |   | $ | 3,040 |   | $ | 2,272 |   |
| Warranty provision                          |       |       | 721                              |       | 851                          |                            |       |   | 1,775 |   | 1,956 |   |
| Claims paid/settlements                     |       |       | (171                             | )          | (165                         | )                               |       |   | (1,776 | ) | (1,718 | ) |
| Balance at the end of the period            |       |       | $                                | 3,039      |                         | $                               | 2,510      |   |   |   | $ | 3,039 |   | $ | 2,510 |   |

 

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**8.****             ****EmployeeRetirement Plans**

 

Thecomponents of net periodic pension cost consist of the following:

 
| ** **                               | ** ** | ** ** | **Three months ended** | ** ** | ** **                   | ** ** | **Nine months ended** | ** ** |
|------------------------------------------|------------|------------|----------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                               | ** ** | ** ** | **September 30,  2010**     | ** ** | **September 30,  2009** | ** ** | ** **                      | ** ** | **September 30,  2010** | ** ** | **September 30,  2009** | ** ** |
| ** **                               | ** ** | ** ** | ** **                       | ** ** | ** **                   | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Component  of net periodic pension cost: |       |       |                             |       |                         |       |                            |       |   |   |   |   |
| Service  cost                            |       |       | $                                | 200        |                         | $          | 205                             |       |   |   | $ | 600 |   | $ | 615 |   |
| Interest  cost                           |       |       | 358                              |       | 338                          |       |                            |       | 1,074 |   | 1,016 |   |
| Expected  return on plan assets          |       |       | (290                             | )          | (246                         | )          |                            |       | (870 | ) | (738 | ) |
| Amortization  of net loss                |       |       | 81                               |       | 130                          |       |                            |       | 243 |   | 390 |   |
| Net  periodic pension cost               |       |       | $                                | 349        |                         | $          | 427                             |       |   |   | $ | 1,047 |   | $ | 1,283 |   |

 

The Company estimates its total required minimumcontributions to its pension plans in 2010 will be $1,050.  Through September 30, 2010, the Companyhas made $711 of cash contributions to the pension plans in 2010 versus $1,179through the same period 2009.

 

In May 2010, in connection with the  closure of the Company’s manufacturingfacility in Johnson City, TN substantially all the employees at this facilitywere terminated.  This resulted in acessation of all future benefit accruals for these employees under the Company’spension and 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 notimpact the consolidated statement of operations for the nine months endedSeptember 30, 2010.

 

Components of net periodic other postretirement benefit cost consist ofthe following:

 
| ** **                                                    | ** ** | ** ** | **Three months ended** | ** ** | ** **                   | ** ** | **Nine months ended** | ** ** |
|---------------------------------------------------------------|------------|------------|----------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                                                    | ** ** | ** ** | **September 30,  2010**     | ** ** | **September 30,  2009** | ** ** | ** **                      | ** ** | **September 30,  2010** | ** ** | **September 30,  2009** | ** ** |
|                                                          |       |       |                             |       |                         |       |                            |       |   |   |   |   |
| Components  of net periodic other postretirement benefit cost |       |       |                             |       |                         |       |                            |       |   |   |   |   |
| Service  cost                                                 |       |       | $                                | 71         |                         | $          | 76                              |       |   |   | $ | 237 |   | $ | 229 |   |
| Interest  cost                                                |       |       | 107                              |       | 105                          |       |                            |       | 348 |   | 315 |   |
| Amortization  of net (gain)/loss                              |       |       | --                               |       | (18                          | )          |                            |       | (7 | ) | (55 | ) |
| Curtailment  gain - Johnson City location closing             |       |       | --                               |       | —                       |       |                            |       | (667 | ) | — |   |
| Net  periodic other postretirement benefit cost               |       |       | $                                | 178        |                         | $          | 163                             |       |   |   | $ | (89 | ) | $ | 489 |   |

 

The curtailment gain for the OPEB plan 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 nine months endedSeptember 30, 2010 and $364 (before taxes) was recognized as a reductionto the net actuarial loss in accumulated other comprehensive loss atSeptember 30, 2010.  As thecurtailment occurred in the three month period ending June 30, 2010, therewas no impact on the statement of operations for the three month period ending September 30,2010.

 

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**9.  Dividends**

 

Cash dividends declared and paid on a per sharebasis were as follows:

 
| ** **          | ** ** | **Three and nine months ended** | ** ** |
|---------------------|------------|-----------------------------------------------------|------------|
| ** **          | ** ** | **September 30,**                              | ** ** |
| ** **          | ** ** | **2010**                                            | ** ** | **2009** | ** ** |
|                |       |                                                |       |   |   |
| Dividends  declared |       | $                                                   | 0.18       |   | $ | 0.00 |   |
| Dividends  paid     |       | $                                                   | 0.18       |   | $ | 0.00 |   |

 

**10.****      ****Stock Repurchases**

 

On January 23, 2009, the Company entered intosecurities repurchase agreements with certain members of management.  Pursuant to these agreements, the Companyrepurchased at fair value and subsequently retired 27,004 shares of commonstock and 89,371 stock options in exchange for aggregate consideration of$1,137, comprised of a cash payment of $1,000 and the satisfaction of theremaining principal amount of $137 on promissory notes held by the members ofmanagement.  As a result of the repurchaseof stock options, the Company recorded $738 of compensation expense in the ninemonths ended September 30, 2009, which represented the fair value of therepurchased options.

 

**11.****      ****Earnings Per Share**

 

Basic earnings per share of common stock is computedby dividing net income (loss) by the weighted average number of common sharesoutstanding during the period.  Dilutedearnings per share of common stock is computed by dividing net income (loss) bythe weighted average number of shares of common stock and common stockequivalents and assumed exercise of stock options, using the treasury stockmethod as well as the  conversion of  both class A and class B restricted shares.  Stock options for which the exercise priceexceeds the average fair value and restricted shares have an anti-dilutiveeffect on earnings per share and are excluded from the calculation.  There were 458,770 shares excluded fromdiluted earnings per share for the nine months ended September 30, 2010 asthe shares would be anti-dilutive for that period as the Company incurred a netloss.

 

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

 
| ** **                                                                       | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                       | ** ** | **September 30,  2010**     | ** ** | **September 30,  2009**    | ** ** | **September 30,  2010** | ** ** | **September 30,  2009** | ** ** |
|                                                                             |       |                             |       |                            |       |   |   |   |   |
| Basic  weighted average common shares outstanding                                |       | 21,158,573                       |       | 14,421,736                      |       | 17,963,720 |   | 14,424,347 |   |
| Incremental  shares applicable to common stock options and restricted stock |       | 388,194                          |       | 325,305                         |       | - |   | 325,305 |   |
| Average  diluted weighted average common shares outstanding                      |       | 21,546,767                       |       | 14,747,041                      |       | 17,963,720 |   | 14,749,652 |   |

 

**12.  Employee Stock Plans**

 

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

 

In connection with the IPO, in May 2010, theCompany’s Board of Directors and stockholders amended and restated the Company’s2004 Stock Incentive Plan (as amended and restated, the “A&R 2004 Plan”)and certain outstanding award agreements thereunder, to among other things,eliminate the ability of the holders thereunder to use a promissory note to payany portion of the exercise price of the options, to provide that the use of “netexercises” to pay any portion of the exercise price of the options shall be atthe sole discretion of the committee administering the A&R 2004 Plan, andto effect certain ministerial 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 ofSeptember 30, 2010, 356,044 shares of common stock are reserved forissuance upon the exercise of outstanding options under the A&R 2004Plan.  All outstanding options are fullyvested, excluding 47,500 options, of which 23,750 will vest on August 27,2011 and the remaining options will vest on August 27, 2012.   All options expire 10 years from the date ofgrant.

 

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*** ***

***2010 Stock Incentive Plan***

 

In connection with the IPO, in May 2010, theCompany’s Board of Directors and stockholders adopted the 2010 Stock IncentivePlan (the “2010 Plan”).  The 2010 Planprovides for the issuance of nonqualified stock options, incentive stockoptions, stock appreciation rights, restricted stock awards and restrictedstock units, any of which may be performance-based, and for incentive bonuses,which may be paid in cash or stock or a combination of both, to eligibleemployees, officers, non-employee directors and other service providers to theCompany and its subsidiaries.  A maximumof 2,130,000 shares of common stock may be issued pursuant to all awards underthe 2010 Plan.

 

In May 2010, in connection with the IPO, anaggregate of 208,130 shares of restricted stock were granted to certainofficers and employees under the 2010 Plan. The restricted stock awards were time-based and vest over a five-yearperiod in equal annual installments of 20% per year, commencing on the firstanniversary of the grant date.  Therestricted stock does not carry voting or dividend rights until the stockvests.

 

As of September 30, 2010, the Company had1,921,870 shares of common stock available for future issuance of awards underthe 2010 Plan.  The shares of commonstock to be issued under the 2010 Plan will be made available from authorizedand unissued Company common stock.

 

***Stock Options***

 

The following table summarizes information withrespect to the Company’s stock option activity under the A&R 2004 Plan forthe three and nine months ended September 30, 2010. In connection with theIPO, certain of the Company’s selling stockholders exercised 288,570 stockoptions and sold the underlying shares. Such stockholders paid the exercise price of such options through a netexercise.  In the three months ending September 30,2010, certain of the Company’s selling stockholders exercised 174,571 stockoptions and paid the exercise price of such options through a net exercise,resulting in an additional 95,000 outstanding shares. The options exercised inconjunction with the IPO as well as those exercised in the three month periodending September 30, 2010 were granted under APB 25 with an exercise priceequal to fair value at date of grant, and accordingly no compensation expensewas recorded at the time of grant.  As aresult of the net exercise mechanism, the optionholders did not bear the riskand rewards of the options.  As such, theCompany recorded $1,227 and $2,975 of stock based compensation expense for thethree and nine months ended September 30, 2010 respectively.  The following is a rollforward of stockoption activity for the three and nine months ended September 30, 2010.

 
|                                |   | **Three months ended** |   | **Nine months ended**  |   |
|-------------------------------------|--------|----------------------------------|--------|----------------------------------|--------|
|                                |   | **September 30, 2010** |   | **September 30, 2010** |   |
| Stock options - beginning of period |   | 530,615                          |   | 819,185                          |   |
| Options exercised                   |   | (174,571                         | )      | (463,141                         | )      |
| Stock options – end of period  |   | 356,044                          |   | 356,044                          |   |

 

***Restricted Stock Awards***

 

Asummary of restricted stock activity for the nine months endedSeptember 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           |       | 4.59  years |   |
| Vested                                                     |       | —                  |       |                | —     |            |       |   |
| Cancelled  and forfeited                                   |       | —                  |       |                | —     |            |       |   |
|                                                       |       |                    |       |                |       |            |       |   |
| Unvested  at September 30, 2010                       |       | 208,130                 |       |                | $          | 11.25           |       | 4.59  years |   |
|                                                       |       |                    |       |                |       |            |       |   |
| Expected  to vest in the future at September 30, 2010 |       | 208,130                 |       |                | $          | 11.25           |       | 4.59  years |   |

 

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The fair value of the Company’s restricted stockawards is the closing stock price on the date of grant, or $11.25 per share.The Company recognized $110 and $183 of compensation expense related torestricted stock awards granted for the three and nine months endedSeptember 30, 2010.  Theunrecognized compensation expense calculated under the fair value method forshares expected to vest as of September 30, 2010 was approximately $1,707and is expected to be recognized over a weighted average period of 4.59 years.

 

**13.****      ****Commitments and Contingencies**

 

In the ordinary course of business, the Company isengaged in various litigation including product liability and intellectualproperty disputes.  However, the Companydoes not believe that any pending litigation will have a material adverseeffect on its consolidated financial position. In addition, the Company is not currently a party to anyenvironmental-related claims or legal matters.

 

**14.****      ****Restructuring**

 

On April 27, 2009, the Company announced a planto close its Johnson City, TN manufacturing facility and move production fromthis facility to its Milwaukee, WI and Rockland, ME facilities.  The company completed the closure of thisfacility as of August 31, 2010.  TheCompany expects to realize significant annual cost savings and improvedcustomer delivery performance as a result. The closure has resulted in the elimination of approximately 100positions in Johnson City and the addition of approximately 50 positions inRockland and approximately 35 positions in Milwaukee.

 

Related to the facility closure, the Companyrecorded ($46) and $78 of employee termination costs and $45 and $750 for otherclosure costs for the three and nine months ended September 30, 2010,respectively.  Restructuring expenses of$872 and $897 were recorded for the three and nine months endedSeptember 30, 2009, respectively. The Company expects the total cost of this restructuring to be $2,103consisting of employee termination costs of $768 and other costs of $1,335.  The other costs consist principally offacility move preparation and equipment relocation costs.  These costs are included in the selling,general and administrative expense line in the Company’s consolidatedstatements of operations.

 

The following represents a reconciliation of changesin the restructuring reserves related to this project throughSeptember 30, 2010.

 
| ** **                                                    | ** ** | ** ** | **Employee**    | ** ** | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------|------------|------------|-----------------|------------|------------|---------------------|------------|------------|------------|------------|
| ** **                                                    | ** ** | ** ** | **Termination** | ** ** | ** ** | **Other Exit** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                    | ** ** | ** ** | **Costs**       | ** ** | ** ** | **Costs**           | ** ** | ** ** | **Total**  | ** ** |
| Accrued  restructuring reserves as of December 31, 2009  |       |       | $               | 690        |       |                | $          | -          |       |       | $ | 690 |   |
| Activity  during nine months ended September 30, 2010:   |       |       |            |       |       |                |       |       |       |       |
| Charges  to earnings                                          |       |       | 78              |       |       | 750                 |       |       | 828        |       |
| Payments                                                      |       |       | (700            | )          |       | (750                | )          |       | (1,450     | )          |
| Accrued  restructuring reserves as of September 30, 2010 |       |       | $               | 68         |       |                | -          |       |       | $          | 68 |   |
|                                                               |            |            |                 |            |            |                     |            |            |            |            |  |  |  |

 

In connection with the restructuring, the Companyreassessed the useful lives of its manufacturing facility and certainequipment.  As a result of thisassessment, the Company assigned shorter useful lives to these assets andrecorded accelerated depreciation of $447 and $1,877 for the three and ninemonths ended September 30, 2010, respectively.  This change in estimate reduced basic anddiluted earnings per share by $0.01 and $0.06 for the three and nine monthsended September 30, 2010, respectively. The Company did not record any accelerated depreciation for the threeand nine months ended September 30, 2009. Because of actions taken in therestructuring, the Johnson City property is being actively marketed for sale inthe third quarter of fiscal 2010 and is classified as held for sale in theconsolidated balance sheet.

 

**15.****      ****Income Taxes**

 

Deferred income taxes reflect the net tax effects oftemporary differences between the carrying amounts of assets and liabilitiesfor financial reporting purposes and the amounts used for income taxpurposes.  The largest item affectingdeferred taxes is the difference between book and tax amortization of goodwilland other intangibles amortization.  TheCompany estimates that the effective combined federal and state tax rate for2010 will be approximately 43%.  TheCompany’s effective tax 

 

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ratewas 51.1% and 38.7% for the three months ended September 30, 2010 and2009, respectively.  The Company’seffective tax rate (benefit) for the nine months ended September 30, 2010and 2009 was (44.8%) and 16.0%, respectively.  The effective tax rate (benefit) for the nine months endedSeptember 30, 2010 was higher than the corresponding period in 2009 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.

 

**16.****      ****Related Party Transactions**

 

TheCompany is party to a Joint Management Services Agreement with AuroraManagement Partners, LLC (“AMP”) and ACOF Management, LP (“ACOF”), affiliatesof its principal stockholders.  Prior tothe IPO, this agreement obligated the Company to pay an annual management feeof $1,250 per annum, to AMP and ACOF, pro rata in accordance with theirrespective holdings, plus reimbursement of reasonable out-of-pocket expenses,in exchange for consultation and advice in fields such as financial services,accounting, general business management, acquisitions, dispositions andbanking.

 

Inconnection with the Company’s IPO, the Company amended and restated the termsof its Joint Management Services Agreement to, among other things,(i) extend the term of service until the earlier of (A) the fifthanniversary of the consummation of the Company’s IPO, (B) such time as AMPand ACOF, together with their affiliates, collectively hold less than 5% of theCompany’s outstanding common stock and (C) such time as all partiesmutually agree in writing, while eliminating all other termination events(other than termination for cause); (ii) eliminate the annual managementfee, as well as the provision obligating the Company to pay AMP and ACOF atransaction fee in the event of an acquisition or any sale or disposition ofthe Company or any of its divisions or any sale of substantially all Companyassets or similar transactions in exchange for a one-time fee of  $5,800 upon the consummation of the IPO, prorata in accordance with their respective holdings; and (iii) modify theexpense reimbursement provisions to include reimbursement for out-of-pocketexpenses incurred in connection with SEC and other legally required filingsmade by each of AMP and ACOF with respect to the Company’s securities andcertain other expenses.  The one-timemanagement fee was paid on May 10, 2010, and is included in managementfees — related party expense for the nine months ended September 30, 2010.

 

Duringthe three and nine months ended September 30, 2010, the Company recognizedmanagement fees and related expenses of $57 and $6,370 respectively relating tothe Joint Management Service Agreement. For the three and  nine monthsended September 30,  2009 theCompany recognized $411 and $1,066, respectively, relating to the JointManagement Services Agreement.

 

**Item 2.    *Management’sDiscussion and Analysis of Financial Condition and******Results of Operations***

 

*The following discussion and analysis of our financial condition andresults of operations should be read in conjunction with our consolidatedfinancial statements and related notes which are included in Item 1 of thisQuarterly Report on Form 10-Q, as well as the information contained in theprospectus related to our initial public offering (“IPO”), dated May 4,2010, 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 this Quarterly Report on Form 10-Q, unless the contextindicates otherwise: “Douglas Dynamics,” the “Company,” “we,” “our,” or “us”refer to Douglas Dynamics, Inc. (formerly known as Douglas DynamicsHoldings, Inc.).*

 

**Forward-LookingStatements**

 

*This Quarterly Report on Form 10-Q contains certain “forward-lookingstatements” within the meaning of Section 21E of the Securities ExchangeAct of 1934, as amended (the “Exchange Act”). These statements include information relating to future events, productdemand, the payment of dividends, future financial performance, strategies,expectations, closure of our Johnson City manufacturing facility, competitiveenvironment, regulation and availability of financial resources.  These statements are often identified by useof words such as “anticipate,” “believe,” “intend,” “estimate,” “expect,” “continue,”“should,” “could,” “may,” “plan,” “project,” “predict,” “will” and similarexpressions and include references to assumptions and relate to our futureprospects, developments and business strategies.  Such statements involve known and unknownrisks, uncertainties and other factors that could cause our actual results,performance or achievements to be materially different from any future results,performance or achievements expressed or implied by these forward-lookingstatements.  Factors that could cause orcontribute to such differences include, but are not limited to:(i) weather conditions, particularly lack of or reduced levels ofsnowfall; (ii) a significant decline in economic conditions;(iii) our inability to maintain good relationships with our distributors;(iv) lack of available or favorable financing options for our end-users ordistributors; (v) increases in the price of steel or other materialsnecessary for the production of our products that cannot be passed on to ourdistributors; (vi) the inability of our suppliers to meet our volume orquality requirements; (vii) our inability to protect or continue to buildour intellectual property portfolio; (viii) our inability to develop newproducts or improve upon existing products in response to end-user needs;(ix) losses due to lawsuits arising out of personal injuries*

 

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*associatedwith our products; and (x) our inability to compete effectively againstcompetition, as well as those discussed in the section entitled “Risk Factors,”set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q.** **Given these risksand uncertainties, 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.*

 

**OurBusiness**

 

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

 

Theannual demand for snow and ice control equipment is driven primarily by thereplacement cycle of the existing installed base, which is predominantly afunction of the average life of a snowplow or spreader and is driven by usageand maintenance practices of the end-user. We believe actively-used snowplowsare typically replaced, on average, every 7 to 8 years. The primary factorinfluencing the replacement cycle for snow and ice control equipment is thelevel, timing and location of snowfall.

 

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

 

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

 

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

 

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

 

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

 

**InitialPublic Offering**

 

OnMay 10, 2010, the Company completed its IPO of 10,000,000 shares of commonstock at a public offering price of $11.25 per share, less underwritingdiscounts.  The 10,000,000 shares soldincluded 6,500,000 shares sold by the Company and 3,500,000 shares sold bycertain selling stockholders.  Inaddition, on May 14, 2010, the selling stockholders in the IPO closed thesale of an additional 1,500,000 shares to the underwriters at the publicoffering price of $11.25 per share, less underwriter discounts, pursuant to theunderwriters’ exercise in full of their overallotment option.  The Company received approximately $73.1million in gross proceeds from the issuance and sale of its common stock in theIPO and approximately $63.9 million in net proceeds after deductingunderwriting discounts and total expenses related to the IPO.  The Company did not receive any proceeds fromthe sale of its stock by the selling stockholders in the IPO.  The Company used the proceeds from the IPO,together with the increase in its term loan facility and cash on hand, toredeem all of its outstanding $150.0 million, 7.75% senior notes (“Senior Notes”)due January 15, 2012, including accrued and unpaid interest thereon andthe related redemption premium.

 

**Closureof Johnson City, Tennessee Manufacturing Facility**

 

During the third quarter of 2010, theCompany completed the closure its Johnson, City, Tennessee manufacturingfacility.  The Company ceasedsubstantially all manufacturing at this facility on April 2, 2010,effectively reducing its manufacturing facilities from three to two, and ceasedall operations at this facility as of August 31, 2010.  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.  The closure resulted in the elimination ofapproximately 100 positions in Johnson City and the addition of approximately50 positions in Rockland and approximately 35 positions in Milwaukee.  The Company continues to own its JohnsonCity, Tennessee real property, which is being actively marketedfor sale.

 

**Resultsof Operations**

 

*Overview*

 

Duringthe three months ended September 30, 2010 and 2009, we sold 13,085 and13,847 units of snow and ice control equipment, respectively, and during thenine months ended September 30, 2010 and 2009, we sold 32,491 and 31,315units of snow and ice control equipment, respectively.   The following table shows our sales of snowand ice control equipment and related parts and accessories as a percentage ofnet sales for the three and nine months ended September 30, 2010 and 2009.

 
| ** **             | ** ** | ** ** | **Three months ended** | ** ** | **Nine months ended** |
|------------------------|------------|------------|----------------------------------|------------|---------------------------------|
| ** **             | ** ** | ** ** | **September 30,  2010**     | ** ** | **September 30,  2009**    | ** ** | **September 30,  2010** | ** ** | **September 30,  2009** |
| Equipment              |       |       | 91                               | %          |                            | 91 | % |   | 87 | % |   | 85 | % |
|                   |       |       |                             |       |                            |   |   |   |   |   |   |   |   |
| Parts  and accessories |       |       | 9                                | %          |                            | 9 | % |   | 13 | % |   | 15 | % |

 

Thefollowing table sets forth, for the three and nine months endedSeptember 30, 2010 and 2009, the consolidated statements of operations ofDouglas Dynamics, Inc. and its subsidiaries.  All intercompany balances and transactions havebeen eliminated in consolidation.  In thetable below and throughout this “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations,” consolidated statements ofoperations data for the three and nine months ended September 30, 2010 and2009 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** | ** ** | ** **                   | ** **   | **Nine Months Ended** | ** ** |
|-----------------------------------------------|------------|------------|----------------------------------|------------|------------------------------|--------------|---------------------------------|------------|
| ** **                                    | ** ** | ** ** | ** **                       | ** ** | ** **                   | ** **   | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | ** ** | **September 30,  2010**     | ** ** | **September 30,  2009** | ** **   | ** **                      | ** ** | **September 30,  2010** | ** ** | **September 30,  2009** | ** ** |
| ** **                                    | ** ** | ** ** | ***(unaudited)***                | ** ** | ** **                   | *** *** | ***(unaudited)***               | ** ** |
| ** **                                    | ** ** | ** ** | ***(in thousands)***        | ** ** |
|                                          |       |       |                             |       |                         |         |                            |       |   |   |   |   |
| Net  sales                                    |       |       | $                                | 47,448     |                         | $            | 50,396                          |       |   |   | $ | 128,338 |   | $ | 125,206 |   |
| Cost  of sales                                |       |       | 32,221                           |       | 35,241                       |         |                            |       | 86,070 |   | 87,523 |   |
| Gross  profit                                 |       |       | 15,227                           |       | 15,155                       |         |                            |       | 42,268 |   | 37,683 |   |
|                                          |       |       |                             |       |                         |         |                            |       |   |   |   |   |
| Selling,  general, and administrative expense |       |       | 6,819                            |       | 4,916                        |         |                            |       | 20,527 |   | 15,443 |   |
| Intangibles  amortization                     |       |       | 1,541                            |       | 1,541                        |         |                            |       | 4,621 |   | 4,621 |   |
| Management  fees-related party                |       |       | 57                               |       | 411                          |         |                            |       | 6,370 |   | 1,066 |   |
|                                          |       |       |                             |       |                         |         |                            |       |   |   |   |   |
| Income  from operations                       |       |       | 6,810                            |       | 8,287                        |         |                            |       | 10,750 |   | 16,553 |   |
|                                          |       |       |                             |       |                         |         |                            |       |   |   |   |   |
| Interest  expense, net                        |       |       | (2,334                           | )          | (3,802                       | )            |                            |       | (9,038 | ) | (11,756 | ) |
| Loss  on extinguishment of debt               |       |       | -                                |       | -                            |         |                            |       | (7,967 | ) | - |   |
| Other  expense, net                           |       |       | (12                              | )          | (22                          | )            |                            |       | (7 | ) | (105 | ) |
| Income  (loss) before taxes                   |       |       | 4,464                            |       | 4,463                        |         |                            |       | (6,262 | ) | 4,692 |   |
|                                          |       |       |                             |       |                         |         |                            |       |   |   |   |   |
| Income  tax (benefit) expense                 |       |       | 2,279                            |       | 1,725                        |         |                            |       | (2,803 | ) | 751 |   |
|                                          |       |       |                             |       |                         |         |                            |       |   |   |   |   |
| Net  income (loss)                            |       |       | $                                | 2,185      |                         | $            | 2,738                           |       |   |   | $ | (3,459 | ) | $ | 3,941 |   |

 

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Thefollowing table sets forth for the three and nine months endedSeptember 30, 2010 and 2009, the percentage of certain items in ourconsolidated statement of operations, relative to net sales:

 
| ** **                                    | ** ** | ** ** | **Three Months Ended** | ** ** | ** **                   | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------|------------|------------|----------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                                    | ** ** | ** ** | ** **                       | ** ** | ** **                   | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | ** ** | **September 30,  2010**     | ** ** | **September 30,  2009** | ** ** | ** **                      | ** ** | **September 30,  2010** | ** ** | **September 30,  2009** | ** ** |
| ** **                                    | ** ** | ** ** | ***(unaudited)***                | ** ** | ** **                   | ** ** | ***(unaudited)***               | ** ** |
| ** **                                    | ** ** | ** ** | ***(in thousands)***        | ** ** |
|                                          |       |       |                             |       |                         |       |                            |       |   |   |   |   |
| Net  sales                                    |       |       | 100.0                            | %          | 100.0                        | %          |                            |       | 100.0 | % | 100.0 | % |
| Cost  of sales                                |       |       | 67.9                             | %          | 69.9                         | %          |                            |       | 67.1 | % | 69.9 | % |
| Gross  profit                                 |       |       | 32.1                             | %          | 30.1                         | %          |                            |       | 32.9 | % | 30.1 | % |
|                                          |       |       |                             |       |                         |       |                            |       |   |   |   |   |
| Selling,  general, and administrative expense |       |       | 14.4                             | %          | 9.8                          | %          |                            |       | 16.0 | % | 12.3 | % |
| Intangibles  amortization                     |       |       | 3.2                              | %          | 3.1                          | %          |                            |       | 3.6 | % | 3.7 | % |
| Management  fees-related party                |       |       | 0.1                              | %          | 0.8                          | %          |                            |       | 4.9 | % | 0.9 | % |
|                                          |       |       |                             |       |                         |       |                            |       |   |   |   |   |
| Income  from operations                       |       |       | 14.4                             | %          | 16.4                         | %          |                            |       | 8.4 | % | 13.2 | % |
|                                          |       |       |                             |       |                         |       |                            |       |   |   |   |   |
| Interest  expense, net                        |       |       | (5.0                             | )%         | (7.5                         | )%         |                            |       | (7.1 | )% | (9.4 | )% |
| Loss  on extinguishment of debt               |       |       | 0.0                              | %          | 0.0                          | %          |                            |       | (6.2 | )% | 0.0 | % |
| Other  expense, net                           |       |       | 0.0                              | %          | 0.0                          | %          |                            |       | (0.0 | )% | (0.1 | )% |
| Income  (loss) before taxes                   |       |       | 9.4                              | %          | 8.9                          | %          |                            |       | (4.9 | )% | 3.7 | % |
|                                          |       |       |                             |       |                         |       |                            |       |   |   |   |   |
| Income  tax (benefit) expense                 |       |       | 4.8                              | %          | 3.5                          | %          |                            |       | (2.2 | )% | 0.6 | % |
|                                          |       |       |                             |       |                         |       |                            |       |   |   |   |   |
| Net  income (loss)                            |       |       | 4.6                              | %          | 5.4                          | %          |                            |       | (2.7 | )% | 3.1 | % |

 

*NetSales*

 

Net sales were $47.4 million forthe three months ended September 30, 2010 compared to $50.4 million in thethree months ended September 30, 2009, a decrease of $3.0 million, or6.0%. The pre-season sales period is comprised of the second and third quarterscombined. To encourage distributors to receive shipments prior to the peakfourth quarter retail selling season, we offer promotional financial andfreight terms to distributors that place orders during the second quarter. Theseorders are then shipped during the second and third quarters.  The timing of these shipments between thesecond and third quarters can vary year to year based upon a number of factors,including distributor inventory levels and space availability. For 2010,pre-season orders have shifted from traditional patterns to be more heavilyweighted toward the second quarter versus the third quarter.  Netsales were $128.3 million for the nine months ended September 30, 2010compared to $125.2 million in the nine months ended September 30, 2009, anincrease of $3.1 million, or 2.5%.  Thedecrease in net sales for the three months ended September 30, 2010 wasdriven by a decrease in units of 5.5% and a reduction in parts and accessoriessales for the three-month period of $0.3 million, or 5.3%.  The increase in net sales for the nine monthsended September 30, 2010 was driven by a 3.8% increase in unit sales ofsnow and ice control equipment, due in part to above average snowfall duringthe October 1, 2009 to March 31, 2010 snow season and improvingretail sales in February and March of 2010.   Slightly offsetting this increase was areduction in parts and accessories sales for nine months endedSeptember 30, 2010 compared to the corresponding period in 2009 of $1.7million, or 8.4%, as end-users opted to purchase replacement equipment insteadof repairing existing equipment.

 

*Cost of Sales*

 

Cost of sales were $32.2 millionfor the three months ended September 30, 2010 compared to $35.2 millionfor the three months ended September 30, 2009, a decrease of $3.0 million,or 8.5%. Cost of sales were $86.1 million for the nine months endedSeptember 30, 2010 compared to $87.5 million for the nine months endedSeptember 30 2009, a decrease of $1.4 million, or 1.7%.  The decreases in cost of sales for the threeand nine months ended September 30, 2010 compared to the correspondingperiod in 2009 were driven by changes in unit sales as discussed above under “—NetSales”.   Slightly offsetting thedecrease in cost of sales due to lower units was non-recurring accelerateddepreciation costs totaling $0.5 million and $1.9 million, respectively,associated with 

 

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reassessingthe useful lives of the Company’s manufacturing facilities and certainequipment at our Johnson City plant. Cost of sales decreased at a higher rate than net sales due to lowermaterial costs than in the prior comparable periods.  As a percentage of cost of sales, fixed andvariable costs were approximately 16% and 84%, respectively, for the threemonths ended September 30, 2010 versus approximately 15% and 85%,respectively, for the three months ended September 30, 2009, andapproximately 20% and 80%, respectively, for the nine months endedSeptember 30, 2010 versus approximately 17% and 83%, respectively, for thenine months ended September 30, 2009.

 

*Gross Profit*

 

Gross profit was $15.2 million forthe three months ended September 30, 2010 compared to $15.2 million in thethree months ended September 30, 2009, an increase of $0.1 million, or0.5%.  Gross profit was $42.3 million forthe nine months ended September 30, 2010 compared to $37.7 million in thenine months ended September 30, 2009, an increase of $4.6 million, or12.2%.  Gross profit dollars remainedrelatively flat for the three month period due to a decrease in units soldoffset by lower cost of sales as a percentage of net sales.  As a percentage of net sales, gross profitincreased from 30.1% for the three months ended September 30, 2009 to32.1% for the corresponding period in 2010. The increase in gross profit for the nine months endedSeptember 30, 2010 was due primarily to the increased units sales of snow andice control equipment described above under “—Net Sales.”  As a percentage of net sales, gross profitincreased from 30.1% for the nine months ended September 30, 2009 to 32.9%for the corresponding period in 2010, primarily as a result of the factorsdiscussed above under “—Net Sales” and “—Cost of Sales.”

 

*Selling, General andAdministrative Expense*

 

Selling, general and administrativeexpenses, including intangible amortization and management fees, were $8.4million for the three months ended September 30, 2010, compared to $6.9million for the three months ended September 30, 2009, an increase of $1.5million.  Selling, general andadministrative expenses were $31.5 million for the nine months endedSeptember 30, 2010, compared to $21.1 million for the nine months endedSeptember 30, 2009, an increase of $10.4 million.  This increase for the three months ended September 30,2010 was primarily due to compensation expense associated with net exercises ofstock options totaling $1.2 million and an increase in legal fees of $0.3million.    In addition to the increasesnoted in the three-month period, the increase for the nine months endedSeptember 30, 2010 was primarily attributable to non-recurring expensesincurred at the time of the Company’s IPO. The non-recurring charges associated with the IPO totaled $8.5 million,and were comprised namely of the buyout of the management services agreement at$5.8 million, compensation expense associated with net exercises of stockoptions totaling $1.7 million and the expense and payment of cash bonuses underthe Company’s liquidity bonus plan of $1.0 million. As a percentage of netsales, selling, general and administrative expenses increased to 17.7% for thethree months ended September 30, 2010 compared to 13.7% for thecorresponding period in 2009, and from 16.9% for the nine months endedSeptember 30, 2009 to 24.6% for the corresponding period in 2010, due tothe factors discussed above.

 

*Interest Expense*

 

Interest expense was $2.3 millionfor the three months ended September 30, 2010 compared to $3.8 million inthe corresponding period in 2009, a decrease of $1.5 million. Interest expensewas $9.0 million for the nine months ended September 30, 2010 compared to$11.8 million in the corresponding period in 2009, a decrease of $2.8 million.   This decrease in interest expense for thethree and nine months ended September 30, 2010 was due to less interestexpense as a result of the redemption of the Senior Notes with proceeds fromthe IPO, additional borrowings under the Company’s senior credit facilities andcash on hand.

 

*Loss OnExtinguishment of Debt*

 

Loss on extinguishment of debttotaling $8.0 million for the nine months ended September 30, 2010 wasentirely driven by costs associated with the amendment of our senior creditfacilities and the redemption of the Senior Notes, including both the callpremium on the redemption of our Senior Notes, and the write-off of unamortizeddeferred financing costs relating to the redemption of our Senior Notes and theamendment of our senior credit facilities.

 

*IncomeTaxes*

 

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 Company’seffective combined federal and state tax rate for 2010 will be approximately43%.  The Company’s effective tax ratewas 51.1% and 38.7% for the three months ended September 30, 2010 and2009, respectively.  The Company’seffective tax rate for the nine months ended September 30, 2010 and 2009was (44.8)% and 16.0%, respectively.  The effective tax rate (benefit) for the nine months endedSeptember 30, 2010 was higher than the corresponding period in 2009 due tothe release of a valuation allowance for Wisconsin NOLs in the first quarter of2009 due to a tax law change in the state of Wisconsin resulting in the abilityto utilize the NOLs in future periods.

 

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* *

*Net Income (Loss)*

 

Net income for the three monthsended September 30, 2010 was $2.2 million compared to net income of $2.7million for the corresponding period in 2009, a decrease of $0.5 million. Netloss for the nine months ended September 30, 2010 was $3.5 millioncompared to net income of $3.9 million for the corresponding period in 2009, adecrease of $7.4 million.  This decreasein net income was driven by the factors described above and primarily by theimpact of non -recurring costs incurred at the time of the Company’s IPO. Seethe reconciliation table of Net Income (Loss) to Adjusted Net Income in “—Non-GAAP Financial Measures” below for more details regarding the non-recurringexpenses. As a percentage of net sales, net income was 4.6% for the threemonths ended September 30, 2010 compared to 5.4% for the three monthsended September 30, 2009.  As apercentage of net sales, net loss was 2.7% for the nine months endedSeptember 30, 2010 compared to net income of 3.1% for the nine monthsended September 30, 2009.

 

*Adjusted EBITDA*

 

Adjusted EBITDA for the threemonths ended September 30, 2010 was $11.6 million compared to $12.7million in the corresponding period in 2009, a decrease of $1.1 million, or8.7%.  Adjusted EBITDA for the ninemonths ended September 30, 2010 was $32.1 million compared to $28.0million in the corresponding period in 2009, an increase of $4.1 million, or14.6%.  As a percentage of net sales,Adjusted EBITDA decreased from 25.1% for the three months endedSeptember 30, 2009 to 24.4% for the three months ended September 30,2010, and increased from 22.4% for the nine months ended September 30, 2009 to25.0% for the nine months ended September 30, 2010.  For the three-month period ending September30, the decrease in Adjusted EBITDA is primarily attributable to decreased unitsales of snow and ice control equipment.  For the nine-month period ending September 30, the increase in EBITDA isprimarily attributable to increased unit sales of snow and ice equipment whichresulted from stronger pre-season shipments during the second quarter of 2010compared to the corresponding period in 2009.

 

*Non-GAAP Financial Measures*

 

ThisQuarterly Report on Form 10-Q contains financial information calculated otherthan in accordance with U.S. generally accepted accounting principles (“GAAP”).

 

Thesenon-GAAP measures include:

 

·                  Adjusted netincome; and

·                  AdjustedEBITDA.

 

Thesenon-GAAP disclosures should not be construed as an alternative to the reportedresults determined in accordance with GAAP.

 

Adjustednet income represents net income as determined under GAAP, excluding non-recurringexpenses incurred at the time of our IPO, namely the buyout of our managementservices agreement, the loss on extinguishment of debt, stock basedcompensation expense associated with the net exercise of stock options and thepayment of cash bonuses under our liquidity bonus plan. We believe that thepresentation of Adjusted net income for the three and nine months endedSeptember 30, 2010 provides useful information to investors byfacilitating comparisons to our historical performance due to the non-recurringexpenses incurred at the time of the our IPO in May 2010.

 

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Thefollowing table presents a reconciliation of net income (loss), the mostcomparable GAAP financial measure, to adjusted net income for the three andnine months ended September 30, 2010. There were no such adjustmentsduring the three and nine months ended September 30, 2009.

 
| ** **                                                                                   | ** ** | **Three Months  Ended** | ** ** | **Nine Months  Ended**  | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                                                   | ** ** | ** **                   | ** ** | ** **                   | ** ** |
| **(in millions)**                                                                       | ** ** | **September 30,  2010** | ** ** | **September 30,  2010** | ** ** |
| Net  Income (Loss) - (GAAP)                                                                  |       | $2.2                         |       | ($3.5)                       |       |
|                                                                                         |       |                         |       |                         |       |
| Addback  non-recurring expenses, net of tax at 43.0%, incurred at the time of  the IPO: |       |                         |       |                         |       |
|                                                                                         |       |                         |       |                         |       |
| -  Buyout of the Management Services Agreement                                               |       | -                            |       | $3.3                         |       |
|                                                                                         |       |                         |       |                         |       |
| -  Loss on extinguishment of debt                                                       |       | -                            |       | $4.6                         |       |
|                                                                                         |       |                         |       |                         |       |
| -  Liquidity bonus payment                                                                   |       | -                            |       | $0.6                         |       |
|                                                                                         |       |                         |       |                         |       |
| -  Non-recurring stock based compensation expense                                            |       | $0.7                         |       | $1.7                         |       |
|                                                                                         |       |                         |       |                         |       |
| Adjusted  Net Income - (non-GAAP)                                                            |       | $2.9                         |       | $6.7                         |       |

 

AdjustedEBITDA represents net income (loss) before interest, taxes, depreciation andamortization, as further adjusted for management fees paid by us to affiliatesof our principal stockholders, stock-based compensation associated with the netexercise of stock options, payment of cash bonuses under our liquidity bonusplan, loss on extinguishment of debt, certain non-recurring charges related tothe closure of our Johnson City, Tennessee manufacturing facility and certainunrelated legal expenses.   We use, andwe believe our investors benefit from, the presentation of Adjusted EBITDA inevaluating our operating performance because it provides us and our investorswith additional tools to compare our operating performance on a consistentbasis by removing the impact of certain items that management believes do notdirectly reflect our core operations. In addition, we believe that AdjustedEBITDA is useful to investors and other external users of our consolidatedfinancial statements in evaluating our operating performance as compared tothat of other companies, because it allows them to measure a company’soperating performance without regard to items such as interest expense, taxes,depreciation and depletion, and amortization and accretion, which can varysubstantially from company to company depending upon accounting methods andbook value of assets and liabilities, capital structure and the method by whichassets were acquired. Our management also uses Adjusted EBITDA for planning purposes,including the preparation of our annual operating budget and financialprojections. Management also uses Adjusted EBITDA to evaluate our ability tomake certain payments, including dividends, in compliance with our seniorcredit facilities, which is determined based on a calculation of “ConsolidatedAdjusted EBITDA” that is substantially similar to Adjusted EBITDA.

 

Adjusted EBITDA has limitations asan analytical tool. As a result, you should not consider it in isolation, or asa substitute for net income, operating income, cash flow from operatingactivities or any other measure of financial performance or liquidity presentedin accordance with GAAP. Some of these limitations are:

 

·                    Adjusted EBITDA does notreflect our cash expenditures or future requirements for capital expendituresor contractual commitments;

·                    Adjusted EBITDA does notreflect changes in, or cash requirements for, our working capital needs;

·                    Adjusted EBITDA does notreflect the interest expense, or the cash requirements necessary to serviceinterest or principal payments, on our indebtedness;

·                    Although depreciation andamortization are non-cash charges, the assets being depreciated and amortizedwill often have to be replaced in the future;

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

 

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

·                   Adjusted EBITDA does notreflect tax obligations whether current or deferred.

 

The following table presents a reconciliation of netincome (loss), the most comparable GAAP financial measure, to Adjusted EBITDAas well as the resulting calculation of Adjusted EBITDA for the three and ninemonths ended September 30, 2010 and 2009:

 
| ** **                       | ** ** | ** ** | **Three months ended**  | ** ** | ** **              | ** ** | **Nine months ended** | ** ** |
|----------------------------------|------------|------------|-------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                       | ** ** | ** ** | **September 30,  2010** | ** ** | **September 30,  2009** | ** ** | ** **            | ** ** | **September 30,  2010** | ** ** | **September 30,  2009** | ** ** |
|                             |       |       |                    |       |                    |       |                  |       |   |   |   |   |
| **Net Income (Loss)**            |       |       | $                       | 2,185      |                    | $          | 2,738                 |       |   |   | $ | (3,459 | ) | $ | 3,941 |   |
|                             |       |       |                    |       |                    |       |                  |       |   |   |   |   |
| Interest  Expense - Net          |       |       | 2,334                   |       | 3,802                   |       |                  |       | 9,038 |   | 11,756 |   |
| Income  Taxes                    |       |       | 2,279                   |       | 1,725                   |       |                  |       | (2,803 | ) | 751 |   |
| Depreciation  Expense            |       |       | 1,262                   |       | 1,291                   |       |                  |       | 4,827 |   | 3,877 |   |
| Amortization                     |       |       | 1,541                   |       | 1,541                   |       |                  |       | 4,621 |   | 4,621 |   |
| **EBITDA**                       |       |       | 9,601                   |       | 11,097                  |       |                  |       | 12,224 |   | 24,946 |   |
|                             |       |       |                    |       |                    |       |                  |       |   |   |   |   |
| Management  Fees                 |       |       | 57                      |       | 411                     |       |                  |       | 6,370 |   | 1,066 |   |
| Stock  Based Compensation        |       |       | 1,337                   |       | 6                       |       |                  |       | 3,158 |   | 738 |   |
| Loss  on Extinguishment of Debt  |       |       | -                       |       | -                       |       |                  |       | 7,967 |   | - |   |
| Liquidity  Bonus Plan            |       |       | -                       |       | -                       |       |                  |       | 1,003 |   | - |   |
| Other  non-recurring charges (1) |       |       | 565                     |       | 1,138                   |       |                  |       | 1,383 |   | 1,286 |   |
|                             |       |       |                    |       |                    |       |                  |       |   |   |   |   |
| **Adjusted EBITDA**              |       |       | $                       | 11,560     |                    | $          | 12,652                |       |   |   | $ | 32,105 |   | $ | 28,036 |   |

 

----

(1)       Reflects severance andone-time, non-recurring expenses for costs related to the closure of ourJohnson City facility of ($1) and $872 for the three months and $828 and $897for the nine months ended September 30, 2010 and 2009, respectively, $566and $266 of unrelated legal fees for the three months and $1,222 and $389 forthe nine months ended September 30, 2010 and 2009 respectively, and $667and $0 gain on other post employment benefit plan curtailment related to theJohnson City plant closure for the nine months ended September 30, 2010and 2009, respectively.

 

Discussionof Critical Accounting Policies

 

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

 

**New Accounting Pronouncements**

 

For the nine months endedSeptember 30, 2010, the Company did not adopt any new accountingpronouncements that had a significant impact to the Company’s consolidatedfinancial statements.

 

**Liquidity and Capital Resources**

 

Our principal sources of cash havebeen and we expect will continue to be cash from operations and borrowingsunder our senior credit facilities.  Asof September 30, 2010, our senior credit facilities consisted of a $60million senior secured revolving credit facility, entered into by oursubsidiaries, Douglas Dynamics, L.L.C., Douglas Dynamics Finance Company andFisher, LLC, as borrowers and a $125 million senior secured term loan facility,entered into by Douglas Dynamics, 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 senior credit facilities to, among other things, (i) allowus to redeem our Senior Notes, (ii) increase the size of our term loanfacility by $40 million from $85 million to $125 million, which additional termloans will mature in May 2016 and (iii) amend certain of theprovisions in our senior credit facilities which govern our ability to paydividends. On June 9, 2010, we completed the redemption of our SeniorNotes.  We redeemed the Senior Notesusing the proceeds from our IPO, together with the increase in our term loanfacility and cash on hand, for a total of $157.6 million including the accruedinterest thereon and a redemption premium.

 

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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.”

 

Asdiscussed in the prospectus relating to our IPO, in connection with our IPO,our Board of Directors adopted a dividend policy, reflecting an intention to distribute to our stockholders a regularquarterly cash dividend, commencing in the third quarter of 2010 in equalquarterly installments.  The initialannual rate for the dividend was $0.73 per share, or $0.1825 per quarter, butour Board of Directors has approved a $0.0175 increase in the fourth quarter2010 to $0.20 per share.  The declarationand payment of these dividends to holders of our common stock will be at thediscretion of our Board of Directors and will depend upon many factors,including our financial condition and earnings, legal requirements, taxes andother factors our Board of Directors may deem to be relevant. The terms of ourindebtedness also restricts us from paying cash dividends on our common stockunder certain circumstances. As a result of this dividend policy, we may nothave significant cash available to meet any large unanticipated liquidityrequirements. As a result, we may not retain a sufficient amount of cash tofund our operations or to finance unanticipated capital expenditures or growthopportunities, including acquisitions. Our Board of Directors may, however,amend, revoke or suspend our dividend policy at any time and for any reason.

 

Asof September 30, 2010, we had $31.7 million of total liquidity, comprisedof $8.7 million in cash and cash equivalents and borrowing availability of$23.0 million under our revolving credit facility.  Borrowing availability under our revolvingcredit facility is governed by a borrowing base, the calculation of whichincludes cash on hand. Accordingly, use of cash on hand may also result in areduction in the amount available for borrowing under our revolving creditfacility.  Furthermore, our revolvingcredit facility requires us to maintain at least $6.0 million of borrowingavailability. We expect that cash on hand, generated from operations, as wellas available credit under our senior credit facilities will provide adequatefunds for the purposes described above for at least the next 12 months.

 

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

 
| ** **                 | ** ** | **As of**                   | ** ** |
|----------------------------|------------|----------------------------------|------------|
| ** **                 | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                 | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** | **September 30, 2009** | ** ** |
| Cash  and cash equivalents |       | $                                | 8,721      |   | $ | 69,703 |   | $ | 17,210 |   |
| Inventories                |       | 24,475                           |       | 26,697 |   | 26,853 |   |
|                            |            |                                  |            |  |  |  |  |  |  |  |

 

Wehad cash and cash equivalents of $8.7 million at September 30, 2010compared to cash and cash equivalents of $17.2 million at September 30,2009.  The table below sets forth asummary of the significant sources and uses of cash for the periods presentedin thousands.

 
| ** **                                           | ** ** | **Nine months ended September 30,** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **        |
|------------------------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|------------|------------|-------------------|
| **Cash Flows (in thousands)**         | ** ** | **2010**                                                | ** ** | **2009**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| Net  cash provided by (used in) operating activities |       | $                                                       | (38,435    | )          | $          | (39,883    | )          | $                 | 1,448 |   | (3.6 | )% |
| Net  cash provided by (used in) investing activities |       | (2,202                                                  | )          | (4,821     | )          | 2,619      |       | (54.3             | )% |
| Net  cash provided by (used in) financing activities |       | (19,715                                                 | )          | 8,362      |       | (28,077    | )          | (335.8            | )% |
|                                                 |       |                                                    |       |       |       |       |       |              |   |
| Increase  (Decrease) in cash                         |       | $                                                       | (60,352    | )          | $          | (36,342    | )          | $                 | (24,010 | ) | 66.1 | % |
|                                                      |            |                                                         |            |            |            |            |            |                   |  |  |  |  |  |

 

Net cash used in operatingactivities decreased $1.4 million from the nine months ended September 30,2009 to the nine months ended September 30, 2010.  This decrease in cash used was driven mainlyby a year over year increase in pre-tax gross profit of $4.6 million driven byincreased unit shipments and improved unit margins, as well as decreasedinterest expense.  Partially offsettingthis were non-recurring costs incurred at the time of the Company’s IPO, namely the buyout of the management services agreementtotaling $5.8 million, and the payment of cash bonuses under the Company’s liquiditybonus plan totaling $1.0 million.

 

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Net cash used in investingactivities decreased $2.6 million for the nine months ended September 30,2010, compared to the corresponding period in 2009.  This decrease was driven largely by thepurchase of a Milwaukee distribution facility during the second quarter of 2009to expand our Milwaukee facilities in anticipation of the closure of ourJohnson City, TN manufacturing plant.

 

Net cash used in financingactivities increased $28.0 million for the nine months ended September 30,2010 compared to the corresponding period in 2009, primarily as a result of thenet impact of financing activities associated with the Company’s IPO, namelythe redemption of the Company’s Senior Notes, including the redemption premiumand accrued interest thereon totaling $153.9 million, partially offset by anincrease in our term loan of $40.0 million, net proceeds from the IPO of $63.9million, and revolver borrowings of $37.0 million.

 

**Contractual Obligations**

 

There have been no material changesto our contractual obligations in the nine months ended September 30, 2010,except for (a) a reduction in long-term debt and related interest obligationsas a result of the redemption of our Senior Notes on June 9, 2010 and (b) anincrease in our term loan facility by $40 million to $125 million. Foradditional details regarding the changes to our long-term debt, see Note 5 tothe notes to our consolidated financial statements.

 

**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-YearVariability**

 

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 ofoperations for any quarter may not be indicative of results of operations thatmay be achieved for a subsequent quarter or the full year, and may not besimilar to results of operations experienced in prior years. That being thecase, while snowfall levels vary within a given year and from year-to-year,snowfall, and the corresponding replacement cycle of snow and ice controlequipment, is relatively 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 inOctober and end in March) in that region. This is due to the fact thatend-user demand for our products is driven primarily by the condition of their snowand ice control equipment, and in the case of professional snowplowers, bytheir financial ability to purchase new or replacement snow and ice controlequipment, both of which are significantly affected by snowfall levels. Heavysnowfall during a given winter causes usage of our products to increase,resulting in greater wear and tear to our products and a shortening of theirlife cycles, thereby creating a need for replacement snow and ice controlequipment and related 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 replacementsnow and ice control equipment prior to the following winter. To a lesserextent, sales of our products are influenced by the timing of snowfall in agiven winter. Because an early snowfall can be viewed as a sign of a heavyupcoming snow season, our end-users may respond to an early snowfall bypurchasing replacement snow and ice control equipment during the current seasonrather than delaying purchases until after the season is over when mostpurchases are typically made by end-users.

 

We attempt to manage the 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 ourdistributors a combination of pricing, payment and freight incentives duringthis period. These pre-season sales incentives encourage our distributors tore-stock their inventory during the second and third quarters in anticipationof the peak fourth quarter retail sales period by offering pre-season pricingand payment deferral until the fourth quarter. As a result, we tend to generateour greatest 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.

 

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Because of the seasonality of oursales, we experience seasonality in our working capital needs as well. In thefirst quarter we typically require capital as we are generally required tobuild our inventory in anticipation of our second and third quarter pre-seasonsales. During the second and third quarters, our working capital requirementsrise as our accounts receivable increase as a result of the sale and shipmentof products ordered through our pre-season sales program and we continue tobuild inventory. Working capital requirements peak towards the end of the thirdquarter and then begin to decline through the fourth quarter through areduction in accounts receivable 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:

 

·                  the employment of a highly variable cost structurefacilitated by a core group of workers that we supplement with a temporaryworkforce as sales volumes dictate, which allows us to adjust costs on anas-needed basis in response to changing demand;

·                  our enterprise-wide lean concept, which allows us to adjustproduction levels up or down to meet demand;

·                  the pre-season order program described above, whichincentivizes distributors to place orders prior to the retail selling season;and

·                  a vertically 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 andQualitative Disclosures About Market 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 riskprimarily from changes in interest rates. Certain of our borrowings, including our term loan and any revolvingborrowings under our senior credit facilities, are at variable rates of interestand expose us to interest rate risk.  Inaddition, the interest rate on any revolving borrowings is subject to anincrease in the interest rate based on our average daily availability under ourrevolving credit facility.  When theaverage daily excess availability on our revolving credit facility falls below$25 million, our interest rate on the revolving credit facility will increaseby 0.25%.  The maximum impact this wouldhave on our interest expense would be $150,000 per year.  If interest rates increase, our debt serviceobligations on our variable rate indebtedness would increase even though theamount borrowed remained the same, and our net income and cash flows wouldcorrespondingly decrease.

 

As of September 30, 2010, wehad outstanding borrowings under our term loan of $121.8 million.  A hypothetical interest rate change of 1%,1.5% and 2% on our term loan would have changed interest incurred for the ninemonths ended September 30, 2010 by $0.3 million, $0.4 million and $0.7 million,respectively. As of September 30, 2010, we had outstanding borrowingsunder our revolving credit facility of $37.0 million.  A hypothetical interest rate change of 1%,1.5% and 2% on our revolving credit facility would have changed interestincurred for the nine months ended September 30, 2010 by $0.1 million,$0.1 million and $0.2 million, respectively.

 

**Commodity Price Risk**

 

In the normal course of business,we are exposed to market risk related to our purchase of steel, the primarycommodity upon which our manufacturing depends. Our steel purchases as apercentage of revenue were 15.5% and 18.1% for the nine months endedSeptember 30, 2010 and 2009, respectively. While steel is typically available from numerous suppliers, the price ofsteel is a commodity subject to fluctuations that apply across broad spectrumsof the steel market. We do not use any derivative or hedging instruments tomanage steel price risk. If the price of steel increases, our variable costscould also increase. While historically we have successfully mitigated these increasedcosts through the implementation of either permanent price increases and/ortemporary invoice surcharges, in the future we may not be able to successfullymitigate these costs, which could cause our gross margins to decline. If ourcosts for steel were to increase by $1.00 in a period where we are not able topass any of this increase onto our distributors, our gross margins woulddecline by $1.00 in the period in which such inventory was sold.

 

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**Item 4.      *Controls And Procedures***

 

**Evaluation of Disclosure Controlsand Procedures**

 

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 Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosures.

 

**Changes in Internal Control OverFinancial Reporting**

 

There have been no changes in theCompany’s internal control over financial reporting that occurred during theperiod covered by this Quarterly Report on Form 10-Q that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

**PART II. OTHER INFORMATION**

 

**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 anenvironment that involves numerous known and unknown risks and uncertainties.Our business, prospects, financial condition and operating results could bematerially adversely affected by any of these risks, as well as other risks notcurrently known to us or that we currently consider immaterial. The risksdescribed below highlight some of the factors that have affected, and in thefuture could affect our operations.*

 

***Our results of operationsdepend primarily on the level, timing and location of snowfall. As a result, adecline in snowfall levels in multiple regions for an extended time could causeour results 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-yearvariability of our business can cause our results of operations and financialcondition to be materially different from year-to-year; whereas the seasonalityof our business can cause our results of operations and financial condition tobe materially different from 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 variability ofour business, our results of operations, financial condition and ability to paydividends may suffer.

 

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***If economic conditions inthe United States continue to remain weak or deteriorate further, our resultsof operations, financial condition and ability to pay dividends may beadversely 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 andinstead repair their existing equipment, leading to a decrease in our sales ofnew equipment. Weakened economic conditions may also cause our end-users todelay their purchases of new light trucks. Because our end-users tend topurchase new snow and ice control equipment concurrent with their purchase ofnew light trucks, their delay in purchasing new light trucks can also result inthe deferral of their purchases of new snow and ice control equipment. Thedeferral of new equipment purchases during periods of weak economic conditionsmay negatively affect our results of operations, financial condition andability to pay dividends.

 

Weakened economic conditions mayalso cause our end-users to consider price more carefully in selecting new snowand ice control equipment. Historically, considerations of quality and servicehave outweighed considerations of price, but in a weak economy, price maybecome a more important factor. Any refocus away from quality in favor ofcheaper equipment 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 maintaingood relationships with our distributors, the loss or consolidation of ourdistributor base or the actions or inactions of our distributors could have anadverse effect on our results of operations and our ability to pay dividends.***

 

We depend on a network of 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 and serviceof our products at any time, and those distributors that primarily sell ourproducts may choose to sell competing products at any time. Further, difficulteconomic or other circumstances could cause any of our distributors todiscontinue 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 availablefinancing options for our end-users or distributors may adversely affect oursales 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 financing isunavailable on favorable terms or at all, our results of operations and abilityto pay dividends would be adversely affected.

 

***The price of steel, acommodity necessary to manufacture our products, is highly variable. If theprice 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 industryis highly cyclical in nature, and steel prices have been volatile in recentyears and may remain volatile in the future. Steel prices are influenced bynumerous factors beyond our control, including general economic conditionsdomestically and internationally, the availability of raw materials,competition, labor costs, 

 

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freightand transportation costs, production costs, import duties and other traderestrictions. After experiencing a downward trend in steel prices throughoutmost of 2009, steel prices may increase as a result of increased demand fromthe automobile and consumer durable sectors. If the price of steel increases,our variable costs may increase. We may not be able to mitigate these increasedcosts through the implementation of permanent price increases or temporaryinvoice surcharges, especially if economic conditions remain weak and ourdistributors and end-users become more price sensitive. If we are unable tosuccessfully mitigate such cost increases in the future, our gross marginscould decline.

 

***We depend on outsidesuppliers who may be unable to meet our volume and quality requirements, and wemay be unable to obtain alternative sources.***

 

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. Any discontinuationor interruption in the availability of quality products and components from oneor more of our suppliers may result in increased production costs, delays inthe delivery of our products and lost end-user sales, which could have anadverse 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 sufficient materialsto satisfy any sudden or prolonged surges in demand for our products. If wecannot satisfy demand for our products in a timely manner, our sales couldsuffer as distributors can cancel purchase orders without penalty untilshipment.

 

***We do not sell ourproducts under long-term purchase contracts, and sales of our products aresignificantly impacted by factors outside of our control; therefore, ourability to estimate demand is limited.***

 

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 demand couldresult in the procurement of excessive supplies, which could result inincreased inventory and associated carrying costs.

 

***If we are unable toenforce, maintain or continue to build our intellectual property portfolio, orif others invalidate our intellectual property rights, our competitive positionmay 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 withrespect to 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.

 

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***If we are unable todevelop new products or improve upon our existing products on a timely basis,it could have an adverse effect 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.Industry standards, end-user expectations or other products may emerge thatcould render one or more of our products less desirable or obsolete. If any ofthese events occur, it could cause decreases in sales, a failure to realizepremium pricing and an adverse effect on our business and financial condition.

 

***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 our products,which would affect our profitability or result in decreased sales and operatingincome. Additionally, saturation of the markets in which we compete or channelconflicts among our brands and shifts in consumer preferences may increasethese competitive pressures or may result in increased competition among ourdistributors and affect our sales and profitability. In addition, pricecompetition 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, and accordinglyrepresent our primary competitors for market share.

 

***We are subject to complexlaws and regulations, including environmental and safety regulations, that canadversely affect 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:

 

·                  applicable motor vehicle safety standards established bythe National Highway Traffic Safety Administration;

·                  reclamation and remediation and other environmentalprotection; and

·                  standards for workplace safety established by theOccupational Safety and Health Administration.

 

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:

 

·                  product liability claims;

·                  personal injuries;

·                  investigation and remediation of environmentalcontamination and other governmental sanctions such as fines and penalties; and

·                  other environmental 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.

 

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***Financial marketconditions have had a negative impact on the return on plan assets for ourpension plans, which may require additional funding and negatively impact ourcash 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$9 million. In 2009, contributions to our defined benefit pension plans wereapproximately $1.4 million. If plan assets continue to perform belowexpectations, future pension expense and funding obligations will increase,which would have a negative impact on our cash flows. Moreover, under thePension Protection Act of 2006, it is possible that continued losses of assetvalues may necessitate accelerated funding of our pension plans in the futureto meet minimum federal government requirements.

 

***The statements regardingour industry, market positions and market share in this report are based on ourmanagement’s estimates and assumptions. While we believe such statements arereasonable, 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 productliability claims, product quality issues, and other litigation from time totime that could adversely 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,our business and financial condition could suffer. Any losses that we maysuffer from any liability claims, and the effect that any product liabilitylitigation may have upon the reputation and marketability of our products, maydivert management’s attention from other matters and may have a negative impacton our business and operating results. Additionally, we could experience amaterial design or manufacturing failure in our products, a quality systemfailure or other safety issues, or heightened regulatory scrutiny that couldwarrant a recall of some of our products. A recall of some of our productscould also result in increased product liability claims. Any of these issuescould also result in loss of market share, reduced sales, and higher warrantyexpense.

 

***We are heavily dependenton our Chief Executive 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 couldadversely affect our operations, including our ability to perform ourobligations and pay dividends.***

 

As of September 30, 2010 wehad approximately $121.8 million of senior secured indebtedness and $23.0million of borrowing availability under our revolving credit facility. We mayalso be able to incur substantial indebtedness in the future, including seniorindebtedness, which may or may not be secured.

 

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

 

·                  wecould have difficulty satisfying our debt obligations, and if we fail to complywith these requirements, an event of default could result;

 

·                  we may be required to dedicate a substantial portion of ourcash flow from operations to required payments on indebtedness, therebyreducing the cash flow available to pay dividends or fund working capital,capital expenditures and other general corporate activities;

 

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·                  covenants relating to our indebtedness may restrict ourability to make dividends or distributions to our stockholders;

 

·                  covenants relating to our indebtedness may limit ourability to obtain additional financing for working capital, capital expendituresand other general corporate activities, which may limit our flexibility inplanning for, or reacting to, changes in our business and the industry in whichwe operate;

 

·                  we may be more vulnerable to general adverse economic andindustry conditions;

 

·                  we may be placed at a competitive disadvantage compared toour competitors with less debt; and

 

·                  we may have difficulty repaying or refinancing ourobligations under our senior credit facilities on their respective maturitydates.

 

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

 

Certain of our borrowings,including our term 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 creditfacilities impose restrictions on us, which may also prevent us fromcapitalizing on business opportunities and taking certain corporate actions.One of these facilities also includes minimum availability requirements, whichif unsatisfied, could result 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 orcontingent obligations;

 

·                  incur liens and engage in sale and leaseback transactions;

 

·                  make loans and investments in excess of agreed uponamounts;

 

·                  declare dividends, make payments or redeem or repurchasecapital stock in excess of agreed upon amounts and subject to certain otherlimitations;

 

·                  engage in mergers, acquisitions and other businesscombinations;

 

·                  prepay, redeem or purchase certain indebtedness or amend oralter the terms of our indebtedness;

 

·                  sell assets;

 

·                  transact with affiliates or our stockholders; and

 

·                  alter the business 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 our abilityto meet other obligations. Our ability to comply with the covenants containedin our senior credit facilities or in the agreements governing our futureindebtedness, and our ability to avoid liquidity events, may be affected byevents, 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

 

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covenants could result in a defaultunder our senior credit facilities, which could prevent us from payingdividends, borrowing additional amounts and using proceeds of our inventory andaccounts receivable, and also permit the lenders to accelerate the payment ofsuch debt. If any of our debt is accelerated or if a liquidity event (or eventof default) occurs that results in collateral proceeds being applied to reducesuch debt, we may not have sufficient funds available to repay such debt andour other obligations, in which case, our business could be halted and suchlenders could proceed against any collateral securing that debt. Further, ifthe lenders accelerate the payment of the indebtedness under our senior creditfacilities, our assets may not be sufficient to repay in full the indebtednessunder our senior credit facilities and our other indebtedness, if any. Wecannot assure you that these covenants will not adversely affect our ability tofinance our future operations or capital needs to pursue available businessopportunities or react to changes in our business and the industry in which weoperate.

 

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

 

As part of our lean manufacturingstrategy to lower our fixed costs, we closed our Johnson City, Tennesseemanufacturing facility in the third quarter ending September 30, 2010 andthereby reduced our manufacturing facilities from three to two. In connectionwith this closure, we relocated our Johnson City operations and equipment intoour remaining two facilities. We cannot assure you that we will realizecontemplated cost savings from the closure of this facility. In addition, theremay be risks associated with this closure for which we are unprepared, such aslabor and employment litigation, difficulties implementing a smooth transitionand the possibility that this closure leaves us with insufficient manufacturingcapacity. It is therefore possible that our business could be negativelyaffected by the closure of this facility.

 

***Our principal stockholdershold a significant portion of our common stock and may have different intereststhan us 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 andour charter documents could delay or prevent an acquisition of us, even if theacquisition would 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:

 

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

·                  the ability of our Board of Directors to issue preferred stockwith voting rights or with rights senior to those of our common stock withoutany further vote or action by the holders of our common stock;

·                  the division of our Board of Directors into three separate classesserving staggered three-year terms;

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

·                  the prohibition on our stockholders from acting by written consentand calling special meetings;

·                  the requirement that our stockholders provide advance notice whennominating our directors or proposing business to be considered by thestockholders at an annual meeting of stockholders; and

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

 

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.

 

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***If we are unable to assessfavorably the effectiveness of our internal control over financial reporting,or if our independent 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 requested improvements andreceiving a favorable attestation. If we cannot timely and favorably assess theeffectiveness of our internal control over financial reporting, or if ourindependent registered public accounting firm is unable to provide anunqualified attestation report on our internal control over financialreporting, investor confidence and our stock price could decline.

 

***Our dividend policy may limit ourability to pursue growth 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 ofEquity Securities and Use of Proceeds***

 

**Unregistered Sales of Equity Securities**

 

During the three months endedSeptember 30, 2010, the Company sold no securities that were notregistered under the Securities Act of 1933, as amended.

 

**Dividend Payment Restrictions**

 

The Company’s senior credit facilitiesinclude certain restrictions on its ability to pay dividends. The senior creditfacilities also restrict the Company’s subsidiaries from paying dividends andotherwise transferring assets to Douglas Dynamics, Inc. For additionaldetail regarding these restrictions, see Note 5 to the notes to theconsolidated financial statements.

 

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**Item 3.      *Defaults Upon SeniorSecurities***

 

None.

 

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

 

**Item 5.      *Other Information***

 

None.

 

**Item 6.      *Exhibits***

 

The following documents are filed asExhibits to this Quarterly Report on Form 10-Q:

 
| **Exhibit  Numbers** | ** ** | **Description**                                                                                                                                                                                                                                                                                               |
|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1                 |       | Douglas  Dynamics, Inc. 2010 Amended and Restated Stock Incentive Plan  (incorporated by reference to Exhibit 99.1 to the Company’s Registration  Statement on Form S-8 (Registration No. 333-169342) filed with the  Securities and Exchange Commission on September 13, 2010) |
|                 |       |                                                                                                                                                                                                                                                                                                          |
| 31.1*                |       | Certification of the  Company’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                 |
|                 |       |                                                                                                                                                                                                                                                                                                          |
| 31.2*                |       | Certification of the  Company’s Chief Financial Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                 |
|                 |       |                                                                                                                                                                                                                                                                                                          |
| 32.1*                |       | Certification of the  Company’s Chief Executive Officer and Chief Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                     |

 

----

*              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 |
|                          |                            | (Principal Financial Officer and  Authorized Signatory) |
| Dated:  November 8, 2010 |                            |   |

 

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**Exhibit Indexto Form 10-Q for the Period Ended September 30, 2010**

 
| **Exhibit  Numbers** | ** ** | **Description**                                                                                                                                                                                                                                                                                               |
|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1                 |       | Douglas  Dynamics, Inc. 2010 Amended and Restated Stock Incentive Plan  (incorporated by reference to Exhibit 99.1 to the Company’s Registration  Statement on Form S-8 (Registration No. 333-169342) filed with the  Securities and Exchange Commission on September 13, 2010) |
|                 |       |                                                                                                                                                                                                                                                                                                          |
| 31.1*                |       | Certification of the  Company’s Chief Executive Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                 |
|                 |       |                                                                                                                                                                                                                                                                                                          |
| 31.2*                |       | Certification of the  Company’s Chief Financial Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                 |
|                 |       |                                                                                                                                                                                                                                                                                                          |
| 32.1*                |       | Certification of the  Company’s Chief Executive Officer and Chief Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                     |

 

----

*              Filed herewith.

 

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