Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

 

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended October 31, 2008

Commission File No. 000-1409171

 

TITAN MACHINERY INC.

(Exact name of registrant as specified in its charter)

 

 

4876 Rocking Horse Circle
Fargo, ND 58104-6049

(Address of Principal Executive Offices)

 

Registrant’s telephone number (701) 356-0130

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES  x    NO  o

 

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

 

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

 

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

 

The number of shares outstanding of the registrant’s common stock as of December 1, 2008 was: Common Stock, $0.00001 par value, 17,646,483 shares.

 

 

Table of Contents

 

TITAN MACHINERY INC.

QUARTERLY REPORT ON FORM 10-Q

 

Table of Contents

 

				Page No.
PART I.	FINANCIAL INFORMATION
ITEM 1.		FINANCIAL STATEMENTS
		Consolidated Balance Sheets as of October 31, 2008 and January 31, 2008
		Consolidated Statements of Operations for the three and nine months ended October 31, 2008 and 2007
		Consolidated Statements of Stockholders’ Equity for the fiscal year ended January 31, 2008 and nine months ended October 31, 2008
		Consolidated Statements of Cash Flows for the nine months ended October 31, 2008 and 2007
		Notes to Consolidated Financial Statements
ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4.		CONTROLS AND PROCEDURES
PART II.	OTHER INFORMATION
ITEM 1.		LEGAL PROCEEDINGS
ITEM 1A.		RISK FACTORS
ITEM 2.		UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM 3.		DEFAULTS UPON SENIOR SECURITIES
ITEM 4.		SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5.		OTHER INFORMATION
ITEM 6.		EXHIBITS
Signatures
Exhibit Index

 

Table of Contents

 

PART I. – FINANCIAL INFORMATION

 

ITEM 1.          FINANCIAL STATEMENTS

 

TITAN MACHINERY INC.

CONSOLIDATED BALANCE SHEETS

 

		October 31,			January 31,
		2008			2008
		(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	41,861,426		$	42,802,505
U.S. treasury bills		49,903,760			—
Total cash, cash equivalents and U.S. treasury bills		91,765,186			42,802,505
Receivables, net		20,685,208			22,061,275
Inventories		234,688,943			145,766,866
Prepaid expenses		365,617			215,312
Income taxes receivable		—			1,074,216
Deferred income taxes		1,301,000			1,027,000
Total current assets		348,805,954			212,947,174
INTANGIBLES AND OTHER ASSETS
Parts inventory in excess of amounts expected to be sold currently		2,080,000			1,480,000
Goodwill		10,166,051			8,271,133
Intangible assets, net of accumulated amortization		418,965			337,242
Other		397,249			311,581
		13,062,265			10,399,956
PROPERTY AND EQUIPMENT, net of accumulated depreciation		26,257,764			16,022,336
		$	388,125,983		$	239,369,466
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable		$	14,596,431		$	9,244,064
Floorplan notes payable		171,375,535			105,847,648
Current maturities of long-term debt		1,109,274			5,653,840
Customer deposits		11,155,883			19,309,533
Accrued expenses		8,060,286			6,137,842
Income taxes payable		2,687,261			—
Total current liabilities		208,984,670			146,192,927
LONG-TERM LIABILITIES
Long-term debt, less current maturities		2,707,158			13,082,795
Deferred income taxes		2,777,000			1,865,000
Other long term liabilities		3,293,047			811,689
		8,777,205			15,759,484
SUBORDINATED DEBENTURES		—			1,300,000
STOCKHOLDERS’ EQUITY
Common stock, par value $.00001 per share, authorized - 25,000,000 shares; issued and outstanding - 17,639,722 at October 31, 2008 and 13,440,654, at January 31, 2008		176			134
Additional paid-in-capital		137,522,187			58,179,695
Retained earnings		32,841,745			17,937,226
		170,364,108			76,117,055
		$	388,125,983		$	239,369,466

 

See Notes to Consolidated Financial Statements

 

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TITAN MACHINERY INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 

		Three Months Ended October 31,						Nine Months Ended October 31,
		2008			2007			2008			2007
REVENUE
Equipment		$	167,950,651		$	103,371,870		$	386,704,792		$	225,854,237
Parts		29,794,106			18,384,291			74,910,572			45,560,354
Service		12,893,719			7,897,554			32,625,688			20,938,351
Other, including trucking and rental		3,321,691			2,517,573			7,206,523			5,456,924
TOTAL REVENUE		213,960,167			132,171,288			501,447,575			297,809,866
COST OF REVENUE
Equipment		148,677,637			93,799,249			343,581,874			204,331,911
Parts		20,638,082			13,651,728			53,121,067			33,667,873
Service		5,018,963			2,843,191			12,343,742			7,730,777
Other, including trucking and rental		2,279,329			1,492,984			5,026,585			3,534,342
TOTAL COST OF REVENUE		176,614,011			111,787,152			414,073,268			249,264,903
GROSS PROFIT		37,346,156			20,384,136			87,374,307			48,544,963
OPERATING EXPENSES		23,153,447			14,380,458			60,805,415			35,832,842
INCOME FROM OPERATIONS		14,192,709			6,003,678			26,568,892			12,712,121
OTHER INCOME (EXPENSE)
Interest and other income		496,656			119,829			1,257,434			204,464
Floorplan interest expense		(782,701		)	(973,696		)	(2,082,167		)	(2,805,050		)
Subordinated debt interest expense		—			(445,440		)	(20,917		)	(1,324,432		)
Interest expense other		(46,763		)	(245,024		)	(568,723		)	(631,296		)
INCOME BEFORE INCOME TAXES		13,859,901			4,459,347			25,154,519			8,155,807
PROVISION FOR INCOME TAXES		(5,675,000		)	(1,745,000		)	(10,250,000		)	(3,212,663		)
NET INCOME		$	8,184,901		$	2,714,347		$	14,904,519		$	4,943,144
ADJUSTMENTS TO INCOME:
Amortization of syndication fees		—			(5,296		)	—			(15,889		)
Unpaid accumulated preferred dividends		—			(25,594		)	—			(76,782		)
INCOME AVAILABLE TO COMMON STOCKHOLDERS		$	8,184,901		$	2,683,457		$	14,904,519		$	4,850,473
EARNINGS PER SHARE - NOTE 1
EARNINGS PER SHARE - BASIC		$	0.47		$	0.62		$	0.94		$	1.12
EARNINGS PER SHARE - DILUTED		$	0.45		$	0.36		$	0.91		$	0.72
WEIGHTED AVERAGE SHARES - BASIC		17,553,416			4,345,710			15,864,415			4,345,391
WEIGHTED AVERAGE SHARES - DILUTED		18,041,197			7,675,831			16,373,629			7,238,714

 

See Notes to Consolidated Financial Statements

 

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TITAN MACHINERY INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

 

		Common Stock					Additional
		Shares					Paid-In			Retained
		Outstanding		Amount			Capital			Earnings			Total
BALANCE, JANUARY 31, 2007		4,344,753		$	43		$	514,864		$	12,863,630		$	13,378,537
Common stock issued in initial public offering		5,442,395		55			41,793,588			—			41,793,643
Issuance of shares for stock acquisition		235,294		2			1,999,997			—			1,999,999
Issuance of shares for conversion of debt/conversion of redeemable securities/exercise of warrants		3,339,792		33			13,729,791			—			13,729,824
Stock based compensation expense		78,420		1			141,455			—			141,456
Unpaid accumulated dividends		—		—			—			(87,791		)	(87,791		)
Amortization of syndication fees		—		—			—			(51,311		)	(51,311		)
Net income		—		—			—			5,212,698			5,212,698
BALANCE, JANUARY 31, 2008		13,440,654		134			58,179,695			17,937,226			76,117,055
Common stock issued in follow-on offering		4,180,000		42			78,814,792			—			78,814,834
Common stock issued on grant of restricted stock and exercise of stock options		19,068		—			40,004			—			40,004
Stock based compensation expense		—		—			487,696			—			487,696
Net income		—		—			—			14,904,519			14,904,519
BALANCE, OCTOBER 31, 2008		17,639,722		$	176		$	137,522,187		$	32,841,745		$	170,364,108

 

See Notes to Consolidated Financial Statements

 

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TITAN MACHINERY INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

		Nine Months Ended October 31,
		2008			2007
OPERATING ACTIVITIES
Net income		$	14,904,519		$	4,943,144
Adjustments to reconcile net income to net cash from operations
Depreciation		2,770,439			1,524,460
Amortization		168,277			89,370
Gain on sale of equipment		(35,894		)	(37,377		)
Deferred income taxes		68,016			—
Stock based compensation expense		487,696			122,355
Other		(55,668		)	—
Changes in assets and liabilities, net of purchase of equipment dealerships assets and assumption of liabilities
Receivables		2,631,143			(7,773,134		)
Inventories		(14,066,176		)	(7,008,344		)
Prepaid expenses		(150,305		)	(399,922		)
Net change in other assets		(30,000		)	8,699
Floorplan notes payable		4,637,363			4,145,203
Accounts payable		5,002,779			2,484,048
Other long-term liabilities		2,481,358			283,109
Customer deposits		(8,545,082		)	4,930,354
Accrued expenses		1,879,306			1,565,175
Income taxes		3,761,477			445,529
NET CASH PROVIDED BY OPERATING ACTIVITIES		15,909,248			5,322,669
INVESTING ACTIVITIES
Purchase of U.S. treasury bills, net of sales		(49,903,760		)	—
Property and equipment purchases		(6,072,004		)	(5,527,513		)
Net proceeds from sale of equipment		288,106			103,174
Payment for intangible asset		—			(216,819		)
Purchase of equipment dealerships, net of cash purchased		(26,396,064		)	(4,950,478		)
NET CASH USED FOR INVESTING ACTIVITIES		(82,083,722		)	(10,591,636		)
FINANCING ACTIVITIES
Proceeds from follow-on offering of common stock net of underwriting discount of $4,389,000 and other direct costs of $396,166		78,814,834			—
Net change in non-manufacturer floorplan payable		3,602,661			(3,462,099		)
Proceeds from long-term debt borrowings and subordinated debentures		691,431			9,115,964
Principal payments on long-term debt and subordinated debentures		(17,915,535		)	(4,183,588		)
Other		40,004			24,264
NET CASH PROVIDED BY FINANCING ACTIVITIES		65,233,395			1,494,541
NET CHANGE IN CASH AND CASH EQUIVALENTS		(941,079		)	(3,774,426		)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		42,802,505			7,572,000
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	41,861,426		$	3,797,574

 

See Notes to Consolidated Financial Statements

 

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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

		Nine Months Ended October 31,
		2008			2007
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period
Income taxes, net of refunds		$	6,178,000		$	2,590,798
Interest		2,763,160			4,806,047
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
Dividends on preferred redeemable stock charged to retained earnings		$	—		$	76,782
Property and equipment purchased with long-term debt		$	268,709		$	—
Acquisition of equipment dealership assets in exchange for cash and assumption of liabilities including purchase accounting adjustments on prior acquisitions
Accounts receivable		$	(1,255,076	)	$	(1,020,316	)
Inventories		(25,644,469		)	(14,847,239		)
Property and equipment		(6,917,366		)	(1,398,148		)
Intangible asset		(250,000		)	—
Goodwill		(1,894,918		)	(2,882,770		)
Accounts payable		349,588			2,858,131
Floorplan notes payable		7,476,431			8,196,113
Customer deposits		391,432			—
Accrued expenses		43,138			347,110
Income taxes payable		242,254			176,336
Long term debt		735,192			1,000,000
Deferred income taxes, net		327,730			193,807
Issuance of preferred stock		—			2,426,498
Cash paid for dealerships		$	(26,396,064	)	$	(4,950,478	)

 

See Notes to Consolidated Financial Statements

 

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TITAN MACHINERY INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1 -  BUSINESS ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The unaudited financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for interim reporting. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine-month period ended October 31, 2008 are not necessarily indicative of the results that may be expected for the year ended January 31, 2009.  The information contained in the balance sheet as of January 31, 2008 was derived from the Company’s audited financial statements for the year then ended.

 

Nature of Business

 

Titan Machinery Inc. (the “Company”) is engaged in the retail sale, service and rental of agricultural and industrial machinery through stores in North Dakota, South Dakota, Minnesota, Nebraska and Iowa.

 

Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Transportation Solutions, LLC. All significant accounts, transactions and profits between the consolidated companies have been eliminated in consolidation.

 

Cash, Cash Equivalents and U.S. Treasury Bills

 

The Company considers all highly liquid investments with original maturities of three months or less on their acquisition date to be cash equivalents. The Company accounts for investments with original maturities greater than three months, but less than one year, at the date of purchase as short-term marketable securities.

 

As of October 31, 2008 short-term marketable securities consist entirely of U.S. Treasury Bills. These investments are classified as held to maturity as the Company has both the positive intent and ability to hold to maturity. The investments are carried at amortized cost, which due to the short-term nature of the investments, approximates fair value.

 

Recently Issued Accounting Pronouncements

 

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS 157”).  This standard defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This standard applies under other accounting pronouncements that require or permit fair value measurements, but does not require any new fair value measurements. The Company adopted SFAS 157 effective February 1, 2008. The adoption of SFAS 157 for financial assets and liabilities held by the Company did not have a material effect on the Company’s financial statements or notes thereto.

 

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In February 2008, the FASB issued FSP FAS 157-2, Effective Date of FASB Statement No. 157 (“FSP FAS 157-2”), which permits a one year deferral of the application of SFAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company will adopt SFAS 157 for non-financial assets and non-financial liabilities on February 1, 2009 and does not expect the provisions to have a material effect on its results of operations, financial position or cash flows.

 

In October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for that Asset is Not Active (“FSP FAS 157-3”), which clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active.  FSP FAS 157-3  was effective upon issuance.  Its adoption did not have a material effect on the Company’s consolidated financial statements.

 

In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”).  SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities.  The Company has elected not to apply the fair value option to the specified financial assets and liabilities, and accordingly, the adoption of SFAS No. 159 had no financial statement impact.

 

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations (“SFAS 141R”).  SFAS 141R provides additional guidance on improving the relevance, representational faithfulness, and comparability of the financial information that a reporting entity provides in its financial reports about a business combination and its effects.  SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  The Company is in the process of evaluating the effect that the adoption of this standard will have on the Company’s financial statements.

 

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (“SFAS 160”).  SFAS 160 applies to all entities that prepare consolidated financial statements and have an outstanding noncontrolling interest in one or more subsidiaries.  SFAS 160 amends Accounting Research Bulletin No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.  SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.   The Company is in the process of evaluating the effect that the adoption of this standard will have on the Company’s financial statements.

 

On December 21, 2007 the SEC staff issued Staff Accounting Bulletin No. 110 (“SAB 110”), which, effective January 1, 2008, amends and replaces SAB 107, Share-Based Payment. SAB 110 expresses the views of the SEC staff regarding the use of a “simplified” method in developing the expected life assumption in accordance with FASB Statement No. 123(R), Share-Based Payment. The use of the “simplified” method was scheduled to expire on December 31, 2007. SAB 110 extends the use of the “simplified” method in certain situations. The SEC staff does not expect the “simplified” method to be used when sufficient information regarding exercise behavior, such as historical exercise data or exercise information from external sources, becomes available.  The Company plans to track and capture employee exercise behavior in the future as a basis for our valuation assumptions.  The Company currently uses simplified estimates due to the limited number of options exercised.

 

Earnings Per Share

 

Basic earnings per share were computed by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding during the respective periods.  Accumulated preferred dividends and amortization of syndication fees were subtracted from net income to arrive at income available to common stockholders.  Nonvested restricted stock is excluded from the calculation of basic weighted-average shares outstanding.

 

Diluted earnings per share were computed by dividing income available to common stockholders plus assumed conversions by the weighted-average common shares outstanding after adjusting for potential dilution related to the conversion of all dilutive securities into common stock.  All potentially dilutive securities were included in the computation of diluted earnings per share.

 

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The components of basic earnings per share are as follows:

 

		Three Months Ended October 31,						Nine Months Ended October 31,
Basic - Earnings Per Share		2008			2007			2008			2007
Net Income		$	8,184,901		$	2,714,347		$	14,904,519		$	4,943,144
Less: Amortization of syndication fees		—			(5,296		)	—			(15,889		)
Less: Preferred stock dividends - unpaid		—			(25,594		)	—			(76,782		)
Income available to common stockholders		$	8,184,901		$	2,683,457		$	14,904,519		$	4,850,473
Basic weighted-average shares outstanding		17,553,416			4,345,710			15,864,415			4,345,391
Basic - Earnings Per Share		$	0.47		$	0.62		$	0.94		$	1.12

 

The components of diluted earnings per share are as follows:

 

		Three Months Ended October 31,						Nine Months Ended October 31,
Diluted - Earnings Per Share		2008			2007			2008			2007
Income available to common stockholders		$	8,184,901		$	2,683,457		$	14,904,519		$	4,850,473
Plus: Income impact of assumed conversions
Amortization of syndication fees		—			5,296			—			15,889
Preferred stock dividends - unpaid		—			25,594			—			76,782
Interest on convertible debentures, net of tax effect		—			80,581			—			241,743
Income available to common stockholders plus assumed conversions		$	8,184,901		$	2,794,928		$	14,904,519		$	5,184,887
Diluted weighted-average shares outstanding:
Basic weighted-average shares outstanding		17,553,416			4,345,710			15,864,415			4,345,391
Plus: Incremental shares from assumed conversions
Convertible debentures		—			2,308,648			—			2,107,327
Convertible preferred shares		—			790,206			—			574,517
Restricted Stock		86,306			9,573			85,522			10,847
Warrants		110,530			168,443			112,210			153,720
Options		290,945			53,251			311,482			46,912
Diluted weighted-average shares outstanding		18,041,197			7,675,831			16,373,629			7,238,714
Diluted - EPS		$	0.45		$	0.36		$	0.91		$	0.72

 

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NOTE 2 -  INVENTORIES

 

		October 31, 2008			January 31, 2008
New equipment		$	151,769,202		$	78,409,999
Used equipment		48,842,337			44,478,010
Parts, tires and attachments		30,397,325			20,462,680
Work in process		3,680,079			2,416,177
		$	234,688,943		$	145,766,866

 

In addition to the above amounts, the Company has estimated that a portion of its parts inventory will not be sold in the next operating cycle. Accordingly, these balances have been classified as noncurrent assets.

 

NOTE 3 -  LINES OF CREDIT/FLOORPLAN NOTES PAYABLE

 

Operating Line of Credit

 

The Company had no amount outstanding on the line of credit with Bremer Bank National Association (“Bremer Bank”) at October 31, 2008 and January 31, 2008. The agreement provides for available borrowings of $25,000,000 and carries a variable interest rate of prime minus .25%, and has a maturity date of August 1, 2009. The agreement contains certain financial covenants which impose minimum levels of current ratio, debt service coverage, and inventory turnover ratio and a maximum level of debt to tangible net worth ratio. As of October 31, 2008, the Company was in compliance with all of these financial covenants and had $24,750,000 in available borrowings under this line of credit. The line is secured by substantially all assets of the Company.

 

On August 1, 2008, Bremer Bank issued the Company a standby letter of credit in the amount of $250,000 to our insurance carrier for deductible retention. This reduced the amount of borrowings available on its line of credit by $250,000. This agreement expires on August 1, 2009.

 

Floorplan Lines of Credit

 

The Company has floorplan lines of credit for equipment purchases totaling $313,625,000 with various manufacturers and a bank, including a $300,000,000 Wholesale Floorplan Credit Facility with CNH Capital America LLC (“CNH”). As of October 31, 2008, the Company had approximately $149,679,000 in available borrowings remaining under these lines of credit. Under covenants of the CNH credit facility, the Company has agreed, among other things, to maintain various financial ratio levels and to submit certain financial information. As of October 31, 2008, the Company was in compliance with all floorplan financial covenants.

 

Floorplan notes payable relating to these credit facilities totaled approximately $163,946,000 of the total floorplan notes payable balance of $171,375,535 outstanding as of October 31, 2008 and $98,543,886 of the total floorplan notes payable balance of $105,847,648 outstanding as of January 31, 2008. These floorplan notes carried various interest rates ranging from 1.35 to 10.35% as of October 31, 2008 and 6.2 to 9.5% as of January 31, 2008, and are secured by substantially all assets of the Company. Repayment terms vary by individual notes, but generally payments are made from sales proceeds or rental revenue from the related inventories.

 

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NOTE 4 -  LONG-TERM DEBT

 

		October 31, 2008			January 31, 2008
Variable rate notes payable to CNH Capital America LLC (CNH), variable rates at prime to prime plus 1.6%, varying monthly installment payments maturing August 2012, secured by rental fleet equipment		$	1,089,929		$	1,952,440
Non-interest bearing notes to CNH, in varying monthly installments, various maturity dates through February 2010, secured by parts		534,242			1,162,146
Fixed rate notes payable to Ford Motor Credit and GMAC, (5.99% to 9.85%), due in monthly installments including interest and various maturity dates through September 2013, secured by vehicles		497,821			291,428
Fixed rate note to Avoca Implement and Greenfield Implement 10.0%, monthly payments of $18,920, matures January 2011, secured by equipment		641,989			759,080
Fixed rate note to Textron Financial, 7.09%, monthly payments of $4,969, matures January 2018, secured by a company asset		533,742			549,583
Other, 6.5% - 7.25%, various maturity dates through January 2015, secured by equipment		518,709			—
Notes paid in full during nine month period ended October 31, 2008		—			14,021,958
		3,816,432			18,736,635
Less current maturities		(1,109,274		)	(5,653,840		)
		$	2,707,158		$	13,082,795

 

Long-term debt maturities are as follows:

 

12 Months Ending October 31,		Amount
2009		$	1,109,274
2010		695,740
2011		815,139
2012		572,357
2013		140,900
Thereafter		483,022
		$	3,816,432

 

NOTE 5 -  SUBORDINATED DEBENTURES

 

During the first quarter of the current fiscal year the Company repaid all $1,300,000 subordinated debentures that were outstanding as of January 31, 2008.

 

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NOTE 6 -  STOCK WARRANTS, STOCK OPTIONS AND RESTRICTED STOCK

 

Common Stock Warrants

 

In April 2003, the Company issued stock warrants to Cherry Tree Securities, LLC, whose chairman is a director of the Company, for 11,917 shares of common stock at an exercise price of $3.00 per share. The warrants terminate on April 7, 2013.  In August 2004, the Company issued an additional 6,071 stock warrants to Cherry Tree Securities at an exercise price of $3.50 per share.  These warrants terminate on July 1, 2014.

 

In addition, the Company issued stock warrants in April 2005 to an outside party for 115,650 shares of common stock at an exercise price of $3.50 per share. These warrants expire on April 7, 2013.

 

The following is a summary of outstanding stock purchase warrants as of October 31, 2008:

 

Issue Date		Number		Exercise Price			Fair Value Assigned			Purpose of Issuance
April 2003		11,917		$	3.00		$	11,200		Facilitate preferred stock issuance
August 2004		6,071		$	3.50		$	6,600		Facilitate preferred stock issuance
April 2005		115,650		$	3.50		$	126,000		Subordinated debt financing transaction
		133,638

 

Outstanding stock warrants are valued using the Black-Scholes option pricing model. Assumptions used to value the warrants are similar to those used in valuing the stock options as described below. Warrants issued in conjunction with a debt offering are valued and classified as Additional Paid-In Capital per Accounting Principles Board No. 14 Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants.

 

Stock Award Plans

 

The Company implemented the 2005 Equity Incentive Plan, a stock-based compensation plan (the “Plan”), during the year ended January 31, 2006. In August 2007, the Plan was amended to increase the number of shares available under the Plan from 500,000 to 1,000,000 shares. The purpose of the Plan is to provide incentive compensation to participants for services that have been or will be performed for continuing as employees or members of the Board of Directors of the Company. Under the Plan, the Company may grant incentive stock options, non-qualified stock options and restricted stock for up to 1,000,000 shares of common stock under all forms of awards. The Company accounts for stock options and restricted stock using the fair value method under SFAS 123(R). Shares issued for stock-based awards may be either authorized but unissued shares, or shares of treasury stock acquired in the open market.

 

Compensation cost charged to operations under the equity incentive plan was $487,696 for the nine months ended October 31, 2008 and $122,355 for the nine months ended October 31, 2007. The income tax benefit recognized from all stock based compensation arrangements was $198,700 for the nine months ended October 31, 2008 and $47,800 for the nine months ended October 31, 2007.

 

Stock Options

 

The Company grants stock options as part of its long-term incentive compensation to employees and members of the Board of Directors of the Company. Stock options vest over a period of four to six years for employees and immediately for members of the Board of Directors and have contractual terms of five to ten years.

 

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