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 April 30, 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. (Check one):

 

 

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 June 1, 2008 was: Common Stock, $0.00001 par value, 17,632,184 shares.

 

 

TITAN MACHINERY INC.

QUARTERLY REPORT ON FORM 10-Q

 

Table of Contents

 

PART I.			FINANCIAL INFORMATION
	ITEM 1.			FINANCIAL STATEMENTS
				Consolidated Balance Sheets as of April 30, 2008 and January 31, 2008
				Consolidated Statements of Operations for the three months ended April 30, 2008 and 2007
				Consolidated Statements of Cash Flows for the three months ended April 30, 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

 

 

PART I. – FINANCIAL INFORMATION

 

ITEM 1.     FINANCIAL STATEMENTS

 

TITAN MACHINERY INC.

CONSOLIDATED BALANCE SHEETS

 

		April 30,			January 31,
		2008			2008
		(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	41,968,933		$	42,802,505
Receivables, net		28,170,302			22,061,275
Inventories		140,655,034			145,766,866
Prepaid expenses		341,271			215,312
Income taxes receivable		—			1,074,216
Deferred income taxes		1,068,000			1,027,000
Total current assets		212,203,540			212,947,174
INTANGIBLES AND OTHER ASSETS
Parts inventory in excess of amounts expected to be sold currently		1,780,000			1,480,000
Goodwill		8,478,554			8,271,133
Intangible assets, net of accumulated amortization		317,570			337,242
Other		330,949			311,581
		10,907,073			10,399,956
PROPERTY AND EQUIPMENT, net of accumulated depreciation		16,903,567			16,022,336
		$	240,014,180		$	239,369,466
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable		$	13,789,144		$	9,244,064
Floorplan notes payable		96,773,485			105,847,648
Current maturities of long-term debt		3,465,961			5,653,840
Customer deposits		25,735,043			19,309,533
Accrued expenses		5,438,104			6,137,842
Income taxes payable		1,240,533			—
Total current liabilities		146,442,270			146,192,927
LONG-TERM LIABILITIES
Long-term debt, less current maturities		10,519,986			13,082,795
Deferred income taxes		1,897,000			1,865,000
Other long term liabilities		1,513,943			811,689
		13,930,929			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 - 13,449,880 at April 30, 2008 and 13,440,654 at January 31, 2008		134			134
Additional paid-in-capital		58,316,496			58,179,695
Retained earnings		21,324,351			17,937,226
		79,640,981			76,117,055
		$	240,014,180		$	239,369,466

 

See Notes to Consolidated Financial Statements

 

1

 

TITAN MACHINERY INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 

		Three Months Ended April 30,
		2008			2007
					(Restated)
REVENUE
Equipment		$	120,913,483		$	61,102,629
Parts		21,504,016			12,324,957
Service		8,944,228			5,393,335
Other, including trucking and rental		1,220,185			1,005,789
TOTAL REVENUE		152,581,912			79,826,710
COST OF REVENUE
Equipment		107,917,916			54,889,589
Parts		15,793,709			9,149,679
Service		3,417,730			2,217,923
Other, including trucking and rental		853,207			750,750
TOTAL COST OF REVENUE		127,982,562			67,007,941
GROSS PROFIT		24,599,350			12,818,769
OPERATING EXPENSES		18,181,942			10,046,741
INCOME FROM OPERATIONS		6,417,408			2,772,028
OTHER INCOME (EXPENSE)
Interest and other income		310,374			13,658
Floorplan interest expense		(721,589		)	(879,331		)
Subordinated debt interest expense		(20,917		)	(409,118		)
Interest expense other		(292,149		)	(246,280		)
INCOME BEFORE INCOME TAXES		5,693,127			1,250,957
PROVISION FOR INCOME TAXES		(2,306,000		)	(478,663		)
NET INCOME		$	3,387,127		$	772,294
ADJUSTMENTS TO INCOME:
Amortization of syndication fees		—			(5,296		)
Unpaid accumulated preferred dividends		—			(25,594		)
INCOME AVAILABLE TO COMMON STOCKHOLDERS		$	3,387,127		$	741,404
EARNINGS PER SHARE - BASIC		$	0.25		$	0.17
EARNINGS PER SHARE - DILUTED		$	0.24		$	0.12
WEIGHTED AVERAGE SHARES - BASIC		13,449,179			4,344,753
WEIGHTED AVERAGE SHARES - DILUTED		13,854,738			6,967,837

 

See Notes to Consolidated Financial Statements

 

2

 

TITAN MACHINERY INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

		Three Months Ended April 30,
		2008			2007
					(Restated)
OPERATING ACTIVITIES
Net income		$	3,387,127		$	772,294
Adjustments to reconcile net income to net cash from operations
Depreciation		833,881			523,304
Amortization		19,672			26,133
Gain on sale of equipment		(15,825		)	—
Deferred income taxes		(9,000		)	—
Net change in other assets		(19,368		)	3,920
Stock based compensation expense		136,800			—
Changes in assets and liabilities, net of purchase of agricultural dealerships assets and assumption of liabilities
Receivables		(6,109,027		)	1,864,399
Inventories		(1,532,498		)	530,474
Prepaid expenses		(125,959		)	(110,166		)
Floorplan notes payable		783,007			(500,101		)
Accounts payable		4,545,080			2,126,946
Other long-term liabilities		702,254			—
Customer deposits		6,252,490			(2,086,882		)
Accrued expenses		(699,738		)	(778,391		)
Income taxes		2,314,749			(77,225		)
NET CASH FROM OPERATING ACTIVITIES		10,463,645			2,294,705
INVESTING ACTIVITIES
Property and equipment purchases		(1,384,174		)	(851,586		)
Net proceeds from sale of equipment		157,485			—
Purchase of equipment dealerships, net of cash purchased		(3,940,380		)	(5,126,577		)
NET CASH USED FOR INVESTING ACTIVITIES		(5,167,069		)	(5,978,163		)
FINANCING ACTIVITIES
Net change in non-manufacturer floorplan payable		(79,461		)	(2,151,506		)
Proceeds from long-term debt borrowings and subordinated debentures		58,013			1,869,491
Principal payments on long-term debt and subordinated debentures		(6,108,700		)	(831,967		)
Net change in subordinated debt interest accrual		—			(84,161		)
NET CASH USED FOR FINANCING ACTIVITIES		(6,130,148		)	(1,198,143		)
NET CHANGE IN CASH AND CASH EQUIVALENTS		(833,572		)	(4,881,601		)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		42,802,505			7,572,000
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	41,968,933		$	2,690,399

 

See Notes to Consolidated Financial Statements

 

3

 

		Three Months Ended April 30,
		2008			2007
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period
Income taxes, net of refunds		$	—		$	551,000
Interest		1,054,398			1,601,319
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
Dividends on preferred redeemable stock charged to retained earnings		$	—		$	25,594
Acquisition of equipment dealership assets in exchange for cash and assumption of liabilities including purchase accounting adjustments on prior acquisitions
Accounts receivable		$	—		$	(112,788	)
Inventories		(3,433,379		)	(8,107,415		)
Property and equipment		(472,600		)	(772,685		)
Goodwill		(207,421		)	(2,500,000		)
Floorplan notes payable		—			3,148,704
Accounts payable		—			1,255,932
Customer deposits		173,020			130,000
Long term debt		—			1,000,000
Accrued expenses		—			831,675
Cash paid for dealerships		$	(3,940,380	)	$	(5,126,577	)

 

See Notes to Consolidated Financial Statements

 

4

 

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 three month period ended April 30, 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.

 

Recently Issued Accounting Pronouncements

 

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of 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.  SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, which is the year beginning February 1, 2008 for the Company.  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.

 

In February 2008, the FASB issued FSP FAS 157-2, Effective Date of FASB Statement No. 157 (“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 157-2 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 February 2007, the FASB issued SFAS No. 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

 

5

 

different measurement attributes for similar types of assets and liabilities.  SFAS 159 is effective for fiscal years beginning after November 15, 2007.  The Company has elected not to apply the fair value option to the specified financial assets and liabilities, and accordingly, the adoption of SFAS 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 as no options have yet been 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 year.  Accumulated preferred dividends and amortization of syndication fees were subtracted from net income to arrive at income available to common stockholders.

 

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.

 

The components of basic earnings per share are as follows:

 

		Three Months Ended April 30,
Basic - Earnings Per Share		2008			2007
Net Income		$	3,387,127		$	772,294
Less: Amortization of syndication fees		—			(5,296		)
Less: Preferred stock dividends - unpaid		—			(25,594		)
Income available to common stockholders		$	3,387,127		$	741,404
Basic weighted-average shares outstanding		13,449,179			4,344,753
Basic - Earnings Per Share		$	0.25		$	0.17

 

6

 

The components of diluted earnings per share are as follows:

 

		Three Months Ended April 30,
Diluted - Earnings Per Share		2008			2007
Income available to common stockholders		$	3,387,127		$	741,404
Plus: Income impact of assumed conversions Preferred stock dividends - unpaid		—			25,594
Preferred stock - amortization of syndication fees		—			5,296
Interest on convertible debentures net of tax effect		—			80,581
Income available to common stockholders plus assumed conversions		$	3,387,127		$	852,875
Diluted weighted-average shares outstanding:
Basic weighted-average shares outstanding		13,449,179			4,344,753
Plus: Incremental shares from assumed conversions
Convertible debentures		—			2,006,667
Convertible preferred shares		—			466,673
Warrants		109,394			116,910
Options		296,165			32,834
Diluted weighted-average shares outstanding		13,854,738			6,967,837
Diluted - EPS		$	0.24		$	0.12

 

NOTE 2 -  INVENTORIES

 

		April 30,			January 31,
		2008			2008
New equipment		$	76,514,001		$	78,409,999
Used equipment		37,637,323			44,478,010
Parts, tires and attachments		23,612,910			20,462,680
Work in process		2,890,800			2,416,177
		$	140,655,034		$	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 -  LINE OF CREDIT

 

The Company had no amount outstanding on the line of credit with Bremer Bank National Association at April 30, 2008 and January 31, 2008. The agreement provides for available borrowings of $12,000,000 and carries a variable interest rate of prime minus .25% (4.75% at April 30, 2008) with monthly interest payments due, and has a maturity date of August 1, 2008. The line is secured by substantially all assets of the Company and a personal guarantee by our Chief Executive Officer.

 

7

 

NOTE 4 -  LONG TERM DEBT

 

		April 30,			January 31,
		2008			2008
Fixed rate note payable to Bremer Bank, 8.0% interest rate, Monthly payments of $162,000 including interest, to August 2012. Secured by substantially all assets and a personal guarantee by the Company’s Chief Executive Officer		$	7,113,458		$	7,450,998
Fixed rate note payable to Bremer Bank, 8.0% interest rate. Monthly payments of $40,000 to December 2012. Secured by substantially all assets and a personal guarantee by the Company’s Chief Executive Officer		1,883,401			1,925,326
Variable rate notes payable to CNH Capital America LLC (CNH), variable rates at prime plus 0.3% (5.3% at April 30, 2008).Total monthly installment payments of $28,310, maturing August 2012. Secured by rental fleet equipment.		1,259,788			1,952,440
Non-interest bearing note payable under non-compete agreement, due in monthly installments which are capped at $3,333 per month, actual payment calculated from related store profits		196,771			210,152
Non-interest bearing notes to CNH, in varying monthly installments, various maturity dates through February 2010, secured by parts		865,674			1,162,146
Non-interest bearing notes to CNH, monthly payments of $22,624 maturing June 2010, secured by parts. Variable interest rate at prime + 1.6% rate beginning July 2008		588,232			656,104
Non-interest bearing note to CNH, monthly payments of $27,147 maturing October 2009, secured by parts. Variable interest rate at prime + 1.6% rate beginning November 2008		488,640			570,080
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 December 2012, secured by vehicles		324,668			291,428
Fixed rate note to Avoca Implement and Greenfield Implement 10.0%, monthly payments of $18,920. Matures January 2011, secured by equipment		720,954			759,080
Fixed rate note to Textron Financial, 7.09%, monthly payments of $4,969 Matures January 2018, secured by company asset		544,361			549,583
Notes paid in full during three month period ended April 30, 2008		—			3,209,298
		13,985,947			18,736,635
Less current maturities		(3,465,961		)	(5,653,840		)
		$	10,519,986		$	13,082,795

 

8

 

Under covenants of the above Bremer Bank note payable and a Bremer Bank floorplan agreement, the Company has agreed, among other things, to (1) comply with equipment and parts inventory turn ratios; and (2) maintain various financial ratio levels.

 

Additionally, under covenants of the above notes payable with CNH Capital America LLC and a CNH Capital America LLC floorplan agreement, the Company has agreed, among other things, to maintain various financial ratio levels and to submit certain financial information.

 

As of April 30, 2008, the Company was in compliance with all of the above covenants.

 

Long-term debt maturities are as follows:

 

12 Months Ending April 30,		Amount
2009		$	3,465,961
2010		3,204,185
2011		2,853,445
2012		2,579,280
2013		1,464,345
Thereafter		418,731
		$	13,985,947

 

NOTE 5 -  FLOORPLAN NOTES PAYABLE

 

Floorplan notes payable with a bank and manufacturers carry various interest rates ranging from 4.75 percent to 9.0 percent and are secured by substantially all assets of the Company.  The Bremer Bank floorplan note payable, with a balance of $315,080 at April 30, 2008, is secured by the personal guarantee of the Company’s Chief Executive Officer. Repayment terms vary by individual notes, but generally payments are made from sales proceeds or rental revenue from the related inventories.

 

NOTE 6 -  SUBORDINATED DEBENTURES

 

		April 30,			January 31,
		2008			2008
10% debentures to former owners of H.C. Clark Implement Co., interest payments due annually, balance due May 2010, unsecured, subordinated to bank and manufacturer debt		$	—		$	550,000
9% debentures to Vern Anderson, former owner of Vern Anderson Inc., interest payments due quarterly, balance due December 2010, unsecured, subordinated to bank and manufacturer debt		—			450,000
10% debentures to Bernard Smith, former owner of Smith International, interest payments due annually, balance due March 2010, unsecured, subordinated to bank and manufacturer debt		—			300,000
		$	—		$	1,300,000

 

9

 

NOTE 7 -  COMMON STOCK OPTIONS AND WARRANTS

 

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 April 30, 2008:

 

				Exercise			Fair Value
Issue Date		Number		Price			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

 

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 APB 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, 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 options/restricted stock for up to 1,000,000 shares of common stock under all forms of awards. The Company has elected to account for stock options and restricted stock using the fair value method under SFAS 123(R).  Shares issued for option exercises may be either authorized but unissued shares, or shares of treasury stock acquired in the open market.

 

The following table summarizes stock option activity for the three months ended April 30, 2008:

 

							Weighted
				Weighted			Average
				Average			Remaining		Aggregate
		Number of		Exercise			Contractual		Intrinsic
		Options		Price			Term		Value
Outstanding at January 31, 2008		483,252		$	7.43
Granted		10,000		16.40
Exercised		—		—
Outstanding at April 30, 2008		493,252		$	7.61		8.92		$	5,228,210
Options exercisable at April 30, 2008		59,086		$	4.42		7.82		$	814,694

 

10

 

The following table summarizes restricted stock activity for the three months ended April 30, 2008:

 

				Weighted
				Average
				Remaining
				Contractual
		Shares		Term
Outstanding at January 31, 2008		76,506		3.22
Granted		9,426
Forfeited		(200	)
Issued		0
Outstanding at April 30, 2008		85,732		2.62

 

The fair value of each stock-based award granted is estimated using the Black-Scholes pricing model. The following assumptions were made in estimating fair value:

 

Assumption		Fixed Plan
Dividend Yield		0	%
Risk-free interest rate		3.2 - 4.9	%
Expected life of options		5 - 10 years
Expected volatility		14 - 37	%

 

Prior to the Company’s initial public offering the expected volatility was based upon management’s best estimate of the value of the shares based upon the Company’s internal market.  The Company currently estimates its volatility using our quoted market price.  The expected life of options represents the period of time that options granted are expected to be outstanding.  The following is a summary of the status of options outstanding and exercisable at April 30, 2008 under the fixed share-based payment plan:

 

					Weighted
					Average		Weighted
					Remaining		Average			Exercisable
Exercise					Contractual		Exercise			Options
Price			Number		Life		Price			Number
$	4.00		9,250		6.8 years		$	4.00		9,250
4.50			119,002		7.9 years		4.50			49,836
7.50			80,000		9.2 years		7.50			—
8.50			181,000		9.6 years		8.50			—
9.35			94,000		9.6 years		9.35			—
16.40			10,000		9.8 years		16.40			—

 

The weighted average grant date fair value of options granted during the three months ended April 30, 2008 was $7.86.  The weighted average grant date fair value of restricted stock granted during the three months ended April 30, 2008 was $17.48.  Compensation cost charged to operations under the equity incentive plan was $136,800 for the three months ended April 30, 2008 and $0 for the three months ended April 30, 2007.  The income tax benefit recognized from all stock based compensation arrangements was $36,500 for the three months ended April 30, 2008 and $0 for the three months ended April 30, 2007.  For the three months ended April 30, 2008 and 2007, no options were exercised.  As of April 30, 2008, there was $1,126,280 of unrecognized compensation cost on non-vested stock options. That cost is expected to be recognized over a weighted-average period of 4.5 years.  As of April 30, 2008, there was $549,280 of unrecognized compensation cost on non-vested restricted stock. That cost is expected to be recognized over a weighted-average period of 2.1 years.

 

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NOTE 8 -  BUSINESS COMBINATIONS

 

The Company continued to implement its strategy of consolidating dealerships in desired market areas. Below is a summary of the acquisitions completed for the three months ended April 30, 2008. In certain of its business combination transactions the Company recognizes goodwill. Factors contributing to the recognition of goodwill include an evaluation of enterprise value, historical financial performance, estimated industry potential within the market and the market territory relationship to other existing and future planned Company locations.  Pro forma results are not presented as the acquisitions are not considered material, individually or in aggregate, to the Company.

 

Ceres Equipment

 

On February 1, 2008, the Company acquired certain assets of Ceres Equipment, Inc.  The Dealership is located in Roseau, Minnesota and is contiguous to existing markets.  The acquisition increases the Company’s market share in the northwest area of Minnesota. The total cash purchase price for the dealership was $3,940,380.  The Company expects the allocation of the purchase price will be finalized during the fiscal year ending January 31, 2009.  The allocation of the purchase price is presented in the following table:

 

					Prior Acquisition
					Purchase
		Ceres Equipment			Adjustments			Totals
Inventories		$	3,499,901		$	(66,522	)	$	3,433,379
Property and equipment		472,600						472,600
Goodwill		140,899			66,522			207,421
		$	4,113,400		$	—		$	4,113,400
Other liabilities assumed		$	173,020		—			$	173,020
		$	173,020		$	—		$	173,020
Consideration given		$	3,940,380		$	—		$	3,940,380

 

Of the total goodwill of $140,899 recorded in the acquisition transactions during the three months ended April 30, 2008, $140,899 is expected to be deductible for tax purposes.

 

NOTE 9 -  FAIR VALUE OF FINANCIAL STATEMENTS

 

The fair value of a financial instrument is generally defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced liquidation sale. Quoted market prices are generally not available for the Company’s financial instruments. Accordingly, fair values are based on judgments regarding anticipated cash flows, future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates involve uncertainties and matters of judgment, and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. As explained in Note 1, actual results could differ from the estimates.

 

The carrying amount of cash, receivables, payables, short-term debt and other current liabilities approximates fair value because of the short maturity and/or frequent repricing of those instruments. Based upon current borrowing rates with similar maturities, the fair value of the long-term debt approximates the carrying value as of April 30, 2008 and January 31, 2008.

 

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NOTE 10 -  SUBSEQUENT EVENTS

 

On May 1, 2008, the Company acquired an agricultural equipment dealership in Blairstown, Iowa for approximately $2.0 million in cash.  Under the agreement, the Company acquired 100% of the outstanding stock of Quad County Implement, Inc.  The acquisition expands the Company’s presence in market areas contiguous to existing dealerships.

 

On May 21, 2008, the Company received approximately $78.7 million (net of underwriter fees of $4.4 million and estimated offering expenses of approximately $0.5 million) as a result of its public offering of 4.83 million shares of common stock, including 650,000 shares offered by selling stockholders, priced at $20.00 per share.

 

On May 28, 2008, the Company acquired the assets of Mid-Land Equipment Company, L.C., with six construction equipment dealerships, for approximately $14.4 million.  The dealerships are located in Des Moines, Davenport, Clear Lake and Cedar Rapids, Iowa, and Omaha and Lincoln, Nebraska.  The construction equipment stores are contiguous to existing construction equipment stores in South Dakota and overlay the existing nine agricultural locations in Iowa.

 

NOTE 11 -  RESTATEMENT OF FINANCIAL STATEMENTS

 

The Company restated its financial statements for the years ended January 31, 2007, January 31, 2006, and January 31, 2005 to correct various accounting errors and/or disclosure omissions that were identified during the SEC’s review of the Company’s registration statement for its initial public offering.  As a result, the financial statements included in this Quarterly Report are presented as restated solely for the period ended April 30, 2007, as the Company has not previously presented restated information for that period.

 

The Company made adjustments to reclassify syndication costs (previously a component within stockholders’ equity), netting the syndication costs against the offering proceeds to which they relate (preferred stock or long-term debt), and recorded amortization of the syndication costs over the life of the underlying security.  The Company also recorded a liability for unpaid and undeclared accumulated preferred dividends upon the determination that they were probable of being incurred.

 

Corrections also resulted in restatements involving changes to the Statement of Cash Flows to correctly report the inventory floor planned, with non-manufacturers as financing cash inflow, and the repayment of non-manufacturer floorplanning as financing cash outflow.

 

Lastly, the restated financial statements were revised to include earnings per share amounts and related disclosures.

 

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Below are summaries of the financial statement line items that were affected by the restatements described above:

 

Statement Of Operations

 

		Three months ended April 30,
		2007			2007			2007
		(As originally reported and unaudited)			(As restated and unaudited)			(Effect of change)
Revenue		$	79,826,710		$	79,826,710		$	—
Cost of revenue		67,007,941			67,007,941			—
Gross profit		12,818,769			12,818,769			—
Operating expenses		10,046,741			10,046,741			—
Income from operations		2,772,028			2,772,028			—
Other income (expense)		(1,500,651		)	(1,521,071		)	(20,420		)
Income before income taxes		1,271,377			1,250,957			(20,420		)
Provision for income taxes		(478,663		)	(478,663		)	—
Net income		792,714			772,294			(20,420		)
Adjustments to income
Amortization of syndication fees		—			(5,296		)	(5,296		)
Unpaid accumulated preferred dividends		—			(25,594		)	(25,594		)
Income available to common stockholders		$	792,714		$	741,404		$	(51,310	)
Earnings per share - basic		$	—		$	0.17		$	0.17
Earnings per share - diluted		$	—		$	0.12		$	0.12

 

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