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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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 JUNE 30, 2004
Commission file number: 0-25620
A.S.V., INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1459569
State or other jurisdiction of I.R.S. Employer Identification No.
incorporation or organization
840 LILY LANE
P.O. BOX 5160
GRAND RAPIDS, MN 55744 (218) 327-3434
Address of principal executive offices, Registrant's telephone number,
including zip code including area code
Check whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. |X| Yes |_| No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). |X| Yes |_| No
As of July 30, 2004, 12,630,069 shares of the issuer's Common Stock were
issued and outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
A.S.V., INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, December 31,
2004 2003
------------ -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents ........................................... $ 38,680,006 $29,402,756
Short-term investments .............................................. 4,226,006 305,662
Accounts receivable, net ............................................ 28,032,210 16,484,603
Inventories ......................................................... 29,637,257 26,686,707
Other current assets ................................................ 880,573 3,614,506
------------ -----------
Total current assets ..................................... 101,456,052 76,494,234
PROPERTY AND EQUIPMENT, net ............................................ 7,757,600 6,129,922
------------ -----------
Total Assets ............................................. $109,213,652 $82,624,156
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term liabilities ............................ $ 140,022 $ 136,414
Accounts payable .................................................... 9,010,158 6,004,890
Accrued liabilities
Compensation ...................................................... 439,776 372,027
Warranty reimbursements ........................................... 491,100 491,100
Warranties ........................................................ 1,685,000 850,000
Other ............................................................. 534,122 645,346
Income taxes payable ................................................ 540,776 --
------------ -----------
Total current liabilities ..................................... 12,840,954 8,499,777
------------ -----------
LONG-TERM LIABILITIES, less current portion ............................ 1,774,604 1,844,858
------------ -----------
COMMITMENTS AND CONTINGENCIES .......................................... -- --
SHAREHOLDERS' EQUITY
Capital stock, $.01 par value:
Preferred stock, 11,250,000 shares authorized;
no shares outstanding ........................................... -- --
Common stock, 33,750,000 shares authorized; shares issued
and outstanding - 12,621,919 in 2004; 11,053,588 in 2003 ........ 126,219 110,536
Additional paid-in capital .......................................... 66,277,384 51,751,723
Retained earnings ................................................... 28,194,491 20,417,262
------------ -----------
94,598,094 72,279,521
------------ -----------
Total Liabilities and Shareholders' Equity ............... $109,213,652 $82,624,156
============ ===========
See notes to consolidated financial statements.
2
A.S.V., INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net sales .................................................. $ 39,081,165 $ 26,414,478 $ 72,134,936 $ 41,026,708
Cost of goods sold ......................................... 30,313,383 21,082,229 55,796,952 32,890,995
------------ ------------ ------------ ------------
Gross profit ...................................... 8,767,782 5,332,249 16,337,984 8,135,713
Operating expenses:
Selling, general and administrative ................... 2,095,334 1,591,223 3,995,856 3,044,183
Research and development .............................. 181,980 202,182 337,535 363,886
------------ ------------ ------------ ------------
Operating income .................................. 6,490,468 3,538,844 12,004,593 4,727,644
Other income (expense)
Interest expense ...................................... (28,168) (32,053) (56,777) (68,676)
Other, net ............................................ 181,896 49,627 361,413 87,033
------------ ------------ ------------ ------------
Income before income taxes ........................ 6,644,196 3,556,418 12,309,229 4,746,001
Income taxes ............................................... 2,462,000 1,271,000 4,532,000 1,693,000
------------ ------------ ------------ ------------
NET EARNINGS ...................................... $ 4,182,196 $ 2,285,418 $ 7,777,229 $ 3,053,001
============ ============ ============ ============
Net earnings per common share
Basic ................................................. $ .33 $ .23 $ .62 $ .30
============ ============ ============ ============
Diluted ............................................... $ .32 $ .22 $ .58 $ .30
============ ============ ============ ============
Weighted average number of common shares outstanding
Basic ................................................. 12,632,363 10,089,161 12,548,440 10,076,531
============ ============ ============ ============
Diluted ............................................... 13,110,823 10,432,661 13,408,714 10,273,147
============ ============ ============ ============
See notes to consolidated financial statements.
3
A.S.V., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
2004 2003
------------ -----------
Cash flows from operating activities:
Net earnings .................................................. $ 7,777,229 $ 3,053,001
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation .............................................. 442,753 316,693
Tax benefit from stock option exercises ................... 686,000 50,000
Deferred income taxes ..................................... 720,000 100,000
Changes in assets and liabilities:
Accounts receivable ..................................... (11,547,607) (5,552,518)
Inventories ............................................. (2,950,550) 2,600,569
Other current assets .................................... 2,013,933 318,035
Accounts payable ........................................ 3,005,268 2,491,516
Accrued liabilities ..................................... 791,525 188,195
Income taxes payable .................................... 540,776 569,231
------------ -----------
Net cash provided by operating activities ........................ 1,479,327 4,134,722
------------ -----------
Cash flows from investing activities:
Purchase of property and equipment ............................ (2,070,431) (598,240)
Purchase of short-term investments ............................ (4,126,238) (300,894)
Redemption of short-term investments .......................... 205,894 739,307
------------ -----------
Net cash used in investing activities ............................ (5,990,775) (159,827)
------------ -----------
Cash flows from financing activities:
Principal payments on long-term liabilities ................... (66,646) (63,143)
Proceeds from issuance of common stock, net ................... 21,826,431 --
Proceeds from exercise of stock options, net of costs ......... 1,340,311 581,600
Retirements of common stock ................................... (9,311,398) (35,000)
------------ -----------
Net cash provided by financing activities ........................ 13,788,698 483,457
------------ -----------
Net increase in cash and cash equivalents ........................ 9,277,250 4,458,352
Cash and cash equivalents at beginning of period ................. 29,402,756 4,058,091
------------ -----------
Cash and cash equivalents at end of period ....................... $ 38,680,006 $ 8,516,443
============ ===========
Supplemental disclosure of cash flow information:
Cash paid for interest ........................................ $ 57,257 $ 65,118
Cash paid for income taxes .................................... 2,506,414 730,547
See notes to consolidated financial statements.
4
A.S.V., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2004
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying unaudited, consolidated financial statements
follows:
REVENUE RECOGNITION
A.S.V., Inc. ("ASV" or the "Company") generally recognizes revenue on its
product sales when persuasive evidence of an arrangement exists, delivery has
occurred, the price is fixed or determinable and collectibility is reasonably
assured. The Company considers delivery to have occurred at the time of
shipment.
RESEARCH AND DEVELOPMENT
All research and development costs are expensed as incurred.
INTERIM FINANCIAL INFORMATION
The accompanying unaudited, consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America (US GAAP) for interim financial information.
Accordingly, they do not include all of the footnotes required by US GAAP for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal, recurring adjustments) considered necessary for a fair
presentation have been included. Results for the interim periods are not
necessarily indicative of the results for an entire year.
WARRANTIES
The Company provides a limited warranty to its customers. Provision for
estimated warranty costs are recorded when revenue is recognized based on
estimated product failure rates, material usage and service delivery costs
incurred in correcting a product failure. Should actual failure rates, material
usage or service delivery costs differ from the Company's estimates, revisions
to the warranty liability may be required.
Changes in the Company's warranty liability are as follows:
Three months ended June 30,
---------------------------
2004 2003
----------- ---------
Balance, beginning of period $ 1,150,000 $ 600,000
Expense for new warranties issued 929,475 237,430
Warranty claims (394,475) (187,430)
----------- ---------
Balance, end of period $ 1,685,000 $ 650,000
=========== =========
STOCK-BASED COMPENSATION
At June 30, 2004, the Company had three stock-based compensation plans.
The Company accounts for those plans under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. No stock-based employee compensation cost is reflected
in net earnings, as all options granted under those plans had an exercise price
equal to the market value of the underlying common stock on the date of grant.
5
A.S.V., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
STOCK-BASED COMPENSATION (Continued)
The following table illustrates the effect on net earnings and earnings
per share if the Company had applied the fair value recognition provisions of
FASB Statement No. 123, Accounting for Stock-Based Compensation. The weighted
average fair values of the options granted during 2004 and 2003 are $18.30 and
$4.52, respectively. The fair value of each option grant is estimated on the
date of grant using the Black-Scholes options-pricing model with the following
weighted-average assumptions used for all grants in 2004 and 2003: zero dividend
yield; expected volatility of 52.3% and 44.8%, risk-free interest rate of 3.64
and 3.55% and expected lives of 6.88 and 6.95 years.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net earnings, as reported $ 4,182,196 $ 2,285,418 $ 7,777,229 $ 3,053,001
Less total stock-based employee
compensation determined under
fair value methods for all awards,
net of income taxes (267,635) (129,188) (488,659) (241,177)
------------ ------------ ------------ ------------
Pro forma net earnings $ 3,914,561 $ 2,156,230 $ 7,288,570 $ 2,811,824
============ ============ ============ ============
Earnings per share:
Basic - as reported $ .33 $ .23 $ .62 $ .30
============ ============ ============ ============
Basic - pro forma $ .31 $ .21 $ .58 $ .28
============ ============ ============ ============
Diluted - as reported $ .32 $ .22 $ .58 $ .30
============ ============ ============ ============
Diluted - pro forma $ .30 $ .21 $ .54 $ .27
============ ============ ============ ============
NOTE 2. INVENTORIES
Inventories consist of the following:
JUNE 30, December 31,
2004 2003
----------- -----------
Raw materials, service parts
and work-in-process $21,814,541 $16,589,121
Finished goods 4,755,193 7,385,768
Used equipment held for resale 3,067,523 2,711,818
----------- -----------
$29,637,257 $26,686,707
=========== ===========
NOTE 3. LINE OF CREDIT
In July of 2004, the Company elected not to renew its $10 million line of
credit agreement with its primary bank.
NOTE 4. LETTER OF INTENT
On July 20, 2004, the Company announced it had signed a non-binding letter
of intent to acquire all the outstanding common stock of Loegering Mfg. Inc.
(Loegering) of Casselton, North Dakota for a combination of currently existing
cash and ASV common stock. Loegering is a manufacturer of over-the-tire steel
tracks for wheeled skid-steers and also provides attachments for the skid-steer
market. The transaction is subject to due diligence by ASV, negotiation of a
definitive acquisition agreement and satisfaction of other customary conditions
to closing. The Company anticipates it will complete the transaction in the
third quarter of 2004
6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
ASV designs, manufactures and sells rubber-tracked, all-purpose crawlers
and related accessories and attachments. ASV also manufactures rubber-tracked
undercarriages, which are a primary component on Caterpillar Inc.'s
(Caterpillar) Multi Terrain Loaders (MTL). ASV's products are able to traverse
nearly any terrain with minimal damage to the ground, making it effective in
industries such as construction, landscaping and agriculture. ASV distributes
its products through an independent dealer network in the United States, Canada,
Australia, New Zealand and Portugal. The undercarriages sold to Caterpillar are
incorporated by Caterpillar in its MTL products and sold exclusively through the
Caterpillar dealer network, primarily in North America.
ASV experienced a significant increase in sales in the first half of 2004
due to several reasons as explained below:
- The Company believes there is a greater acceptance of rubber
track machines in the marketplace as users experience the
benefits that a rubber track machine can provide over a
standard wheeled machine.
- The number of companies entering into the rubber track machine
market has increased in the last few years, thereby
contributing to the increased awareness and market acceptance
of the products.
- ASV has increased its number of product offerings over the
past few years thereby making it easier to attract prospective
dealers to carry the R-Series Posi-Track product line.
- Caterpillar has increased the number of MTL models it offers
to its dealers from two models in 2001 to five in 2004. In
addition, the number of Caterpillar dealers that are able to
carry the MTL product line has increased from 16 pilot dealers
in 2001 to all North American dealers (approximately 65) in
2004.
- The current low interest rate environment has provided for
easier financing by end users.
- Recent tax legislation has provided increased depreciation
allowances allowing end users to depreciate a greater portion
of machine purchases in the first year of ownership, thereby
potentially reducing the cost of machine ownership in the
first year of operation.
CRITICAL ACCOUNTING POLICIES
The following discussion and analysis of the Company's financial condition
and results of operations are based upon the Company's financial statements,
which have been prepared in accordance with US GAAP. The preparation of these
financial statements requires management to make estimates and judgments that
affect the reported amounts of assets, liabilities and expenses, and related
disclosures. On an on-going basis, management evaluates its estimates and
judgments, including those related to accounts receivable, inventories and
warranty obligations. By their nature, these estimates and judgments are subject
to an inherent degree of uncertainty. Management bases its estimates and
judgments on historical experience, observance of trends in the industry,
information provided by customers and other outside sources and on various other
factors that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.
Management believes the following critical accounting policies, among
others, affect its more significant judgments and estimates used in the
preparation of the Company's consolidated financial statements.
Revenue Recognition and Accounts Receivable. Revenue is recognized when
persuasive evidence of an arrangement exists, delivery has occurred, the price
is fixed or determinable and collectibility is reasonably assured. The Company
generally obtains oral or written purchase authorizations from customers for a
specified amount of product at a
7
specified price and considers delivery to have occurred at the time of shipment.
ASV maintains an allowance for doubtful accounts for estimated losses resulting
from the inability of its customers to make required payments. If the financial
condition of ASV's customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required.
Inventories. Inventories are stated at the lower of cost or market, cost
being determined on the first-in, first-out method. Adjustments to slow moving
and obsolete inventories to the lower of cost or market are provided based on
historical experience and current product demand. The Company does not believe
its inventories are subject to rapid obsolescence. The Company evaluates the
adequacy of the inventories' carrying value quarterly.
Warranties. ASV provides for the estimated cost of product warranties at
the time revenue is recognized. While ASV engages in extensive product quality
programs and processes, including actively monitoring and evaluating the quality
of its component suppliers, ASV's warranty obligation is affected by product
failure rates, material usage and service delivery costs incurred in correcting
a product failure. Should actual product failure rates, material usage or
service delivery costs differ from ASV's estimates, revisions to the estimated
warranty liability may be required.
RESULTS OF OPERATIONS
The following table sets forth certain Statement of Earnings data as a
percentage of net sales:
Three Months Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
------ ------ ------ ------
Net sales ................................ 100.0% 100.0% 100.0% 100.0%
Gross profit ............................. 22.4 20.2 22.6 19.8
Selling, general and administrative ...... 5.4 6.0 5.5 7.4
Research and development ................. 0.5 0.8 0.5 0.9
Operating income ......................... 16.6 13.4 16.6 11.5
Net earnings ............................. 10.7 8.7 10.8 7.4
FOR THE THREE MONTHS ENDED JUNE 30, 2004 AND 2003.
Net Sales. For the three months ended June 30, 2004, net sales increased
48% to $39.1 million, compared with $26.4 million for the same period in 2003.
This increase was primarily the result of three offsetting factors. First, sales
of the Company's R-Series products more than doubled due to the addition of two
new models, the RC-60 and RC-85, in January 2004, and a greater number of
R-Series dealers in 2004. Sales of R-Series products represented 58%, or $22.7
million, of the Company's sales in the second quarter of 2004, compared with
41%, or $10.8 million, in the second quarter of 2003. Second, sales of service
parts more than doubled during the second quarter of 2004 compared with the
second quarter of 2003 due to a greater number of machines and undercarriages in
service. Offsetting these increases was a decrease of approximately $1 million
in the sale of the Company's undercarriages to Caterpillar for use on its MTLs
in the second quarter of 2004 compared with the same period in 2003. This
decrease was a result of Caterpillar changing over its production of MTLs to a
newer series in the first half of 2004.
Gross Profit. Gross profit for the three months ended June 30, 2004
increased to $8.8 million, compared with $5.3 million for the same period in
2003, and the gross profit percentage increased from 20.2% in the second quarter
of 2003 to 22.4% in the second quarter of 2004. The increase in gross profit was
due primarily to the increased sales experienced during the second quarter of
2004. The increase in gross profit percentage was due primarily to a shift in
the mix of products sold in the second quarter of 2004. The Company had
increased sales of R-Series Posi-Track products and slightly decreased sales of
MTL undercarriages in the second quarter of 2004. R-Series products generally
carry a higher gross profit percentage than MTL undercarriages. The Company also
believes its raw material unit cost reduction project initiated in the first
quarter of 2004 as well as operational efficiencies obtained from higher
production volumes helped increase the gross profit percentage in the second
quarter of 2004. Offsetting these increases were steel surcharges of
approximately $550,000 during the second quarter of 2004. The Company
experienced no steel surcharges in the second quarter of 2003.
Selling, General and Administrative. Selling, general and administrative
expenses increased from $1.6 million, or 6.0% of net sales, in the second
quarter of 2003, to $2.1 million, or 5.4% of net sales, in the second quarter of
2004.
8
The increase in expenses was due primarily to increased advertising and
promotion to promote the technology benefits of the Company's products,
increased sales commissions from increased sales of the Company's R-Series
products and the overall increase in the volume of the Company's business.
Research and Development. Research and development expenses decreased from
$202,000 in the second quarter of 2003 to $182,000 in the second quarter of
2004. The decrease was due to the Company's completion of the development of the
RC-60 and RC-85 products in the first quarter of 2004.
Other Income (Expense). Other income increased from $50,000 in the second
quarter of 2003 to $182,000 in the second quarter of 2004. This increase was due
primarily to greater funds available for investment in 2004, due to proceeds
received from the sale of common stock to Caterpillar in January 2004, proceeds
received from the exercise of employee stock options and net earnings generated
in 2003 and 2004.
Net Earnings. For the second quarter of 2004, net earnings were $4.2
million, compared with net earnings of $2.3 million for the second quarter of
2003. The increase was primarily a result of increased sales with an increased
gross profit percentage, offset in part by increased operating expenses and a
higher effective income tax rate. The higher effective income tax rate is due to
lower anticipated research and development tax credits and a higher marginal
income tax rate for anticipated earnings in excess of $10 million for 2004.
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003.
Net Sales. Net sales for the six months ended June 30, 2004 increased 76%
to $72.1million, compared with $41.0 million for the same period in 2003. This
increase was primarily the result of three factors. First, sales of the
Company's R-Series products increased in 2004 due to the addition of two new
models in January 2004, a greater number of R-Series dealers in 2004 and a full
six months of sales of the RC-100 in 2004, which was introduced in the first
quarter of 2003. Second, sales of service parts more than doubled during the six
months ended June 30, 2004 compared with the same period in 2003 due to a
greater number of machines and undercarriages in service. Third, sales of MTL
undercarriages increased slightly for the six months ended June 30, 2004. This
increase was due to three models of undercarriages being sold for the first half
of 2004. In 2003, one undercarriage model was added during the first quarter
and, as such, had sales for only a portion of the first half of 2003.
Gross Profit. For the six months ended June 30, 2004, gross profit
increased to $16.3 million, compared with $8.1 million for the same period in
2003, and the gross profit percentage increased from 19.8% in 2003 to 22.6% in
2004. The increase in gross profit was due primarily to the increased sales
experienced during the first half of 2004 as discussed above. The increase in
gross profit percentage was due primarily to a shift in the mix of products sold
in the second quarter of 2004. The Company had increased sales of R-Series
Posi-Track products in the first half of 2004. R-Series products generally carry
a higher gross profit percentage than MTL undercarriages. The Company also
believes its raw material unit cost reduction project initiated in the first
quarter of 2004 as well as operational efficiencies obtained from higher
production volumes helped increase the gross profit percentage in the second
quarter of 2004. Offsetting these increases were steel surcharges of
approximately $670,000. The Company experienced no steel surcharges in the six
months ended June 30, 2003.
Selling, General and Administrative. For the six months ended June 30,
2004, selling, general and administrative expenses increased to $4.0 million, or
5.5% of net sales, compared with $3.0 million, or 7.4% of net sales, for the
same period in 2003. The increase in expenses was due primarily to increased
advertising and promotion to promote the technology benefits of the Company's
products, increased sales commissions from increased sales of the Company's
R-Series products and the overall increase in the volume of the Company's
business.
Research and Development. Research and development expenses decreased to
$338,000 for the six months ended June 30, 2004, compared with $364,000 for the
six months ended June 30, 2003. The decrease was due to the Company's completion
of the development of the RC-60 and RC-85 products in the first quarter of 2004.
The Company anticipates its spending on research and development activities will
increase in the second half of 2004, to fund additional product offerings and
additional applications of our track technology.
Other Income (Expense). For the six months ended June 30, 2004, other
income was $361,000, compared with $87,000 for the same period in 2003. This
increase was due primarily to greater funds available for investment in 2004,
due to proceeds received from the sale of common stock to Caterpillar in January
2004, proceeds received from the
9
exercise of employee stock options and net earnings generated in 2003 and 2004.
Net Earnings. Net earnings were $7.8 million for the six months ended June
30, 2004, compared with $3.1 million for the six months ended June 30, 2003. The
increase was primarily a result of increased sales with an increased gross
profit percentage, offset in part by increased operating expenses and a higher
effective income tax rate. The higher effective income tax rate is due to lower
anticipated research and development tax credits and a higher marginal income
tax rate for anticipated earnings in excess of $10 million for 2004.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 2004, the Company generated $9.3 million
of cash, compared with $4.1 million of cash for the six months ended June 30,
2003. During the first half of 2004, the Company generated $1.5 million of cash
from operations, due primarily to the increased profitability experienced in
2004 and an increase in accounts payable due to increased volume, offset in part
by increased accounts receivable from the increased sales during 2004 and
increased inventory levels to support higher production. The Company used $6.0
million of cash in 2004 to purchase short-term investments and invest in
property, plant and equipment, consisting primarily of additional manufacturing
space. Financing activities generated an additional $13.8 million in 2004, due
primarily to the sale of common stock to Caterpillar in January 2004 and the
exercise of employee stock options, offset by the repurchase of the warrant held
by Caterpillar in January 2004 and repurchases of shares under the Company's
stock repurchase program.
ACQUISITION OF LOEGERING MFG. INC.
On July 20, 2004, the Company announced it had signed a non-binding letter
of intent to acquire all the outstanding common stock of Loegering Mfg. Inc.
(Loegering) of Casselton, North Dakota for a combination of currently existing
cash and ASV common stock. Loegering is a manufacturer of over-the-tire steel
tracks for wheeled skid-steers and also provides attachments for the skid-steer
market. The transaction is subject to due diligence by ASV, negotiation of a
definitive acquisition agreement and satisfaction of other customary conditions
to closing. The Company anticipates it will complete the transaction in the
third quarter of 2004 and anticipates the transaction will be accretive to
earnings.
CATERPILLAR REVENUE RECOGNITION/GROSS PROFIT
The Company recognizes as sales its cost for the MTL undercarriages, as
defined in the Commercial Alliance Agreement between the Company and
Caterpillar, plus a portion of the anticipated gross profit that Caterpillar
expects to recognize upon sale of the MTLs to Caterpillar dealers, when the
Company ships undercarriages to Caterpillar. On January 1, 2005, the Company's
portion of the anticipated gross profit that Caterpillar expects to recognize
upon sale of the MTLs to Caterpillar dealers will be reduced by 33% for two of
the three undercarriages the Company currently sells to Caterpillar. On January
1, 2006, the Company's portion of the anticipated gross profit that Caterpillar
expects to recognize upon sale of the MTLs to Caterpillar dealers will be
reduced by 33% for the other undercarriage the Company currently sells to
Caterpillar. The Company believes these revisions may cause its overall gross
profit percentage generated on the sale of MTL undercarriages in 2005 to be less
than the overall gross profit percentage it has generated on the sale of MTL
undercarriages for the six months ended June 30, 2004. The MTL undercarriages
are not a commissionable product under the Company's Commercial Alliance
Agreement with Caterpillar.
CUSTOMER NOTE AND FINANCING ARRANGEMENT
Included in accounts receivable at June 30, 2004 is a note receivable for
approximately $867,000 from a customer. The note bears interest at the prime
rate plus 2% and is due in 60 monthly installments beginning February 2004. As
of July 31, 2004, the customer is current on all amounts owed the Company under
this note.
The Company has guaranteed the repayment of a $589,000 note made by this
same customer to a non-affiliated finance company in payment of amounts owed to
the Company by this customer. The Company has computed the value of the
guarantee at $35,000 and has recorded this amount as a reduction of net sales
for the year ended December 31, 2003, when the note and guarantee were entered
into. A similar amount has been included in other accrued liabilities at June
30, 2004.
RENTAL PROGRAM
10
Through June 2004, the Company had a program to market its RC-30 and RC-50
products directly to rental facilities. Under this program, ASV identified
rental facilities that would lease ASV machines from an unaffiliated finance
company. ASV recorded the sale of the machines to the finance company when they
were delivered to the rental facility and collectibility was reasonably assured.
At the end of the four-year lease, should the rental facility elect not to
purchase the leased machines from the finance company, ASV has guaranteed to pay
a residual value equal to 25% of the original selling price of the financed
equipment. At that point, ASV would take possession of the equipment. As of June
30, 2004, the total amount of future residual payments the Company may be
required to make in the event of nonpayment by rental facilities totaled
approximately $100,000. The Company believes the value of the related equipment
will equal or exceed the amount of residual payment. Accordingly, the Company
does not anticipate any loss will be incurred should any residual payments need
to be made.
The lease agreements between the rental facility and the finance company
provided the rental facility a 90-day period during which any rental income
generated was split between the rental facility and ASV. After the 90-day period
expired, the rental facility had the option of terminating the lease, in which
case ASV was only responsible for the costs associated with transferring the
machines to another rental facility. If the rental facility elected to continue
the lease, ASV refunded any rental payments received during the 90-day period.
In June 2004, the Company terminated this rental marketing program and
repurchased approximately $735,000 of machines that had not been remarketed.
This amount has been recorded as a reduction of sales for the three months ended
June 30, 2004 and the machines have been included in used equipment inventory at
June 30, 2004 at cost. The Company does not anticipate it will incur any future
loss as a result of marketing these machines.
RELATIONSHIP WITH FINANCE COMPANIES
The Company has affiliated itself with several finance companies that
finance the sale of the Company's products. By using these finance companies,
the Company receives payment for its products shortly after their shipment. The
Company pays a portion of the interest cost associated with financing these
shipments that would normally be paid by the customer, over a period generally
ranging from three to twelve months, depending on the amount of down payment
made by the customer. The Company is also providing twelve-month terms for one
machine to be used for demonstration purposes for each qualifying dealer. In
addition, the Company does, from time to time, offer extended term financing on
the sale of certain products to its dealers for periods ranging from 90 days to
two years.
STOCK REPURCHASE PROGRAM
In October 2003, the Company announced a new stock buy-back program
whereby ASV may repurchase up to $10 million of its common stock in the open
market. The Company intends to fund the repurchases with available funds. The
term of the repurchase program is through October 2004 or until such amount of
common stock is repurchased. During the second quarter of 2004, the Company
repurchased 44,000 shares of its common stock under this program, at an
aggregate cost of $1.3 million. As of July 30, 2004, the Company had repurchased
66,000 shares of its common stock under this program, at an aggregate cost of
$1.9 million. Under previous programs, the most recent of which expired in
September 2003, the Company repurchased 195,580 shares of its own common stock
at an aggregate purchase price of $2.0 million.
CASH REQUIREMENTS
The Company believes cash expected to be generated from operations, cash
generated from the sale of stock to Caterpillar in January 2004 and its existing
cash and short-term investments will satisfy the Company's projected working
capital needs and other cash requirements for the next twelve months and for the
foreseeable future.
FORWARD-LOOKING STATEMENTS
The statements set forth in this "Liquidity and Capital Resources" section
and elsewhere in this Form 10-Q regarding ASV's future sales levels, product
mix, profitability, expense levels and liquidity, ASV's proposed acquisition of
Loegering, the benefits of Loegering's products and technology and the timing of
the proposed acquisition, are forward-looking statements based on current
expectations and assumptions, and entail various risks and uncertainties that
could cause actual results to differ materially from those expressed in such
forward-looking statements. Certain factors may affect whether these anticipated
events occur including ASV's ability to successfully manufacture the machines,
11
unanticipated delays, costs or other difficulties in the development and
manufacture of the machines, market acceptance of the machines, satisfactory
completion of ASV's due diligence investigation of Loegering, ASV's ability to
successfully negotiate a definitive agreement for the acquisition of Loegering,
the possible inability of ASV or Loegering to satisfy conditions to closing the
proposed acquisition, the risks and uncertainties associated with successfully
integrating the two companies, general market conditions, corporate developments
at ASV or Caterpillar and ASV's ability to realize the anticipated benefits from
its alliances with Caterpillar. Any forward-looking statements provided from
time-to-time by the Company represent only management's then-best estimate of
future results or trends. Additional information regarding these risk factors
and uncertainties is detailed in the Risk Factors filed as Exhibit 99 to this
Quarterly Report on Form 10-Q for the period ended June 30, 2004.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has no history of investing in derivative financial
instruments, derivative commodity instruments or other such financial
instruments, and the Company does not anticipate making such investments in the
future. Transactions with international customers are entered into in US
dollars, precluding the need for foreign currency hedges. Additionally, the
Company invests in money market funds and fixed rate U.S. government and
corporate obligations, which experience minimal volatility. Thus, the exposure
to market risk is not material.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Under the supervision
and with the participation of the Company's management, including the Company's
Chief Executive Officer and Chief Financial Officer, the Company evaluated the
effectiveness of the design and operation of its disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities and Exchange Act
of 1934, as amended (the "Exchange Act")). Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that, as of the end of
the period covered by this report, the Company's disclosure controls and
procedures were adequately designed to ensure that information required to be
disclosed by the Company in the reports that it files or submits under the
Exchange Act, is recorded, processed, summarized and reported within the time
periods specified in applicable rules and forms.
Changes in Internal Controls. During the second fiscal quarter of 2004,
there has been no change in the Company's internal controls over financial
reporting (as defined in Rule 13(a)-15(f) under the Exchange Act) that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
The following table provides information about purchases by the Company
during the quarter ended June 30, 2004 of equity securities that are registered
by the Company pursuant to Section 12 of the Exchange Act.
TOTAL NUMBER OF APPROXIMATE DOLLAR
SHARES PURCHASED AS VALUE OF SHARES THAT
TOTAL NUMBER PART OF PUBLICLY MAY YET BE PURCHASED
OF SHARES AVERAGE PRICE PAID ANNOUNCED PLANS UNDER THE PLANS OR
PERIOD PURCHASED (1) PER SHARE OR PROGRAMS (2) PROGRAMS
------ ------------- ------------------ ------------------- --------------------
04/01/04 - 04/30/04 10,277 $ 30.47 8,000 $9,115,209
05/01/04 - 05/31/04 36,000 $ 28.64 36,000 $8,084,089
12
06/01/04 - 06/30/04 1,353 $ 30.42 -- $8,084,089
TOTAL 47,630 $ 29.09 44,000 $8,084,089
(1) The Company repurchased an aggregate of 44,000 shares of its common stock
pursuant to the repurchase program that it publicly announced on October
22, 2003 (the "Program"). Also includes an aggregate of 3,630 shares of
the Company's common stock that were tendered to pay the option exercise
price of employee stock options exercised during the quarter.
(2) The board of directors approved the repurchase by the Company of shares of
the Company's common stock having a value of up to $10 million in the
aggregate pursuant to the Program. The expiration date of this Program is
the earlier of October 14, 2004 or until such amount of common stock is
repurchased.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of A.S.V., Inc. was held on June 4,
2004. Matters submitted at the meeting for vote by the shareholders were as
follows:
(a) Election of Directors.
The following directors were elected at the Annual Meeting,
each with the following votes:
For Against
--- -------
Gary D. Lemke 11,829,402 471,301
Edgar E. Hetteen 11,823,977 476,726
Jerome T. Miner 11,738,852 561,851
Leland T. Lynch 11,763,763 536,940
James H. Dahl 11,839,629 461,074
R. E. "Teddy" Turner, IV 11,739,875 560,828
Richard A. Benson 11,743,073 557,630
Karlin S. Symons 11,772,137 528,566
(b) Approval of the A.S.V., Inc. 2004 Stock Incentive Plan.
Shareholders approved the 2004 Stock Incentive Plan with a
vote of 6,019,588 votes for, 3,231,234 votes against, 8,174
shares abstaining and 3,041,707 broker non-votes.
(c) Ratification of Appointment of Independent Public Accountants.
Shareholders ratified the appointment of Grant Thornton LLP as
the Company's independent auditors for the fiscal year ending
December 31, 2004, with a vote of 12,256,640 votes for, 39,513
votes against and 4,550 shares abstaining.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
13
Exhibit
Number Description
------ -----------
3.1 Second Restated Articles of Incorporation of the Company (a)
3.1a Amendment to Second Restated Articles of Incorporation of the
Company filed January 6, 1997 (c)
3.1b Amendment to Second Restated Articles of Incorporation of the
Company filed May 4, 1998 (f)
3.2 Bylaws of the Company (a)
3.3 Amendment to Bylaws of the Company adopted April 13, 1999 (k)
4.1 Specimen form of the Company's Common Stock Certificate (a)
4.2* 1994 Long-Term Incentive and Stock Option Plan (a)
4.3 Warrant issued to Leo Partners, Inc. on December 1, 1996 (c)
4.4* 1996 Incentive and Stock Option Plan (d)
4.5* 1996 Incentive and Stock Option Plan, as amended (e)
4.6* 1998 Non-Employee Director Stock Option Plan (e)
4.7* Amendment to 1998 Non-Employee Director Stock Option Plan (l)
4.8 Securities Purchase Agreement dated October 14, 1998 between
Caterpillar Inc. and the Company (g)
4.9 Securities Purchase Agreement dated October 31, 2000 between
Caterpillar Inc. and the Company (m)
10.1 Development Agreement dated July 14, 1994 among the Iron Range
Resources and Rehabilitation Board, the Grand Rapids Economic
Development Authority ("EDA") and the Company (b)
10.2 Lease and Option Agreement dated July 14, 1994 between the EDA
and the Company (b)
10.3 Option Agreement dated July 14, 1994 between the EDA and the
Company (b)
10.4 Supplemental Lease Agreement dated April 18, 1997 between the
EDA and the Company (d)
10.5 Supplemental Development Agreement dated April 18, 1997
between the EDA and the Company (d)
10.6 Line of Credit dated May 22, 1997 between Norwest Bank
Minnesota North, N.A. and the Company (d)
10.7 Extension of Lease Agreement dated May 13, 1998 between the
EDA and the Company (f)
10.8 First Amendment to Credit Agreement dated June 30, 1998
between Norwest Bank Minnesota North, N.A. and the Company (f)
10.9 Commercial Alliance Agreement dated October 14, 1998 between
Caterpillar Inc. and the Company (g)
10.10 Management Services Agreement dated January 29, 1999 between
Caterpillar Inc. and the Company (i)
10.11 Marketing Agreement dated January 29, 1999 between Caterpillar
Inc. and the Company (i)
14
10.12 Third Amendment to Credit Agreement dated June 9, 1999 between
Norwest Bank Minnesota North, N.A. and the Company (j)
10.13 Fourth Amendment to Credit Agreement dated June 1, 2000
between Norwest Bank Minnesota North, N.A. and the Company (l)
10.14** Multi-Terrain Rubber-Tracked Loader Alliance Agreement dated
October 31, 2000 between Caterpillar Inc. and the Company (m)
10.15** Manufacturing and Distribution Agreement dated January 2, 2001
between Polaris Industries Inc. and the Company (n)
10.16 Fifth Amendment to Credit Agreement dated June 1, 2001 between
Wells Fargo Bank Minnesota, N.A. and the Company (o)
10.17 Sixth Amendment to Credit Agreement dated June 1, 2002 between
Wells Fargo Bank Minnesota, N.A. and the Company (p)
10.18 Seventh Amendment to Credit Agreement dated June 1, 2002
between Wells Fargo Bank Minnesota, N.A. and the Company (q)
10.19** Marketing Agreement dated March 13, 2003 between Jacobsen, a
division of Textron, Inc., and the Company (r)
10.20 Business Loan Agreement dated July 7, 2003 between Wells Fargo
Bank Minnesota, N.A. and the Company (s)
11 Statement re: Computation of Per Share Earnings
21 Subsidiaries (a)
31.1 Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99 Risk Factors
(a) Incorporated by reference to the Company's Registration
Statement on Form SB-2 (File No. 33-61284C) filed July
7, 1994.
(b) Incorporated by reference to the Company's
Post-Effective Amendment No. 1 to Registration Statement
on Form SB-2 (File No. 33-61284C) filed August 3, 1994.
(c) Incorporated by reference to the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1996
(File No. 0-25620) filed electronically March 28, 1997.
(d) Incorporated by reference to the Company's Quarterly
Report on Form 10-QSB for the quarter ended June 30,
1997 (File No. 0-25620) filed electronically August 13,
1997.
(e) Incorporated by reference to the Company's Definitive
Proxy Statement for the year ended December 31, 1997
(File No. 0-25620) filed electronically April 28, 1998.
15
(f) Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998
(File No. 0-25620) filed electronically August 12, 1998.
(g) Incorporated by reference to the Company's Current
Report on Form 8-K (File No. 0-25620) filed
electronically October 27, 1998.
(h) Incorporated by reference to the Company's Current
Report on Form 8-K (File No. 0-25620) filed
electronically February 11, 1999.
(i) Incorporated by reference to the Company's Annual Report
on Form 10-K for the year ended December 31, 1998 (File
No. 0-25620) filed electronically March 26, 1999.
(j) Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1999
(File No. 0-25620) filed electronically August 9, 1999.
(k) Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1999 (File No. 0-25620) filed electronically November
12, 1999.
(l) Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2000
(File No. 0-25620) filed electronically August 10, 2000.
(m) Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30,
2000 (File No. 0-25620) filed electronically November
13, 2000.
(n) Incorporated by reference to the Company's Annual Report
on Form 10-K for the year ended December 31, 2000 (File
No. 0-25620) filed electronically March 30, 2001.
(o) Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2001
(File No. 0-25620) filed electronically August 13, 2001.
(p) Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2002
(File No. 0-25620) filed electronically August 14, 2002.
(q) Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30,
2002 (File No. 0-25620) filed electronically November
14, 2002.
(r) Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2003
(File No. 0-25620) filed electronically May 14, 2003.
(s) Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2003
(File No. 0-25620) filed electronically August 14, 2003.
* Indicates management contract or compensation plan or
arrangement.
** Certain information contained in this document has been
omitted and filed separately accompanied by a
confidential request pursuant to Rule 24b-2 of the
Exchange Act.
(B) REPORTS ON FORM 8-K
The following Current Reports on Form 8-K were filed by the Company during
the quarter ended June 30, 2004:
Current Report on Form 8-K filed April 22, 2004 reporting under Item 12.
"Results of Operation and Financial Condition" that on April 22, 2004, ASV
issued a press release disclosing its financial results for the three months
ended March 31, 2004. In addition, the press release contained information
regarding a conference call to be held April 22, 2004 during which ASV planned
to discuss its financial results for the three months ended March 31, 2004 and
its outlook for the balance of fiscal 2004.
16
Current Report on Form 8-K filed June 4, 2004 reporting under Item 9.
"Regulation FD Disclosure" that on June 4, 2004, ASV issued a press release
disclosing its updated financial outlook for 2004 which included a discussion of
its estimated anticipated net sales and anticipated earnings per share for the
twelve months ending December 31, 2004.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
A.S.V., INC.
Dated: August 9, 2004 By /s/ Gary Lemke
-----------------------------------
Gary Lemke
Chief Executive Officer
Dated: August 9, 2004 By /s/ Thomas R. Karges
-----------------------------------
Thomas R. Karges
Chief Financial Officer
(principal financial and accounting officer)
18
EXHIBIT INDEX
EXHIBIT METHOD OF FILING
------- ----------------
11 Statement re: Computation of Per Share Earnings............... Filed herewith electronically
31.1 Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002................. Filed herewith electronically
31.2 Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002................. Filed herewith electronically
32.1 Certification of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002................. Filed herewith electronically
32.2 Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002................. Filed herewith electronically
99 Risk Factors.................................................. Filed herewith electronically
19