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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended December 31, 1999
[_] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from _________________to___________________.
Commission file number: 0-25620
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A.S.V., Inc.
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(Exact name of registrant as specified in its charter)
Minnesota 41-1459569
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State or other jurisdiction of I.R.S. Employer
incorporation of organization Identification No.
840 Lily Lane, P.O. Box 5160, Grand Rapids, MN 55744 (218) 327-3434
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Address of principal executive offices Registrant's telephone
number, including area
code
Securities registered under Section 12(b) of the Exchange Act:
None
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Title of each class
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
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Title of each class
Indicate by check mark whether the registrant (1) 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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Based on the closing sale price at March 15, 2000, the aggregate market
value of the registrant's Common Stock held by nonaffiliates was $105,735,225.
As of March 15, 2000, 9,688,815 shares of the registrant's Common Stock
were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
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Portions of the registrant's Proxy Statement for its June 2, 2000 Annual
Meeting, which will be filed by April 29, 2000, are incorporated by reference in
Part III.
1
PART I
Item 1. Description of Business
General
A.S.V., Inc. was incorporated in Minnesota in July 1983 and its wholly-
owned subsidiary, A.S.V. Distribution, Inc., was incorporated in Minnesota in
January 1989. A.S.V., Inc. and A.S.V. Distribution, Inc. are collectively
referred to herein as the "Company."
ASV designs, manufactures and sells track-driven all-season vehicles. The
Company's two principal product lines, the Posi-Track(TM) product line and the
Track Truck(R) product line, use a rubber track suspension system that takes
advantage of the benefits of both traditional rubber wheels and steel tracks.
Rubber track vehicles provide the traction, stability and low ground pressure
necessary for operation on soft, wet, muddy, rough, boggy, slippery, snowy or
hilly terrain, but, unlike steel track vehicles, can be driven on groomed,
landscaped and paved surfaces without causing damage. The Company's products are
versatile machines used in the construction, agricultural, landscaping, trail
grooming and maintenance, vineyard, military, wildlife management and other
markets.
The Company has the following models in its Posi-Track product line; the
MD-70, the 2800 series, the HD 4500 series, the 4810 and the DX 4530. The
Company has one model in its Track Truck product line, the HPT 2800.
Track Truck is a registered trademark, and Posi-Track, Posi-Turn and Snow
Saver are trademarks, of ASV, Inc. This Annual Report also contains trademarks
of other companies.
In 1999, the Company closed on a strategic alliance with Caterpillar Inc.
("Caterpillar") whereby Caterpillar purchased, for an aggregate purchase price
of $18 million, one million newly issued shares of the Company's Common Stock
and a warrant to purchase 10,267,127 newly issued shares of the Company's Common
Stock. In connection with this transaction, the Company received, among other
items, access to Caterpillar's worldwide dealer network through which it can
distribute its products.
Current Year Developments
Dealer Transition Matters
During 1999, as a result of the strategic alliance entered into with
Caterpillar, many of the Company's independent Posi-Track dealers were hesitant
to place orders for the Company's products. The Company believes these dealers
were unsure of their future status as Posi-Track dealers. Over half of these
independent dealers decided to no longer carry the Posi-Track product line in
1999. During 1999, the Company spent much of its marketing efforts to transition
from these existing independent dealers to new Caterpillar dealers, many of whom
had little experience with rubber tracked compact equipment. During this
transition phase, the Company's sales decreased.
Introduction of Concept Machine
At its annual shareholders' meeting in June 1999, the Company introduced a
new concept machine. This machine is significantly smaller than the Company's
current models and is expected to be marketed to the landscape, rental and
homeowner markets. The Company anticipates it will begin production of this
concept vehicle in the second quarter of 2000. This new product is expected to
be sold through multiple distribution channels in 2000.
New Model Posi-Track
In the third quarter of 1999, the Company began manufacturing a new model
Posi-Track, the 4810. This model incorporates many new components, primarily the
greater use of Caterpillar components, including a Caterpillar engine. The 4810
is approximately the same size as the Company's HD 4500 series Posi-Track and is
offered to both Caterpillar and independent ASV dealers.
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Integration with Caterpillar's Computer Systems
In September 1999, the Company's computer systems were integrated with
Caterpillar's computer systems. The integration allows Caterpillar dealers to
order goods and parts and process warranty claims with the Company on-line. This
process is similar to how Caterpillar dealers perform these tasks with
Caterpillar factories.
Markets for the Company's Products
With the increased production and sales volume of the Company's Posi-Track
crawler/tractors (specifically the MD-70, HD 4500 series, 2800 series and the
4810) over the last several years, sales of the Company's original product, the
Track Truck, and its DX 4530 model have had limited production and sales. These
models are sold primarily for over-the-snow applications and have a much more
limited market than the Company's crawler/tractor models. In 1999, sales of the
Track Truck and DX 4530 accounted for approximately 2.5% of the Company's net
sales. Therefore, unless specifically mentioned, the following discussion will
pertain only to the Posi-Track crawler/tractors referred to above. Hereafter,
the term Posi-Track will refer to the crawler/tractor models.
The Company believes its Posi-Tracks are very versatile and can be used in
a wide variety of applications. The following represents several of the possible
markets where the Company's products may be used.
Construction. The construction industry currently depends heavily on skid-
steer vehicles for a wide variety of functions. Skid-steers are small four-
wheeled vehicles that were originally designed and used primarily as loaders,
but in the last decade have become increasingly more popular for a variety of
functions and more versatile with the availability of attachments such as
backhoes, forklifts, breakers, planers, rakes and augers. Most skid-steer
attachments are designed to be used with an industry standard quick-attach
mechanism which allows attachments used by one manufacturer to be used on
vehicles manufactured by another.
The primary disadvantage of skid-steer vehicles is that they are wheeled
vehicles and are not designed for operation on wet, soft, slippery or rough
ground, which means that they are inherently limited as to when and where they
can function. Skid-steers often sit idle in the winter and spring or after rain
because the ground is not suitable for their operation. A wheeled skid-steer
exerts ten times or more ground pressure than a Posi-Track which makes a skid-
steer less suitable for operation on landscaped or groomed ground.
Recognizing the benefits of tracked vehicles, a few manufacturers have
created tracks that can be placed around a skid-steer's wheels. Add-on tracks
are generally steel; however, rubber add-on tracks are now available due to the
limitations imposed by steel tracks. Although rubber add-on tracks can decrease
a skid-steer's ground pressure to approximately 10 pounds per square inch, the
overall design of a Posi-Track gives it more versatility and less ground
pressure than a skid-steer with add-on tracks.
In addition to the tasks performed by skid-steers, Posi-Tracks are used for
construction jobs performed by small steel track dozers. A skid-steer's design
lacks the power, traction and stability necessary for moving dirt and other
materials efficiently. Therefore, dozers have remained single purpose machines
and, because of their steel tracks and significant ground pressure, cannot be
operated on soft, groomed, landscaped or paved surfaces.
Landscaping. Like the construction industry, the landscaping industry
depends heavily on small dozers and skid-steers with loaders, backhoes, rakes
and other attachments. Landscapers have also been limited by these machines on
soft, wet, muddy, hilly or rough terrain or on groomed or paved surfaces,
thereby affecting productivity. Skid-steers and dozers cause greater soil
compaction than a Posi-Track, which is a concern for landscapers because the
more compact the soil, the more difficult it is for plants to grow. The Posi-
Track can also be adapted to perform special functions in the landscaping
industry. For example, the Company manufactures a Posi-Track attachment which is
used for laying a specially cut continuous roll of sod over 100 feet in length
and weighing over 1,200 pounds. The sod is held in front of the vehicle and
unrolls as the Posi-Track moves forward, laying the sod on the ground. The Posi-
Track's rubber tracks then move over the sod, gently setting it in place. This
procedure allows sod to be laid with significantly less manual labor and on
places such as sides of hills where traditional smaller sod sections could be
washed away by excessive rain.
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Agricultural. Posi-Tracks are used in the agricultural industry to perform
the functions of small tractors. Its three-point hitch and reversible seating
allow it to be used with pull-type attachments such as roto-tillers, plows,
disks and cultivators. The Posi-Track's hydraulic power take off shaft allows it
to be used for farming chores such as grinding and unloading feed. Its low
ground pressure and rubber tracks allow it to be used on wet, soft, muddy ground
that would not be possible with traditional wheeled tractors, thereby increasing
the number of productive days. In addition, Posi-Track's low ground pressure
reduces compaction of soil. Posi-Tracks are being used in several grape
vineyards in California's Napa Valley as a replacement to four-wheel drive
tractors.
Trail Grooming and Maintenance. The Posi-Track is used for maintaining
trails such as snowmobile, cross-country ski, biking and hiking trails. The
Posi-Track is used with a mower attachment to clear and maintain trails for
biking, hiking and other purposes.
Wildlife Management. Posi-Tracks are used in wildlife management by Federal
agencies and the departments of natural resources of a number of states. They
are used to mow trails for wildlife and to mow clearings so that grass, clover
and other vegetation needed for wildlife can grow. They are also used to clear
cattails and other unwanted vegetation from swamps to provide access for feeding
ducks and other waterfowl. Posi-Tracks have also been equipped for use in the
management of controlled burning or the maintenance of fire lines to prevent the
spread of forest fires and for access to remote sites for a variety of other
purposes.
Military Applications. The Posi-Track (model MD-70 only) is being equipped
with robotic and video equipment to enable remote operation of the machine at
distances up to three miles. Current applications for this type of Posi-Track
include detonation and removal of land mines, clearing unexploded munitions on
bomb ranges and clearing bomb ranges of overgrown vegetation. For these types of
applications, the Company is selling the Posi-Track MD-70 to an unrelated party
who equips it with the necessary robotics and video equipment to provide for the
remote operation.
The Company has been awarded a supply contract number for several of its
Posi-Track models under the General Service Administration which allows Federal
governmental agencies to purchase them without going through a competitive
bidding process.
Other. The versatility of the Posi-Track has allowed for their use in areas
where a typical skid-steer vehicle could not operate. A grain export company is
using Posi-Track's in the hold of grain vessels to level the grain for proper
weight distribution or before adding more cargo, eliminating many hours of hand
labor.
Products
The Company's principal products are contained in one primary product line,
the Posi-Track product line. All products under this product line utilize a
rubber track suspension system that takes advantage of the benefits of
traditional rubber wheels and steel tracks, without the disadvantages possessed
by each. Wheeled vehicles have less traction, are less stable than tracked
vehicles and cannot operate on soft, wet, slippery, rough or hilly terrain.
Steel tracks damage the surfaces on which they operate. Also, the significant
ground pressure of both wheeled and steel track vehicles creates compacted soil.
The rubber track utilized in the Posi-Track product line provides the traction,
stability and mobility of tracked vehicles, but does not damage surfaces. In
addition, all Posi-Tracks have extremely low ground pressure which means they
will not cause significant soil compaction.
The Company began manufacturing the Track Truck in 1984. The current Track
Truck model is the HPT 2800 and is used primarily in over-the-snow applications.
The Company began manufacturing the Posi-Track Model MD-70 for sale in 1991. In
July 1997, the Company began selling the Posi-Track HD 4500 series, which is
larger than the MD-70 and has additional features not available on the current
model MD-70, most notably a maintenance-free suspension which eliminated all
periodic maintenance on the suspension parts. In October 1997, the Company began
selling the Posi-Track DX 4530, the largest of all the Posi-Track models
produced. The DX 4530 is used primarily in over-the-snow applications. The DX
4530 has features not found on either the MD-70 or HD 4500 models. In August
1998, the Company began selling the Posi-Track 2800 series. The 2800 series
integrated the size, weight and operating capabilities of the Company's Model
MD-70 Posi-Track with the maintenance-free undercarriage currently in use on the
Company's HD 4500 and DX 4530 models. In July 1999, the Company began
manufacturing the 4810, which incorporates a Caterpillar engine and other
Caterpillar components. The 4810 is intended to be a replacement to the HD 4500
series. In June 1999, the Company introduced a smaller concept rubber tracked
vehicle. This concept vehicle is significantly smaller than any of the Company's
existing models and will be sold to the landscape and homeowner market. The
Company anticipates beginning production of this
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model in the second quarter of 2000. The vast majority of the Company's future
production is expected to be devoted to the 4810, the 2800 series and the new
smaller vehicle. The Company may, from time to time, build its other models on
an as needed basis.
The rubber tracks used on the Company's products are made of molded rubber
reinforced with layers of nylon, Kevlar and fiberglass rods. The majority of the
Company's Posi-Track products feature a maintenance-free suspension with no
grease fittings. The Posi-Track products utilize diesel engines manufactured by
various engine manufacturers. The current model Posi-Tracks utilize engines
manufactured by Isuzu and Caterpillar.
Posi-Track Crawler/Tractor Models.
The Company believes its Posi-Tracks are ideal replacements to skid-steers,
small dozers and small tractors and can perform many of the jobs handled by
these vehicles without the disadvantages they possess. Their standard quick-
attach mechanism enables them to operate the attachments used by skid-steers.
They are also designed to be used with a dozer attachment. In addition, their
three-point hitch attachment and reversible seating allow them to function as a
small tractor.
The Posi-Track's weight is distributed over its two tracks, which have a
ground surface of approximately 102 x 18 inches per track, which results in an
average ground pressure of approximately 2-3 pounds per square inch, compared to
approximately 35 pounds per square inch for a typical wheeled skid-steer
weighing approximately the same as a Posi-Track. The Posi-Track's low ground
pressure allows it to operate on wet, soft, slippery, rough and hilly terrain.
Conventional wheeled vehicles may not be able to operate or may be destructive
in these conditions. The Posi-Track's low ground pressure also reduces
compaction which decreases the need for frequent tilling and conditioning of the
soil.
Posi-Tracks are multi-purpose vehicles which the Company believes are
attractive to customers principally because of their:
. Size. Posi-Tracks equipped with a loader, weigh approximately 7,400 to
8,500 pounds, depending on model, and have an approximate ground
pressure of 3 pounds per square inch. The overall size of a Posi-Track
is comparable to a typical skid steer.
. Features. The Posi-Track's loader includes a quick-attach mechanism
which allows for use of a wide range of attachments, manufactured both
by the Company and others such as a bucket, forklift, rake, mower and
snowblower. Posi-Tracks can accept a category one or category two
three-point hitch, depending on model. A dozer blade and backhoe are
also available for all Posi-Tracks.
. Price. The current retail price of a Posi-Track ranges from
approximately $42,600 for a model 2800 with a loader, bucket and
quick-attach mechanism to approximately $52,000 for a 4810 with a
loader, bucket and quick-attach mechanism. Although the most common
skid-steer vehicles have a slightly lower base price, comparably
equipped skid-steers cost approximately the same as a Posi-Track 2800.
. Ease of Operation. Posi-Tracks feature a reversible driver's seat
which allows an operator to face either end of the vehicle for better
control. All Posi-Track models are maneuverable and can easily turn in
their own length.
In addition to the attachments already available on the market from other
manufacturers, the Company also manufactures and sells attachments for the Posi-
Track for special functions not performed by other competing vehicles. Because
skid-steers are not designed for performing dozer functions, dozers have
traditionally been separate, single-function vehicles. However, because of its
rubber track and design, the Posi-Track is able to perform dozer functions with
the dozer attachment manufactured and sold by the Company. The Company also
modifies a mower attachment for the Posi-Track and designs, manufactures and
sells other attachments for special purposes.
Over-the-Snow Models
The Company manufactures two additional models, the Track Truck and the DX
4530, which are primarily marketed towards over-the-snow applications, such as
snow trail grooming for snowmobile and ski trails. With the increased popularity
and production of the Company's Posi-Track crawler/tractor models, the
production and sales of the over-the-snow models has greatly decreased over the
last several years. In 1999, sales related to over-the-snow models
5
accounted for approximately 2.5% of the Company's net sales. The Company
anticipates it may manufacture these models in the future, but only on a build
to order basis.
Sales and Marketing
Prior to entering into its strategic alliance with Caterpillar in October
1998, the Company sold and distributed its Posi-Tracks primarily through
independent construction and farm equipment dealers in the United States and
limited areas of Canada and New Zealand. The Company also began distributing
its DX 4530 through selected Posi-Track dealers in the United States during
1998.
Subsequent to entering into its strategic alliance with Caterpillar, the
Company's Posi-Track products have begun being distributed through Caterpillar's
worldwide dealer network which consists of 195 dealers in approximately 200
countries. In the United States, there are 64 Caterpillar dealers representing
approximately 400 dealer locations. The Company is first distributing its Posi-
Track products to Caterpillar dealers in North America and certain Caterpillar
dealers in Australia. The Company believes its association with Caterpillar will
provide the necessary dealer locations to adequately cover the available market
for its Posi-Track products.
As of March 1, 2000, 50 Caterpillar dealers and 15 independent dealers
representing over 350 locations in the United States, Canada and Australia sell
and service the Company's machines. The Company anticipates it will expand
further into Canada, Australia, Central America and South America in 2000.
As of October 1998 (prior to the Caterpillar transaction), the Company had
5 Caterpillar dealers and 50 independent dealers with approximately 120 total
dealer locations. From October 1998 to March 2000, the number of independent
Posi-Track dealers has been reduced as they decided to no longer carry the
Company's products. In addition, one Caterpillar dealer had their Posi-Track
trade area reduced as they were selling into the trade area of several other
Caterpillar dealers. This dealer was the Company's largest customer for 1998,
accounting for approximately 21% of the Company's net sales in 1998.
The Company sells and distributes the Track Truck in the United States
through three independent dealers as well as in-house sales and marketing
efforts. Sales of the Company's products in geographic areas outside the above-
mentioned areas are made on a direct basis through in-house sales and marketing
efforts.
The construction and farm equipment industries, in which the Posi-Track
models compete, have historically been cyclical. Sales of construction and
agricultural equipment are generally affected by the level of activity in the
construction and agricultural industries as well as farm production and demand,
weather conditions, interest rates and construction levels (especially housing
starts). In addition, the demand for the Company's products may be affected by
the seasonal nature of the activities in which they are used. Sales of the Posi-
Track have generally been greater in the spring and summer.
In 1999, no customers accounted for over 10% of the Company's net sales.
During 1998, approximately 21% of the Company's net sales were made to one
unaffiliated customer. In 1997, approximately 27% of the Company's net sales
were made to two unaffiliated customers, each accounting for over 10% of sales.
As of March 15, 2000, the Company had orders for approximately $3.1 of
Posi-Tracks and related accessories. As of March 22, 1999, the Company had
orders for approximately $3.0 million of Posi-Tracks and related accessories.
The Company generally does not offer financing on its vehicles, but has
arrangements with several finance companies to finance the sale of the Company's
vehicles to its dealers and end purchasers. The Company has an agreement with
John Deere Credit whereby John Deere Credit will provide floor plan financing to
certain of the Company's Posi-Track dealers. For 1999, 1998 and 1997,
approximately 2%, 8% and 10%, respectively, of the Company's sales were financed
through John Deere Credit. Company financed sales were less than 1% of the
Company's sales for the years 1997 through 1999.
The agreement with John Deere Credit requires the Company to repurchase any
units not paid for by the purchaser within the terms of the respective
agreements. As of February 28, 2000, the total amount owed to John Deere Credit
by dealers under the Company's agreement was approximately $332,000.
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Affiliation with Caterpillar
On October 14, 1998, ASV entered into a Securities Purchase Agreement (the
"Purchase Agreement") with Caterpillar Inc. ("Caterpillar"). This Purchase
Agreement was approved by the Company's shareholders on January 28, 1999 and
closed January 29, 1999. Pursuant to the Purchase Agreement, Caterpillar
acquired, for an aggregate purchase price of $18,000,000, one million newly
issued shares of the Company's Common Stock and a warrant (the "Warrant") to
purchase an additional 10,267,127 newly issued shares of the Company's Common
Stock at a price of $21.00 per share (the "Transaction"). The Purchase Agreement
provided that, upon closing, the Company's Board of Directors would be increased
from eight to ten members and the Company's Board of Directors appointed two
members designated by Caterpillar.
In connection with entering into the Purchase Agreement, the Company and
Caterpillar have entered into several ancillary agreements. First, the Company
and Caterpillar have entered into a commercial alliance agreement (the
"Commercial Alliance Agreement") pursuant to which Caterpillar will provide the
Company with access to its worldwide dealer network and will make various
management, financial and engineering resources available to the Company. In
addition, Caterpillar and the Company have entered into various other agreements
pursuant to which Caterpillar and the Company will supply each other with
certain components, Caterpillar will agree to allow the Company to use certain
of its trademarks and trade dress in the event certain conditions are met and
Caterpillar and the Company will agree to share certain technologies, all at
certain costs. Material terms of these ancillary agreements are described below.
The Commercial Alliance Agreement. The Commercial Alliance Agreement
provides that the Company and Caterpillar will enter into certain agreements,
each of which is discussed below.
Marketing Agreement. The Marketing Agreement requires Caterpillar to
provide the Company with access to its worldwide distribution network, in
part, by promoting the sale of the Company's products to Caterpillar's
dealers. Caterpillar will first promote ASV's products in North America and
gradually extend such promotion throughout the world consistent with a
joint marketing plan to be developed by the Company and Caterpillar. In
addition, under the Marketing Agreement, Caterpillar intends to handle
orders for the Company's products and administer its warranties. In
consideration for Caterpillar's services under the Marketing Agreement, ASV
will pay to Caterpillar a commission equal to 5% of the dealer net price
for complete machines and 3% for replacement parts and Company-branded
attachments sold to Caterpillar dealers plus the costs of certain services
provided by Caterpillar. The Marketing Agreement was entered into between
Caterpillar and the Company on January 29, 1999.
Trademark and Trade Dress License Agreement. The Marketing Agreement
provides that the Company and Caterpillar enter into a Trademark and Trade
Dress License Agreement (the "License Agreement") at such time as the
Company's products have been evaluated by Caterpillar and have been found
to meet Caterpillar's quality and safety standards in accordance with
Caterpillar's established testing and validation procedures. The License
Agreement will provide, in part, that Caterpillar will grant to the Company
the non-exclusive, non-transferable right and license to use certain
trademarks of Caterpillar on the Company's products for a fee equal to a
percentage of the dealer net price for products sold to dealers with such
trademarks. The term of the License Agreement will be five years from the
date of the signing of the License Agreement, unless earlier terminated by
mutual consent of the Company and Caterpillar. Although no time frame for
the evaluation of the Company's products has been agreed to, the Company
anticipates that such process may take from two to four years, or longer.
The Company and Caterpillar have currently chosen to focus on product
offerings without the Caterpillar trademark and have elected not to pursue
this portion of the Marketing Agreement at the current time.
Management Services Agreement. Under the Management Services Agreement,
Caterpillar will make available to the Company general management support
in connection with the day-to-day operation of its business, commercial
development and marketing research services, financial planning services,
such other administrative services as Caterpillar and the Company may
subsequently agree to in writing, and manufacturing and engineering
services. In consideration for Caterpillar's obligations under the
Management Services Agreement, the Company will pay Caterpillar a fee equal
to Caterpillar's fully-loaded cost, as defined in the Management Services
Agreement, plus an administrative surcharge (or such other fee as the
parties may agree upon). The Management Services Agreement remains in
effect indefinitely until otherwise terminated by the parties and was
entered into between Caterpillar and the Company on January 29, 1999.
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Other Agreements. The Commercial Alliance Agreement also provides that the
Company and Caterpillar enter into several additional agreements, the terms of
which, including the fees and costs to be paid thereunder, may be negotiated in
the future as the need warrants. These agreements are as follows:
Service Agreements. The parties have agreed to enter into Service
Agreements pursuant to which Caterpillar will offer to ASV financial
services, logistics services and services to promote ASV's products to
governmental bodies, either through Caterpillar or a wholly owned
subsidiary of Caterpillar, and ASV will agree to use such services if the
prices to be negotiated for such services are competitive from a total
value point of view. Caterpillar and the Company have chosen to operate
under this portion of the Commercial Alliance Agreement without a formal
Service Agreement.
Supply Agreement (Caterpillar to ASV). The parties have agreed to enter
into a Supply Agreement (Caterpillar to ASV) pursuant to which Caterpillar
will offer to supply Caterpillar components to ASV for incorporation into
ASV's products, including, without limitation, diesel engines, and ASV will
agree to purchase such components from Caterpillar if the terms upon which
such components are offered for sale to ASV are competitive from a total
value point of view. Caterpillar and the Company have chosen to operate
under this portion of the Commercial Alliance Agreement without a formal
Supply (Caterpillar to ASV) Agreement
Supply Agreement (ASV to Caterpillar). The parties have agreed to enter
into a Supply Agreement (ASV to Caterpillar) pursuant to which ASV will
offer to supply ASV components to Caterpillar for incorporation into
Caterpillar's products that do not compete with ASV's products and ASV will
further agree to license to Caterpillar the intellectual property rights
necessary for Caterpillar to manufacture such components in the event it
becomes economically impractical for ASV to supply such components. Events
giving the need for a formal Supply Agreement (ASV to Caterpillar) have not
yet occurred, therefore no Supply Agreement (ASV to Caterpillar) has been
entered into.
Technology License Agreement (ASV to Caterpillar). The parties have agreed
to enter into a Technology License Agreement (ASV to Caterpillar) pursuant
to which ASV will offer to license to Caterpillar, on an exclusive (except
as to ASV) and royalty bearing basis, the right to use ASV's proprietary
patents and know-how relating to all-terrain rubber track vehicles in the
design, manufacture, use and sale of Caterpillar's products that do not
compete directly with ASV's products (subject to ASV's right to supply
components to Caterpillar pursuant to the Supply Agreement (ASV to
Caterpillar) described above). Events giving the need for a formal
Technology License Agreement have not yet occurred, therefore no Technology
License Agreement has been entered into.
Joint Venture Agreement. The parties have agreed to enter into a Joint
Venture Agreement pursuant to which ASV and Caterpillar will establish a
50-50 joint venture company to design and develop a line of agricultural
tractors utilizing key aspects of the parties' respective technology and
know-how. Caterpillar and the Company have had preliminary discussions
regarding the Joint Venture, although a formal Joint Venture Agreement has
not been entered into.
Caterpillar currently owns approximately 8.7% of the Company's outstanding
Common Stock (assuming the exercise of all outstanding options and warrants) and
has the right to own up to approximately 51.8% of the Company's outstanding
Common Stock (assuming the exercise of all outstanding options and warrants)
upon exercise of the Warrant.
Competition
The markets in which the Posi-Track competes are generally comprised of
small to medium sized tractor-type vehicles including skid-steers. The market is
dominated by large corporations producing models with substantial name
recognition, including Case, which manufactures the Uniloader skid-steer,
Ingersoll Rand which manufactures the Bobcat, Gehl, Deere & Co. and Caterpillar
Inc. The competitors primarily produce wheeled or steel track vehicles in the
markets in which the Posi-Track competes. Caterpillar, John Deere and Case sell
rubber track vehicles in the medium to large sized tractor market. In 1999,
Ingersoll Rand introduced a rubber track skid steer which would be considered
comparable in size to the Company's Posi-Track 2800 series.
The Company expects its products to compete in the market based on, among
other things: adaptability, versatility, performance, convenience of operation,
features, size, brand loyalty, price and reputation. Some of the Company's
competitors possess significantly greater resources than the Company, as well as
established reputations within the industry.
8
There is no assurance that a competitor with greater capital resources will not
enter and exploit the Company's markets to the Company's detriment. The Company
believes the introduction of additional competitors could enhance market
acceptance of rubber track vehicles.
Warranty
The Company provides a limited warranty to purchasers of its products. The
warranty covers defects in materials and workmanship for a period of one year
from the delivery date. The rubber tracks used on the Company's products carry a
pro-rated warranty up to 2,000 hours of usage. Components which are not
manufactured by the Company are subject only to the warranty of the manufacturer
of the component and may be greater in length than the limited warranty provided
by the Company.
On September 1, 1999, the Company's warranty policy changed with respect to
all machines sold after that date. This was done in conjunction with the Company
integrating its computer system with Caterpillar's computer system to allow
Caterpillar dealers to process warranty claims on-line, eliminating the need to
file paper warranty claims. The changes in the Company's warranty policy include
the elimination of reimbursing dealer labor relating to warranty repairs,
eliminating travel costs relating to warranty repairs and the elimination of the
15% warranty discount provided on parts used in warranty repairs. In addition,
should a Caterpillar manufactured part, such as an engine, fail during the
warranty period, Caterpillar is responsible for providing the warranty on that
part.
The Company plans to offer an extended warranty in 2000 through an
unaffiliated company. This unaffiliated company would be responsible for
administering and paying all warranty claims under this extended warranty
program.
Manufacturing and Suppliers
The Company manufactures and assembles its products at its facility in
Grand Rapids, Minnesota. See "Item 2. Description of Property." The majority of
the component parts are purchased from outside vendors. Certain parts, such as
engines and transmissions, are standard "off-the-shelf" parts purchased by the
Company and incorporated into its vehicles. Others, such as the rubber track,
undercarriage components and loader, are manufactured specifically for the
Company. The remaining parts, such as the Posi-Track frame, are manufactured on
site for incorporation into the vehicles. In order to help reduce production
costs, the Company periodically reviews those parts that may be more cost-
effective to manufacture in-house.
The Company owns the tooling used by outside vendors for manufacturing
customized parts. While current vendors are meeting the Company's quality and
performance expectations, the Company believes alternative contract
manufacturers are available should the necessity arise. However, shortages of
parts or the need to change vendors could result in production delays or
reductions in product shipments that could adversely affect the Company's
business. The Company believes that a change in suppliers for component parts
could occur without material disruption of the Company's business.
Intellectual Property Rights
In 1986, a patent was issued to the Company with respect to the Posi-Turn
power steering system. The steering system was invented by Gary Lemke, President
of the Company, and his rights with respect to the invention were assigned by
him to the Company. In connection with the assignment, the Company did not pay
any compensation to Mr. Lemke, but agreed that in the event the Company licenses
any of its rights under the patent to others, Mr. Lemke would receive 25% of any
royalties under such license. This royalty agreement was terminated in January
1999, with no consideration paid to Mr. Lemke.
In 1999, the Company filed patent application with the U.S. Patent Office
pertaining to its undercarriage and drive sprocket mechanism. There can be no
guarantee that a patent will be granted with respect to this application.
The Company has registered the trademark Track Truck(R) with the U.S.
Patent and Trademark Office and claims common law trademark rights in the names
Posi-Track(TM), Posi-Turn(TM) and Snow Saver(TM). Despite these protections, it
may be possible for competitors or users to copy aspects of the Company's
products.
The Company believes that patent and trademark protection is less
significant to its competitive position than the
9
knowledge, ability and experience of the Company's personnel, product
enhancements, new product development and the ongoing reputation of the Company.
Research and Development
During the years ended December 31, 1999, 1998 and 1997, the Company spent
approximately $531,000, $319,000 and $217,000, respectively, on research and
development. The Company's research and development expenses have been incurred
in connection with development of new models and enhancements to existing
products.
Insurance
The Company maintains product liability insurance as well as a commercial
umbrella insurance policy in amounts the Company believes are adequate. The
Company also maintains key-person life insurance in the amount of $1,000,000 on
the life of Mr. Lemke.
Employees
As of March 15, 2000, the Company had 112 employees, two of whom are part-
time. The Company's employees include four in management, 16 in administration,
14 in sales and marketing and 78 in manufacturing, engineering and research and
development. The Company believes its relations with its employees are good.
None of the Company's employees is represented by a labor union. The Company
also reimburses Caterpillar for the salary related costs of two Caterpillar
employees that work at the Company's Grand Rapids facility.
Item 2. Description of Property
The Company's manufacturing and office facilities are located in Grand
Rapids, Minnesota. These facilities consist of approximately 95,000 square feet
of production space and approximately 10,000 square feet of office space. The
facilities are leased under a 20-year lease from the Grand Rapids Economic
Development Authority. The lease agreement provides for monthly rental payments
to January 2018, with a balloon payment of approximately $756,000 in January
2003. The Grand Rapids facility has been the Company's primary production and
office facility since the original 40,000 square foot facility was first
occupied by the Company in May 1995. The facility was expanded to its present
size in 1997. The Company has an option to purchase the facility at any time at
the present value of the remaining lease payments plus the current purchase
price of the land on which the facility was constructed. The purchase price of
the land is currently $195,000, but can be reduced or forgiven over a remaining
period of six years if certain minimum employment levels are met and maintained
during the applicable year.
The Company also owns a parcel of land consisting of 63 acres and six
buildings with a total of 47,000 square feet, which it uses for its research and
development facility and additional warehousing.
The Company believes that its properties are adequately covered by
insurance.
Item 3. Legal Proceedings
During its 1999 fiscal year, the Company was not involved in any material
legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Information
The Company's common stock trades on the Nasdaq Stock Market(R) under the
ticker symbol ASVI. The following table sets forth sales price information for
the periods indicated, as adjusted to reflect the Company's three-for-two stock
splits, effective January 21, 1997 and May 15, 1998:
Year Ended December 31, 1999 High Low
---------------------------- ---- ---
First Quarter $18.50 $15.00
Second Quarter 23.88 15.25
Third Quarter 23.00 14.37
Fourth Quarter 16.69 12.38
Year Ended December 31, 1999 High Low
---------------------------- ---- ---
First Quarter $20.00 $14.50
Second Quarter 25.88 16.83
Third Quarter 26.38 14.13
Fourth Quarter 21.50 14.88
The quotations reflect inter-dealer prices, without retail mark-up, mark-
down or commissions, and may not represent actual transactions.
Holders
As of March 15, 2000, the Company had approximately 269 holders of record
of its Common Stock (not including beneficial holders). The Company believes it
has approximately 4,500 beneficial holders of its Common Stock.
Dividends
The Company has never declared or paid a cash dividend on its Common Stock.
The Company currently intends to retain earnings for use in the operation and
expansion of its business and therefore does not anticipate paying any dividends
in the foreseeable future.
Item 6. Selected Financial Data
(Dollar amounts in thousands, Year ended December 31,
except per share data) 1999 1998 1997 1996 1995
------------------------------------------------------------------------------
Net Sales..................... $36,168 $39,019 $24,316 $12,266 $8,245
Net Income.................... 1,412 3,366 2,324 922 440
Net Income Per Share-Diluted.. .14 .40 .28 .12 .06
Total Assets.................. 48,650 29,533 19,215 13,410 6,322
Long-Term Liabilities......... 2,197 2,464 7,021 5,697 643
Shareholders' Equity.......... 39,096 19,515 9,957 6,287 5,078
11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
The following table sets forth, for the periods indicated, certain
Statements of Earnings data as a percentage of net sales:
Year Ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
Net sales.................................. 100.0% 100.0% 100.0%
Cost of goods sold......................... 76.7 75.6 74.5
Gross profit............................... 23.3 24.4 25.5
Selling, general & administrative expense.. 15.7 8.9 9.2
Operating income........................... 6.2 14.7 15.4
Interest expense........................... 0.8 1.5 1.6
Net income................................. 3.9 8.6 9.6
Net Sales. Net sales for the year ended December 31, 1999 decreased 7% to
approximately $36,168,000 compared with $39,019,000 in 1998. This decrease is
the result of several offsetting factors. First, the Company closed the
Transaction with Caterpillar in January 1999. The Company spent much of 1999
transitioning from its mostly independent dealer network to the Caterpillar
dealer network. Based on the success the Company had selling to Caterpillar
dealers in prior years, it was felt the transition to additional Caterpillar
dealers would be a relatively simple process. However, the degree to which these
additional Caterpillar dealers embraced new products, such as ASV's Posi-Track,
varied greatly. This required increased training and market development activity
by both the Company and the dealers to get the necessary marketing programs and
other support in place. During this time period, sales decreased. Second, in
1999, the Company introduced a new model Posi-Track, the 4810, that incorporated
many Caterpillar components. The initial production of the 4810 was later than
anticipated due to delays encountered during the initial production process,
leading to decreased sales during primarily the third quarter of 1999.
Offsetting these two factors was in an increase in sales of approximately $2.3
million relating to Posi-Track machines sold under military contracts.
Net sales for the year ended December 31, 1998 increased 60% to
approximately $39,019,000 compared with $24,316,000 in 1997. The increase can be
attributed to a combination of several factors. First, the Company expanded its
network of Posi-Track dealers in 1998. Prior to the announcement of the
Transaction with Caterpillar in October 1998, the Company had approximately 120
dealer locations able to distribute its Posi-Track products compared with 91 at
March 1998. Second, 1998 was the first full year of sales for the Company's HD
4500 series Posi-Track which accounted for approximately 75% of all units
shipped in 1998. Sales of the HD 4500 series began in the third quarter of 1997.
Third, the Company introduced the MD 2800 series in the third quarter of 1998,
which accounted for approximately 19% of all units shipped in 1998. The Company
believes the two additional model Posi-Tracks available for sale in 1998 and the
maintenance-free undercarriage found on these models were responsible for the
sales decrease of the MD-70 Posi-Track in 1998. Fourth, the Posi-Track model DX
4530 was available for the full year in 1998. 1998 sales of the Posi-Track DX
4530 increased approximately 47% over 1997. Conversely, sales of the Company's
Track Truck decreased approximately 54% as customers purchased the DX 4530
instead of the Track Truck. Lastly, sales of service parts increased 80% in 1998
as the number of machines in service continues to increase. Also, sales of used
equipment increased 67% in 1998 as the Company has been able to increase its
used equipment offerings and devote additional marketing efforts towards its
sale.
Gross Profit. For the year ended December 31, 1999, gross profit decreased
12% to approximately $8,429,000 compared with approximately $9,531,000 for 1998.
This decrease is a result of decreased sales in 1999 as discussed above and a
decrease in the Company's gross profit percentage from 24.4% in 1998 to 23.3% in
1999. The decreased gross profit percentage is due to several factors. First, as
discussed above, the Company experienced delays resulting in production
inefficiencies during its initial start up of production for the 4810 during the
third quarter of 1999. Second, the military contract discussed above had a
significantly lower gross profit percentage than the Company's typical sales to
its dealers. This was due to the high subcontract costs on this military
contract. Also, the Company experienced increased warranty costs as a percentage
of net sales, mainly from earlier model machines, which were not fully recovered
from its vendors.
Gross profit for the year ended December 31, 1998 increased to
approximately $9,531,000, or 24.4% of net sales, compared with approximately
$6,202,000, or 25.5% of net sales in 1997. The increase in gross profit is due
to the 60% increase in the Company's net sales for 1998. The gross profit
percentage change was due to an increase resulting from the sale of models with
higher gross margins more than offset by an increase in warranty expense and two
additional factors.
12
First, the Company incurred initial start up production costs related to its
Model 2800 Series Posi-Track, primarily during the fourth quarter, as
manufacturing changes were made to improve the overall product. Second, the
Company experienced less retail sales as a percentage of its total net sales in
1998, thereby reducing its overall gross profit margin, as more of its product
was sold through its dealer network in 1998 compared with 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from approximately $3,480,000 in 1998 to
$5,671,000 in 1999. As a percentage of net sales, these expenses increased from
8.9% of net sales in 1998 to 15.7% of net sales in 1999. The increased level of
expenses was due to several factors. First, the Company began paying a
commission to Caterpillar for sales to its dealers in 1999, which accounted for
approximately 42% of the increase. Second, the Company increased its marketing
efforts to assist in the transition of selling to Caterpillar dealers. These
marketing efforts included increased start up, training and market development
costs, as well as additional sales and support personnel hired to service the
dealers added in 1999. In addition, the Company integrated its computer system
with Caterpillar's to allow Caterpillar dealers to place orders for whole
machines and parts and process warranty claims in a similar fashion as they do
with Caterpillar. The increased expenses combined with the decreased sales
caused an increase in selling, general and administrative expenses when
expressed as a percentage of net sales. The Company anticipates its selling,
general and administrative expenses will increase as the Company's net sales
increase.
For the twelve months ended December 31, 1998, selling, general and
administrative expenses increased from approximately $2,230,000 in 1997 to
$3,480,000 in 1998. As a percentage of net sales, however, these expenses
decreased to 8.9% of net sales in 1998 from 9.2% of net sales in 1997. The
increase in the expenses is due to increased sales and marketing efforts and
increased administrative costs from increased employment levels. The increased
sales and marketing costs are primarily from additional sales personnel hired in
1998 and increased advertising and promotion expenditures to expand the
Company's dealer network. The decreased percentage of selling, general and
administrative expenses is due to the Company closely managing its costs as
sales volume increases.
Research and Development. Research and development expenses for the year
ended December 31,1999 increased approximately $212,000 to $531,000. The
increase is due primarily to the introduction of the 4810 model Posi-Track,
continued work on the Company's new smaller machine and enhancements to the
existing Posi-Track models.
For the twelve months ended December 31, 1998, research and development
expenses increased to approximately $319,000 compared with approximately
$217,000 in 1997. The increase is due primarily to the introduction of the 2800
series Posi-Track in 1998 and enhancements to existing Posi-Track models.
In order to maintain its competitive advantage over other manufacturers of
similar products, the Company believes it will increase the level of spending on
research and development activities. It is expected the main thrust of these
activities will be directed towards extensions of the Company's current product
lines and improvements of existing products.
Interest Expense. Interest expense was approximately $306,000, or 0.8% of
net sales, in 1999 compared with $576,000, or 1.5% of net sales, in 1998 and
$399,000, or 1.6% of net sales, in 1997. The decrease in 1999 is the combination
of two offsetting factors. Interest expense decreased in 1999 as the Company's
convertible debentures were exchanged for common stock in 1998. Offsetting this
decrease was an increase in borrowings under the Company's line of credit during
1999. The increased interest expense in 1998 was due to the expansion of the
Company's manufacturing facilities and the related debt thereon. In addition, in
connection with the exchange by the holders of the Company's convertible
debentures in the fourth quarter of 1998, the Company paid one additional
quarter of interest to those who exchanged their debentures for common stock.
This amount represented approximately $81,000 of additional interest expense in
1998.
Net Income. For the year ended December 31, 1999, net income decreased to
approximately $1,412,000, compared with approximately $3,366,000 in 1998. This
decrease was due to decreased sales with a lower gross profit and increased
operating expenses, offset in part by lower interest expense.
Net income for the twelve months ended December 31, 1998 was approximately
$3,366,000, compared with approximately $2,324,000 in 1997. The increase was due
to increased sales and profitability on those sales, offset, in part, by
increased operating expenses.
13
Liquidity and Capital Resources
At December 31, 1999, the Company's working capital increased $19,082,000
to approximately $36,497,000. The primary reason for the increase was the
Company's Transaction with Caterpillar, which resulted in an immediate increase
in working capital of $18 million. The Company utilized the proceeds from the
Transaction initially to pay off advances under its line of credit and to fund
current operations. Inventory levels increased 73% compared with December 31,
1998 due to several reasons. During the transition to Caterpillar dealers, the
Company chose not to reduce its production levels, but instead, increased its
finished goods, primarily its 2800 series Posi-Tracks. The Company is in the
process of marketing these finished units to its current dealers, as well as
additional international Caterpillar dealers. Other reasons for the inventory
increase include the general increase in inventory needed to begin production of
the new 4810 model Posi-Track, the long lead times to purchase certain inventory
items, and the need to inventory service parts for older model machines that are
in the field. In addition, as the Company transitioned from independent dealers
to Caterpillar dealers, the Company chose to repurchase the inventory held by
the independent dealers. To the extent possible, this inventory was transferred
to the new Caterpillar dealer. Any inventory not transferred was brought to the
Company's facilities and accounted for the majority of the $3.4 million increase
in used equipment held for resale. The Company anticipates it will be able to
reduce its inventory levels in 2000. Current liabilities decreased slightly from
1998, with the Company's line of credit borrowings increasing to fund current
operations and accounts payable decreasing as the Company reduced its purchasing
volume in the fourth quarter of 1999. Accrued commission increased in 1999 with
the closing of the Transaction with Caterpillar.
At December 31, 1998, the Company's working capital increased to
approximately $17,416,000 from approximately $13,342,000 at December 31, 1997.
This increase was due primarily to the increase in the Company's inventory and
accounts receivable levels, offset, in part, by increases in accounts payable
and borrowings on the Company's line of credit. The Company's sales during the
fourth quarter of 1998 were approximately $3,290,000 less than the third quarter
of 1998, due to dealer transition matters related to the Caterpillar
Transaction. During the fourth quarter, the Company chose not to
reduce its production levels, but instead, increased its finished goods. This
decision, along with the overall increase in the Company's business activity,
caused inventory levels to increase 61% from 1997. Accounts receivable increased
as more of the Company's sales occurred in December in fourth quarter 1998
compared with fourth quarter 1997. With the decrease in fourth quarter 1998
sales, the Company began drawing on its line of credit, with the outstanding
advances under the line totaling $3,535,000 at December 31, 1998. With the
increase in the Company's overall volume, accounts payable increased
approximately $1,439,000, or 98%, at December 31, 1998. Due to the exercise of
certain stock options in the latter half of 1998, the Company had no liability
for income taxes at December 31, 1998. In addition, the current portion of long-
term liabilities increased approximately $219,000 due to the additional debt
incurred for the Company's facility expansion and the acquisition of land and
buildings for storage and to house the Company's research and development
activities
Since the closing of the Transaction with Caterpillar on January 29, 1999,
the Company has been working closely with Caterpillar and its dealers to
introduce the Company's products to those Caterpillar dealers not currently
selling and servicing the Posi-Track product line. The Company spent much of
1999 meeting with potential Caterpillar dealers and educating them on the
benefits of a rubber tracked machine. The Company also put in place many systems
that it believes will help Caterpillar dealers interface with the Company. In
September 1999, the Company's computer systems were integrated with
Caterpillar's computer systems. This allows Caterpillar dealers to order
machines, attachments, parts and process warranty claims on-line in a manner
similar to how they perform these tasks with Caterpillar factories. As of March
1, 2000, 50 Caterpillar dealers and 15 independent dealers representing over 350
locations in the United States, Canada and Australia sell and service the
Company's machines. The Company anticipates it will expand further into
Australia, Canada and Central and South America in 2000.
In June 1999, the Company introduced a new smaller concept machine,
intended for the landscape and homeowner markets. Weighing approximately 2,600
pounds, this machine is significantly smaller than any of the Company's previous
models. The Company intends to build its first production run of this machine in
the second quarter of 2000 at its Grand Rapids facility. The raw materials for
this machine will be purchased from many of the same suppliers the Company is
currently using for its other products. The machine is expected to be sold
through multiple distribution channels and will have a retail price of
approximately $20,000.
On September 1, 1999, the Company's warranty policy changed with respect to
all machines sold after that date. This was accomplished at the same time as the
integration of the Company's computer system with Caterpillar's computer system
to allow Caterpillar dealers to process warranty claims on-line, eliminating the
need to file paper warranty claims. The changes in the Company's warranty policy
include the elimination of reimbursing dealers labor relating to warranty
repairs, eliminating travel costs relating to warranty
14
repairs and the elimination of the 15% warranty discount provided on parts used
in warranty repairs. In addition, should a Caterpillar manufactured part, such
as an engine, fail during the warranty period, Caterpillar is responsible for
providing the warranty on that part. The Company believes the change to its
warranty policy will reduce its warranty expense in the future.
As a result of the Transaction, the Company's near term revenues,
profitability and other financial results are expected to be lower than if the
Transaction were not announced or entered into. The decline is related to a
number of factors, including (i) the commission to be paid to Caterpillar for
sales made to Caterpillar dealers, (ii) transition issues affecting orders from
the preexisting non-Caterpillar affiliated dealers, and (iii) certain other
costs of implementing the Transaction and the agreements contemplated by the
Commercial Alliance Agreement. Over the longer term, however, management
believes that the Company will be able to achieve improved financial results due
to the Transaction and the Commercial Alliance Agreement.
The Company believes its existing cash and marketable securities, together
with cash expected to be provided by operations and available, unused credit
lines, will satisfy the Company's projected working capital needs and other cash
requirements for at least the next twelve months.
The statements set forth above under "Liquidity and Capital Resources" and
elsewhere in this Form 10-K which are not historical facts are forward-looking
statements including the statements regarding the Company's expected revenue,
profitability and other financial results in 2000 and beyond and the Company's
capital needs. These forward-looking statements involve risks and uncertainties,
many of which are outside the Company's control and, accordingly, actual results
may differ materially. Factors that might cause such a difference include, but
are not limited to, lack of market acceptance of new or existing products,
inability to attract new dealers for the Company's products, unexpected delays
in obtaining raw materials, unexpected delays in the manufacturing process,
unexpected additional expenses or operating losses or the activities of
competitors. Additional factors include the Company's ability to realize the
anticipated benefits from the relationship with Caterpillar. Any forward-looking
statements provided from time-to-time by the Company represent only management's
then-best current estimate of future results or trends.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company has no history of, and does not anticipate in the future,
investing in derivative financial instruments, derivative commodity instruments
or other such financial instruments. 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 8. Financial Statements and Supplementary Data
The following financial statements and financial schedules are attached as
a separate section immediately following the signature page of the Annual Report
on Form 10-K:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Earnings for the years ended December 31, 1999,
1998 and 1997
Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997
Notes to Consolidated Financial Statements
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
15
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by Item 10 is incorporated by reference to the
sections entitled "Election of Directors", "Executive Officers" and "Section
16(a) Beneficial Ownership Compliance" in the Company's Proxy Statement for its
2000 Annual Meeting of Shareholders, which will be filed with the Securities and
Exchange Commission pursuant to Regulation 14A within 120 days of the Company's
fiscal year end.
Item 11. Executive Compensation
The information required by Item 11 is incorporated by reference to the
section entitled "Executive Compensation" in the Company's Proxy Statement for
its 2000 Annual Meeting of Shareholders, which will be filed with the Securities
and Exchange Commission pursuant to Regulation 14A within 120 days of the
Company's fiscal year end.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 is incorporated by reference to the
section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Company's Proxy Statement for its 2000 Annual Meeting of
Shareholders, which will be filed with the Securities and Exchange Commission
pursuant to Regulation 14A within 120 days of the Company's fiscal year end.
Item 13. Certain Relationships and Related Transactions
The information required by Item 13 is incorporated by reference to the
section entitled "Certain Relationships and Related Transactions" in the
Company's Proxy Statement for its 2000 Annual Meeting of Shareholders, which
will be filed with the Securities and Exchange Commission pursuant to Regulation
14A within 120 days of the Company's fiscal year end.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements
The financial statements filed as part of this report are listed
under Item 8. Financial Statements and Supplementary Data.
(a) (2) Financial Statement Schedules
The following items are attached as a separate section immediately
following the financial statements included in this Annual Report on Form
10-K:
Report of Independent Certified Public Accountants on the Financial
Statement Schedules for the years ended December 31, 1999, 1998 and
1997
Schedule II - Valuation and Qualifying Accounts for the years ended
December 31, 1999, 1998 and 1997
(a) (3) Exhibits
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 (e)
3.1b Amendment to Second Restated Articles of Incorporation of the
Company filed May 4, 1998 (h)
16
3.2 Bylaws of the Company (a)
3.3 Amendment to Bylaws of the Company adopted April 13, 1999 (l)
4.1 Specimen form of the Company's Common Stock Certificate (a)
4.3 * 1994 Long-Term Incentive and Stock Option Plan (a)
4.4 Warrant issued to Leo Partners, Inc. on December 1, 1996 (d)
4.5 * 1996 Incentive and Stock Option Plan (e)
4.6 * 1996 Incentive and Stock Option Plan, as amended (f)
4.7 * 1998 Non-Employee Director Stock Option Plan (f)
4.8 Securities Purchase Agreement dated October 14, 1998 between
Caterpillar Inc. and the Company (h)
4.9 Warrant issued to Caterpillar Inc. on January 29, 1999 (i)
4.10 Option Certificate dated as of October 14, 1998 between Caterpillar
Inc and the Company (h)
4.11 Voting Agreement dated as of October 14, 1998 by certain
shareholders of the Company and Caterpillar Inc. (h)
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 (e)
10.5 Supplemental Development Agreement dated April 18, 1997 between the
EDA and the Company (e)
10.6 Line of Credit dated May 22, 1997 between Norwest Bank Minnesota
North, N.A. and the Company (e)
10.7 * Employment Agreement dated October 17, 1994 between the Company and
Thomas R. Karges (c)
10.8 Consulting Agreement between the Company and Leo Partners, Inc.
dated December 1, 1996 (d)
10.9 Extension of Lease Agreement dated May 13, 1998 between the EDA and
the Company (g)
10.10 First Amendment to Credit Agreement dated September 30, 1998
between Norwest Bank Minnesota North, N.A. and the Company (g)
10.11 Commercial Alliance Agreement dated October 14, 1998 between
Caterpillar Inc. and the Company (h)
10.13 Management Services Agreement dated January 29, 1999 between
Caterpillar Inc. and the Company (j)
10.14 Marketing Agreement dated January 29, 1999 between Caterpillar Inc.
and the Company (j)
10.15 Third Amendment to Credit Agreement dated June 9, 1999 between
Norwest Bank Minnesota North, N.A. and the Company (k)
17
11 Statement re: Computation of Per Share Earnings
22 List of Subsidiaries (a)
23 Consent of Grant Thornton LLP, independent auditors
27 Financial Data Schedule for the year ended December 31, 1999
99 Risk Factors (k)
(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 Quarterly Report on
Form 10-QSB for the quarter ended September 30, 1994 (File No.
33-61284C) filed November 11, 1994.
(d) 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.
(e) 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.
(f) 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.
(g) 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.
(h) Incorporated by reference to the Company's Current Report on
Form 8-K (File No. 0-25620) filed electronically October 27,
1998.
(i) Incorporated by reference to the Company's Current Report on
Form 8-K (File No. 0-25620) filed electronically February 11,
1999.
(j) 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.
(k) 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.
(l) 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.
* Indicates management contract or compensation plan or
arrangement.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1999.
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, A.S.V., Inc. has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized:
A.S.V., Inc.
/s/ Gary Lemke Date: March 29, 1999
------------------------- --------------------
By: Gary Lemke, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Philip C. Smaby Date: March 29, 1999
----------------------------------------------- --------------------
By: Philip C. Smaby, Chairman of the Board
and Director
/s/ Jerome T. Miner Date: March 29, 1999
----------------------------------------------- --------------------
By: Jerome T. Miner, Vice-Chairman of the Board
and Director
/s/ Gary Lemke Date: March 29, 1999
----------------------------------------------- --------------------
By: Gary Lemke, President and Director
(Chief Executive Officer)
/s/ Edgar E. Hetteen Date: March 29, 1999
----------------------------------------------- --------------------
By: Edgar E. Hetteen, Vice President and Director
/s/ James Dahl Date: March 29, 1999
----------------------------------------------- --------------------
By: James Dahl, Director
/s/ Leland T. Lynch Date: March 29, 1999
----------------------------------------------- --------------------
By: Leland T. Lynch, Director
/s/ Karlin S. Symons Date: March 29, 1999
----------------------------------------------- --------------------
By: Karlin S. Symons, Director
/s/ R. E. Turner, IV Date: March 29, 1999
----------------------------------------------- --------------------
By: R. E. Turner, IV, Director
/s/ Richard A. Benson Date: March 29, 1999
----------------------------------------------- --------------------
By: Richard A. Benson, Director
/s/ Richard A. Cooper Date: March 29, 1999
----------------------------------------------- --------------------
By: Richard A. Cooper, Director
/s/ Thomas R. Karges Date: March 29, 1999
----------------------------------------------- --------------------
By: Thomas R. Karges, Chief Financial Officer
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON SCHEDULE
Board of Directors
A.S.V., Inc.
In connection with our audit of the consolidated financial statements of
A.S.V., Inc. referred to in our report dated February 22, 2000, which is
included in the Annual Report of A.S.V., Inc. on Form 10-K for the year ended
December 31, 1999, we have also audited Schedule II for each of the three years
in the period ended December 31, 1999. In our opinion, this schedule presents
fairly, in all material respects, the information required to be set forth
therein.
GRANT THORNTON LLP
Minneapolis, Minnesota
February 22, 2000
ASV, Inc.
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
ASSETS 1999 1998
------------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 743,184 $ 308,565
Short-term investments 1,247,696 243,035
Accounts receivable (net of allowance for doubtful accounts
of $40,000 8,661,049 4,563,840
Inventories 32,391,256 18,776,758
Prepaid expenses and other 771,418 912,457
Income taxes receivable 39,658 163,989
----------- -----------
Total current assets 43,854,261 24,968,644
----------- -----------
PROPERTY AND EQUIPMENT, NET 4,795,674 4,563,996
----------- -----------
$48,649,935 $29,532,640
=========== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ 4,080,000 $ 3,535,000
Current portion of long-term liabilities 254,412 219,417
Accounts payable 1,775,883 2,913,526
Accrued liabilities
Compensation 252,708 281,055
Commissions 306,831 -
Warranties 450,000 400,000
Other 237,134 204,017
----------- -----------
Total current liabilities 7,356,968 7,553,015
----------- -----------
LONG-TERM LIABILITIES, less current portion
Capital lease obligation 2,197,046 2,289,114
Note payable - 175,271
----------- -----------
2,197,046 2,464,385
----------- -----------
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 - 9,686,457 in 1999 and
8,601,835 in 1998 96,865 86,018
Additional paid-in capital 30,859,403 12,701,622
Retained earnings 8,139,653 6,727,600
----------- -----------
39,095,921 19,515,240
----------- -----------
$48,649,935 $29,532,640
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-1
A.S.V., Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
Years ended December 31, 1999, 1998 and 1997
1999 1998 1997
------------ ------------ ------------
Net sales $36,168,415 $39,018,904 $24,315,591
Cost of goods sold 27,739,554 29,487,983 18,113,910
----------- ----------- -----------
Gross profit 8,428,861 9,530,921 6,201,681
----------- ----------- -----------
Operating expenses
Selling, general and administrative 5,670,629 3,479,911 2,230,399
Research and development 531,375 319,324 216,888
----------- ----------- -----------
6,202,004 3,799,235 2,447,287
----------- ----------- -----------
Operating income 2,226,857 5,731,686 3,754,394
----------- ----------- -----------
Other income (expense)
Interest expense (306,202) (576,224) (398,589)
Interest income 229,405 98,465 223,111
Other, net 16,993 92,128 74,641
----------- ----------- -----------
(59,804) (385,631) (100,837)
----------- ----------- -----------
Income before income taxes 2,167,053 5,346,055 3,653,557
Provision for income taxes 755,000 1,980,000 1,330,000
----------- ----------- -----------
NET EARNINGS $ 1,412,053 $ 3,366,055 $ 2,323,557
=========== =========== ===========
Net earnings per common share
Basic $ .15 $ .43 $ .32
=========== =========== ===========
Diluted $ .14 $ .40 $ .28
=========== =========== ===========
Weighted average number of common shares outstanding
Basic 9,586,032 7,764,504 7,366,117
=========== =========== ===========
Diluted 9,941,616 9,015,513 8,900,651
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-2
A.S.V., Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1999, 1998 and 1997
Additional
Common stock paid-in Retained
--------------------
Shares Amount capital earnings Total
---------- ---------- ----------- ---------- -----------
Balance at December 31, 1996 7,215,988 $ 72,160 $ 5,176,985 $1,037,988 $ 6,287,133
Exercise of stock options 302,322 3,023 174,186 - 177,209
Tax benefit from exercise of
stock options - - 1,018,000 - 1,018,000
Warrant earned - - 151,200 - 151,200
Net earnings - - - 2,323,557 2,323,557
---------- ---------- ----------- ---------- -----------
Balance at December 31, 1997 7,518,310 75,183 6,520,371 3,361,545 9,957,099
Exercise of stock options and
warrants 456,248 4,562 1,281,722 - 1,286,284
Tax benefit from exercise of
stock options - - 835,000 - 835,000
Cost of shares retired (54,535) (545) (1,074,186) - (1,074,731)
Exchange of convertible
debentures, net of exchange costs 681,812 6,818 4,987,515 - 4,994,333
Warrant earned - - 151,200 - 151,200
Net earnings - - - 3,366,055 3,366,055
---------- ---------- ----------- ---------- -----------
Balance at December 31, 1998 8,601,835 86,018 12,701,622 6,727,600 19,515,240
Issuance of common stock, net of
issuing costs 1,000,000 10,000 17,539,173 - 17,549,173
Exercise of stock options 115,740 1,158 801,541 - 802,699
Tax benefit from exercise of
stock options - - 270,000 - 270,000
Cost of shares retired (31,118) (311) (604,133) - (604,444)
Warrant earned - - 151,200 - 151,200
Net earnings - - - 1,412,053 1,412,053
---------- ---------- ----------- ---------- -----------
Balance at December 31, 1999 9,686,457 $ 96,865 $30,859,403 $8,139,653 $39,095,921
========== ========== =========== ========== ===========
The accompanying notes are an integral part of these financial statements.
F-3
A.S.V., Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 1998 and 1997
1999 1998 1997
------------ ----------- -----------
Cash flows from operating activities:
Net earnings $ 1,412,053 $ 3,366,055 $ 2,323,557
Adjustments to reconcile net earnings to net cash used in
operating activities:
Depreciation and amortization 380,750 314,131 207,101
Interest accrued on capital lease obligation 48,288 50,242 46,056
Deferred income taxes (110,000) (235,000) (123,000)
Warrant earned 151,200 151,200 151,200
Changes in assets and liabilities
Accounts receivable (4,097,209) (2,573,934) (728,678)
Inventories (13,614,498) (7,102,731) (6,513,674)
Prepaid expenses and other 251,039 (334,561) (17,953)
Accounts payable (1,137,643) 1,438,825 695,092
Accrued liabilities 361,601 324,475 112,949
Income taxes 394,331 469,337 1,020,720
------------ ----------- -----------
Net cash used in operating activities (15,960,088) (4,131,961) (2,826,630)
------------ ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (612,428) (564,208) (1,065,802)
Purchase of short-term investments (4,523,188) - (746,985)
Redemption of short-term investments 3,518,527 1,012,125 1,761,578
------------ ----------- -----------
Net cash provided by (used in) investing activities (1,617,089) 447,917 (51,209)
------------ ----------- -----------
Cash flows from financing activities:
Principal payments on long-term liabilities (280,632) (64,876) (25,265)
Proceeds from issuance of common stock (net) 17,549,173 - -
Proceeds from exercise of stock options and warrants 802,699 1,286,284 177,209
Retirement of common stock (604,444) (1,074,731) -
Proceeds from line of credit advances (net) 545,000 3,535,000 -
Costs of exchanging convertible debentures - (5,667) -
------------ ----------- -----------
Net cash provided by financing activities 18,011,796 3,676,010 151,944
------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents 434,619 (8,034) (2,725,895)
Cash and cash equivalents at beginning of period 308,565 316,599 3,042,494
------------ ----------- -----------
Cash and cash equivalents at end of period $ 743,184 $ 308,565 $ 316,599
============ =========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 287,262 $ 613,337 $ 350,072
Cash paid for income taxes 535,145 1,745,663 432,280
============ =========== ===========
Supplemental disclosure of investing and financing activities:
Assets acquired by incurring capital lease obligation $ - $ 327,285 $ 1,302,749
Assets acquired by incurring promissory note - 350,543 -
Tax benefit from exercise of stock options 270,000 835,000 1,018,000
Issuance of common stock in exchange for convertible
debentures - 5,000,000 -
============ =========== ===========
The accompanying notes are an integral part of these financial statements.
F-4
A.S.V., Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company designs and manufactures track-driven, all-season vehicles and
related accessories and attachments in northern Minnesota. The Company sells
its products through a national dealer network and also directly to the end
user throughout the United States and internationally. In January 1999, the
Company entered into an agreement with Caterpillar Inc., whereby the Company
also sells to the Caterpillar dealer network.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of A.S.V., Inc.
and its wholly-owned subsidiary. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Cash Equivalents
----------------
All highly liquid temporary cash investments with an original maturity of
three months or less are considered to be cash equivalents. At December 31,
1999 and 1998, the Company had cash equivalents of approximately $508,000 and
$609,000, which consisted of a money market account. The fair value of these
investments approximates cost.
Short-Term Investments
----------------------
The Company considers its short-term investments at December 31, 1999 and
1998 as "available for sale" and, therefore, states its short-term
investments at fair value with unrealized gains and losses reported as a
separate component of shareholders' equity.
Accounts Receivable
-------------------
The Company grants credit to customers in the normal course of business.
Management performs on-going credit evaluations of customers and maintains
allowances for potential credit losses which, when realized, have generally
been within management expectations.
Inventories
-----------
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
Property and Equipment
----------------------
Property and equipment are carried at cost. Building and improvements are
depreciated over periods of 18 to 39 years using the straight-line method.
Tooling, machinery and equipment, and vehicles are depreciated over periods
of 3 to 20 years using straight-line and accelerated methods. Accelerated
methods are used for income tax purposes.
Warranties
----------
Provision for estimated warranty costs is recorded at the time of sale and
periodically adjusted to reflect actual experience.
Revenue Recognition
-------------------
Revenue is recognized when ownership transfers to the customer, which is when
products are shipped.
Advertising Expense
-------------------
Advertising is expensed as incurred. Advertising expense was $422,674,
$416,194 and $320,545 for 1999, 1998 and 1997.
Stock Options
-------------
The Company accounts for the issuance of stock options to employees using the
intrinsic value method. Under this method, compensation expense is recognized
for the amount by which the market price of the common stock on the date of
grant exceeds the exercise price of an option.
Accounting Estimates
--------------------
The preparation of the consolidated financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities, and the related amounts of revenues and expenses. Actual
results could differ from those estimates.
Reclassifications
-----------------
Certain of the 1998 and 1997 amounts have been reclassified to conform with
the presentation in the 1999 financial statements.
F-5
A.S.V., Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Net Income Per Common Share
---------------------------
Basic net income per share amounts have been computed by dividing net income
by the weighted average number of outstanding common shares. Diluted net
income per share is computed by dividing net income, plus the interest
expense (net of tax) applicable to the convertible debentures in the amount
$233,213 and $206,700 for 1998 and 1997, by the weighted average number of
outstanding common shares and common share equivalents relating to stock
options and warrants, when dilutive. For the years ended December 31, 1999,
1998 and 1997, 355,584, 1,251,009 and 1,534,534 shares of common stock
equivalents were included in the computation of diluted net income per share.
Options and warrants to purchase 10,731,252, 381,750, and 381,750 shares of
common stock with a weighted average exercise price of $20.88, $18.33 and
$18.33 were outstanding at December 31, 1999, 1998 and 1997, but were
excluded from the computation of common share equivalents because their
exercise prices were greater than the average market price of the common
shares.
NOTE B - SHORT-TERM INVESTMENTS
Short-term investments consist primarily of a diversified portfolio of
taxable governmental agency bonds. As of December 31, 1999 the securities
consist of available for sale debt securities which mature in the years 2000
and 2004. At December 31, 1999 and 1998, the fair value of all short-term
investments approximated cost. Therefore, net income equals comprehensive
income.
NOTE C - INVENTORIES
Inventories consist of the following:
December 31,
--------------------------
1999 1998
----------- -----------
Raw materials,
semi-finished and
wip inventory $19,531,208 $12,980,197
Finished goods 7,574,115 3,913,519
Used equipment
held for resale 5,285,933 1,883,042
----------- -----------
$32,391,256 $18,776,758
=========== ===========
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31,
--------------------------
1999 1998
----------- -----------
Land $ 132,635 $ 132,635
Buildings and
improvements 3,632,813 3,526,794
Tooling 445,904 367,266
Machinery and
equipment 1,500,825 1,209,941
Vehicles 337,795 200,908
----------- -----------
6,049,972 5,437,544
Less accumulated
depreciation 1,254,298 873,548
----------- -----------
$ 4,795,674 $ 4,563,996
=========== ===========
NOTE E - LINES OF CREDIT
The Company has a $10,000,000 line of credit agreement with a bank which is
due on demand. The interest rate is variable at prime less one half percent
(effective rate of 8.00% and 7.25% as of December 31, 1999 and 1998). As of
December 31, 1999, there were advances of $4,080,000 outstanding under this
line of credit. At December 31, 1999, the Company was in compliance with or
had received a waiver for all bank covenants.
NOTE F - LONG-TERM LIABILITIES
Convertible Debentures
During 1996, the Company issued $5,000,000 of unsecured senior convertible
debentures with interest payable quarterly at 6.5%. The debentures were
convertible at any time into the Company's common stock at $7.33 per share,
approximately the fair market value of the stock at the time the debentures
were sold. All convertible debentures were exchanged during November 1998 for
681,812 shares of common stock.
F-6
A.S.V., Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE F - LONG-TERM LIABILITIES - Continued
Capital Lease Obligation
------------------------
The Company leases its manufacturing and office building from the Grand
Rapids Economic Development Authority ("the City")
The agreement provides for a balloon payment of approximately $756,000 in
January 2003 and extends to January 2018.
Future minimum lease payments under this capital lease obligation at December
31, 1999 are as follows:
2000 $ 228,134
2001 228,134
2002 228,134
2003 892,208
2004 135,554
Thereafter 1,554,153
----------
Total payments 3,266,317
Amounts representing interest (weighted
average 6.8%) 990,130
----------
Present value of minimum
capitalized lease payments $2,276,187
==========
Assets related to the capital lease were $2,250,773 at December 31, 1999 and
1998. Accumulated amortization was $162,796 and $106,526 at December 31, 1999
and 1998.
Note Payable
------------
During 1998, property was exchanged for property with a value of $149,457 and
a promissory note for $350,543. The balance of the note at December 31, 1999
is $175,271 and is due January 2000. Interest at 8% is payable quarterly.
NOTE G - PROVISION FOR INCOME TAXES
The provision for income taxes consists of the following:
Year ended December 31,
---------------------------------
1999 1998 1997
--------- ---------- ----------
Current
Federal $ 760,000 $1,984,000 $1,294,500
State 105,000 231,000 158,500
--------- ---------- ----------
865,000 2,215,000 1,453,000
Deferred (110,000) (235,000) (123,000)
--------- ---------- ----------
$ 755,000 $1,980,000 $1,330,000
========= ========== ==========
Net deferred income tax assets relate to the tax effect of temporary
differences as follows:
December 31,
---------------------
1999 1998
-------- --------
Accruals and reserves $490,000 $420,000
Other 50,000 10,000
-------- --------
$540,000 $430,000
======== ========
The net deferred tax asset is included with prepaid expenses and other in the
financial statements.
The following is a reconciliation of the Federal statutory income tax rate to
the effective tax rate:
1999 1998 1997
------ ------ ------
Statutory federal rate 34.0% 34.0% 34.0%
State income taxes, net
of federal benefit 2.6 2.6 2.6
Other (1.8) .4 (.2)
------ ------ ------
34.8% 37.0% 36.4%
====== ====== ======
The Company realizes an income tax benefit from the exercise or early
disposition of certain stock options. This benefit results in a decrease in
current income taxes payable and an increase in additional paid-in capital.
F-7
A.S.V., Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE H - TRANSACTIONS WITH CATERPILLAR
A Securities Purchase Agreement (the Agreement) with Caterpillar Inc. closed
on January 29, 1999. Under the terms of the Agreement, Caterpillar acquired,
for an aggregate purchase price of $18,000,000, one million newly issued
shares of common stock and a warrant to purchase an additional 10,267,127
newly issued shares of common stock at a price of $21.00 per share. The
warrant is exercisable at any time through January 2009 subject to partial
termination in the event the Company achieves certain financial goals. In
connection with this transaction, the Company incurred expenses of
approximately $450,000, which were offset against the proceeds for the issued
shares.
As a result of the Agreement, the board of directors was increased from eight
to ten members with the additional two members appointed by Caterpillar. In
addition, the Agreement contains other provisions which allow Caterpillar to
maintain its proportionate potential ownership and that restricts certain
situations including acquisitions, loans and the payment of dividends,
without approval of at least one of the Caterpillar designated members of the
Board.
At December 31, 1999, Caterpillar owned approximately 10% of the Company's
outstanding common stock and will have the right to own up to approximately
52% of the Company's common stock (assuming the exercise of all outstanding
options and warrants) upon exercise of the warrant.
The warrant issued to Caterpillar provides for a potential change of control.
As a result, in accordance with the 1994 and 1996 stock option plans, all
previously issued stock options became fully vested upon the closing of the
transaction.
The Company and Caterpillar have also entered into a Commercial Alliance
Agreement pursuant to which Caterpillar will provide the Company with access
to its dealer network and will make various management, financial and
engineering resources available to the Company. Included in the Commercial
Alliance Agreement is a Marketing Agreement which provides, among other
things, that the Company will pay Caterpillar a commission equal to 5% of the
dealer net price for complete machines and 3% for replacement parts and
Company-branded attachments for all sales made to Caterpillar dealers. Total
commission expense for 1999 under the agreement was approximately $923,000.
In addition, if the Company's products are sold under the Caterpillar brand
name, the Company will pay Caterpillar a trademark license fee equal to 3% of
the net sales of these products to Caterpillar dealers. There were no sales
under this agreement in 1999. The Company and Caterpillar also entered into
other ancillary agreements for the benefit of both the Company and
Caterpillar.
During 1999, the Company purchased parts used in its products from
Caterpillar. The Company also reimburses Caterpillar for the salary related
costs of two Caterpillar employees that work on the Company's behalf.
In addition, the Company utilizes Caterpillar's warranty processing system to
handle warranty claims on its machines and reimburses Caterpillar for the
warranty expense incurred by Caterpillar dealers.
During 1999, total parts purchases and salary and warranty reimbursements
were approximately $2,459,000. Also, at December 31, 1999, accounts payable
to Caterpillar was $614,500.
NOTE I - SHAREHOLDERS' EQUITY
Stock Option Plans
------------------
The Company's 1994 Long-Term Incentive and Stock Option Plan (the 1994 Plan)
provides for the granting of stock options, stock appreciation rights,
restricted stock awards and performance awards to officers, directors,
employees and independent contractors of the Company at an exercise price
which is equal to the fair market value of the stock on the date of grant.
Under the plan, the option term is fixed at the date of grant and may not
exceed ten years for an incentive stock option or fifteen years for
non-qualified stock options. In the year of adoption, the Company reserved
281,250
F-8
A.S.V., Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE I - SHAREHOLDERS' EQUITY - Continued
shares of common stock for issuance under this plan. Each year thereafter,
one and one-half percent of the number of shares of the Company's common
stock outstanding at the previous fiscal year end are available for issuance
under the plan with a maximum of 1,125,000 shares available. Options awarded
under the 1994 Plan are generally exercisable in 25% cumulative amounts
beginning one year from the date of issuance.
The Company's 1996 Stock Option Plan reserved 750,000 shares of its common
stock. The Plan was amended in 1998 to increase the number of shares which
may be issued under the plan to 2,250,000 shares of common stock. This plan
has similar terms and vesting requirements as the 1994 Plan.
Director Stock Option Plan
--------------------------
The Company adopted the 1998 Non-employee Director Stock Option Plan during
1998. The plan provides for the granting of stock options to directors who
are not employees of the Company at an exercise price which is equal to the
fair market value of the stock on the date of grant. Under the plan, the
option term is fixed at five years. The plan reserved 450,000 shares of its
common stock and has similar vesting requirements as the 1994 plan.
The plan provides that each eligible director shall receive an option to
purchase 15,000 shares on the first business day of each calendar year.
However, in December 1998, the Board of Directors unanimously approved a
resolution reducing the number of shares subject to the options to be granted
under the plan in 1999 from 15,000 shares to 1,000 shares. The plan was
amended in January 2000 to reduce the number of options to be granted each
year from 15,000 shares to 3,000 shares, except that an option to purchase
5,000 shares was granted in 2000 on a one-time only basis.
Option transactions under the plans during each of the three years in the
period ended December 31, 1999 are summarized as follows:
Weighted
Average
Exercise
Shares Price
--------- --------
Outstanding at
December 31, 1996 1,383,300 $ 7.78
Granted 464,250 17.70
Exercised (310,200) 1.01
Canceled (3,375) 3.11
--------- ------
Outstanding at
December 31, 1997 1,533,975 12.07
Granted 9,375 16.55
Exercised (186,248) 4.40
--------- ------
Outstanding at
December 31, 1998 1,357,102 13.16
Granted 55,752 17.88
Exercised (115,740) 6.94
--------- ------
Outstanding at
December 31, 1999 1,297,114 $13.91
========= ======
A total of 31,118 shares were tendered in the exercise of options in 1999.
At December 31, 1999, 1998 and 1997, 1,242,114, 584,420 and 418,913 options
were exercisable with a weighted average exercise price of $13.74, $11.46 and
$7.07.
The following information applies to grants that are outstanding at December
31, 1999:
Options outstanding
-------------------------------------
Weighted-
Number average Weighted-
Range of outstanding remaining average
exercise at contractual exercise
prices period end life price
---------------- ----------- ----------- ---------
$ 1.44 - $ 2.16 12,300 1.4 years $ 1.61
2.56 - 3.83 54,000 2.4 years 3.02
12.17 - 18.25 861,814 4.1 years 12.88
18.33 369,000 4.5 years 18.33
-----------
1,297,114
===========
Options exercisable
----------------------------
Number Weighted-
Range of exercisable average
exercise at exercise
prices period end price
----------------- ----------- ---------
$ 1.44 - $ 2.16 12,300 $ 1.61
2.56 - 3.83 54,000 3.02
12.17 - 18.25 806,814 12.54
18.33 369,000 18.33
-----------
1,242,114
===========
F-9
A.S.V., Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE I - SHAREHOLDERS' EQUITY - Continued
The weighted average fair values of the options granted during 1999, 1998 and
1997 are $10.67, $9.62 and $10.07. 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 1999,
1998 and 1997; zero dividend yield; expected volatility of 50.0%, 49.68% and
48.80%; risk-free interest rate of 6.83%, 5.37% and 5.90% and expected lives
of 6.78, 7.00 and 6.56 years.
The Company's pro forma net income and net income per common share for 1999,
1998 and 1997, had the fair value based method been used, are set forth
below:
1999 1998 1997
-----------------------------------
Net earnings As reported $ 1,412,053 $3,366,055 $2,323,557
(loss)
Pro forma (3,176,720) 1,500,730 1,189,627
Net earnings
(loss) per
common share
Basic As reported $.15 $.43 $.32
Pro forma (.33) .19 .16
Diluted As reported .14 .40 .28
Pro forma (.33) .19 .16
Stock Warrant
-------------
In connection with the Company's public offering, a warrant was issued to the
Underwriter to purchase up to 270,000 shares of the Company's common stock at
the exercise price of $1.73 per share. The warrant was exercised during 1998.
Shares Retired
--------------
During 1999 and 1998, in connection with the exercise of stock options by
employees and directors, the Company repurchased 31,118 and 54,535 shares of
stock from various employees and directors of the Company for total
consideration of $604,444 and $1,074,731. These shares had been held for
longer than six months and were considered mature shares.
NOTE J - RELATED PARTY TRANSACTION
The Company uses a public relations firm that is affiliated with one of the
Company's directors. Total fees paid to the public relations firm in 1999
were approximately $229,000.
NOTE K - CONSULTING AGREEMENT
Effective December 1, 1996, the Company entered into a five-year consulting
agreement and issued a warrant for the purchase of 337,500 shares of the
Company's common stock at $7.33 per share, expiring December 1, 2006, in
exchange for consulting services to be received over the term of the
agreement. Subsequently, an individual who contracts with the consulting firm
was appointed a member of the Board of Directors. The warrant is exercisable
and outstanding as of December 31, 1999.
The fair value of the warrant granted is $2.24 per share and was calculated
on the date of grant using the average of the Black-Scholes and Shelton
options-pricing models with the following assumptions: zero dividend yield;
risk-free interest rate of 6.3%; expected life of ten years; expected
volatility of 48.8% and a marketability discount factor of 40.0%. The
marketability discount factor was determined based upon no public market for
the warrant and the limit on exercisability. Compensation costs are
recognized evenly over the term of the consulting agreement.
NOTE L - COMMITMENTS AND CONTINGENCIES
Credit Arrangement
------------------
The Company entered into an agreement with a financing company (the
"Creditor") whereby the Creditor extends credit to the Company's dealers to
finance goods sold to the dealers. The agreement requires the Company to
repurchase goods and pay the Creditor for the unpaid balance of the credit,
along with repossession costs, in the event of default by dealers. As of
December 31, 1999 and 1998, approximately $537,000 and $1,570,000 was
outstanding in credit that had been extended to the Company's dealers. No
inventory has been repurchased under this agreement.
F-10
A.S.V., Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE M - MAJOR CUSTOMERS
During 1999, no customers accounted for over 10% of sales. During 1998, 20.6%
of sales were made to one unaffiliated customer. In 1997, 26.8% of sales were
made to two unaffiliated customers, each accounting for over 10% of sales.
NOTE N - EMPLOYEE BENEFIT PLAN
The Company has a 401(k) employee savings and profit sharing plan which
provides for employee salary deferrals of up to $10,000 and discretionary
Company contributions. The plan covers employees who have completed three
months of service, as defined in the plan, and who have attained the age of
20 and one-half. Discretionary Company contributions for 1999, 1998 and 1997
were $37,285, $28,863 and $22,898.
F-11
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
A.S.V., Inc.
We have audited the accompanying consolidated balance sheets of A.S.V., Inc. as
of December 31, 1999 and 1998, and the related consolidated statements of
earnings, changes in shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above, present fairly, in
all material respects, the consolidated financial position of A.S.V., Inc. as of
December 31, 1999 and 1998, and the consolidated results of their operations and
their consolidated cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
GRANT THORNTON LLP
Minneapolis, Minnesota
February 22, 2000
F-12
A.S.V., Inc. and Subsidiary
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1999, 1998 and 1997
Balance Additions Balance
Beginning Charged to End of
Accrued Warranty of Period Expense Deductions (A) Period
---------------- --------- ---------- -------------- --------
1999 $400,000 $1,120,587 $1,070,587 $450,000
1998 $200,000 $1,197,973 $ 997,973 $400,000
1997 $100,000 $ 451,316 $ 351,316 $200,000
(A) Warranty credits issued
EXHIBIT INDEX
Exhibit Method of Filing
- ------- ----------------
11 Statement re: Computation of Per Share Earnings Filed herewith electronically
23 Consent of Grant Thornton LLP, independent auditors Filed herewith electronically
27 Financial Data Schedule for the year ended December 31, 1999 Filed herewith electronically