-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WQUA+xGfp7f+Uin6D+YQ9gvMxfi3f5Secd0wG86pEcc11qrMYWknduLqgOccf2bc UaMJ+RUAihiDrfFyPKLiWQ== 0001045969-98-000313.txt : 19980330 0001045969-98-000313.hdr.sgml : 19980330 ACCESSION NUMBER: 0001045969-98-000313 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ASV INC /MN/ CENTRAL INDEX KEY: 0000926763 STANDARD INDUSTRIAL CLASSIFICATION: CONSTRUCTION MACHINERY & EQUIP [3531] IRS NUMBER: 411459569 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-25620 FILM NUMBER: 98576314 BUSINESS ADDRESS: STREET 1: P O BOX 5160 CITY: GRAND RAPIDS STATE: MN ZIP: 55744-5160 BUSINESS PHONE: 2183273434 MAIL ADDRESS: STREET 1: PO BOX 5160 CITY: GRAND RAPIDS STATE: MN ZIP: 55744-5160 10-K 1 10-K 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, 1997 [_] 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 ------- A.S.V., INC. (Exact name of registrant as specified in its charter) MINNESOTA 41-1459569 --------------------- --------------------- State or other jurisdiction of I.R.S. Employer identification No. incorporation of organization 840 LILY LANE, P.O. BOX 5160, GRAND RAPIDS, MN 55744 (218) 327-3434 - ---------------------------------------------------- ---------------------- Address of principal executive offices Registrant's telephone number, including area code Securities registered under Section 12(b) of the Exchange Act: NONE ------------------------------ Title of each class Securities registered under Section 12(g) of the Exchange Act: COMMON STOCK, $.01 PAR VALUE ---------------------------- Title of each class Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 Check if there is no disclosure of delinquent filers in response to Items 405 of Regulation S-K in this form, and no disclosure will 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 price at March 10, 1998, the aggregate market value of the registrant's Common Stock held by nonaffiliates was $88,654,254. As of March 24, 1998 5,022,582 shares of the registrant's Common Stock were issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE: ------------------------------------ Portions of the registrant's Proxy Statement for its June 19, 1998 Annual Meeting which will be filed by April 30, 1998, are incorporated by reference in Part III. 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." Effective January 1, 1998, all the assets and liabilities of A.S.V. Distribution, Inc. were transferred to A.S.V., Inc. A.S.V., Inc. 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 currently offers three models in its Posi-Track product line; the MD-70, the HD 4500 and the DX 4530. The Company currently offers one model in its Track Truck product line, the HPT 2800. CURRENT YEAR DEVELOPMENTS In January 1997, the Company completed a 3-for-2 stock split of its common stock. All share and per share amounts included in this report have been adjusted to reflect the stock split. In 1997, the Company introduced two new models in its Posi-Track product line. In the third quarter of 1997, the Company began selling the Posi-Track HD 4500. The most significant difference between the HD 4500 and the Company's existing Model MD-70 Posi-Track is the elimination of all of the grease fittings on the vehicle's undercarriage, thereby significantly reducing operator maintenance. The HD 4500 is larger than the MD-70, has greater lifting capabilities and has a more powerful engine. The HD 4500 serves some of the same markets as the MD-70, but is intended for the more industrial user. The HD 4500 is sold through the Company's existing Posi-Track dealer network. In the fourth quarter of 1997, the Company began selling the Posi-Track DX 4530. The DX 4530 is a track utility vehicle that is being sold into the trail grooming and utility work vehicle market. It combines the benefits of the Company's HD 4500 and the Track Truck on a larger rubber track suspension with the ability to run attachments from the comfort of a fully enclosed operator cab. The DX 4530 features the same maintenance-free style suspension as the HD 4500 and is powered by a 4.5 liter turbo diesel engine, producing 125 horsepower. The DX 4530 was sold direct from the Company to the end user in 1997. Beginning in 1998, the Company anticipates it will sell the DX 4530 through certain Posi- Track dealers, as well as continue its direct sales efforts. In September 1997, the Company occupied its expanded production facility in Grand Rapids, Minnesota. The Company added 60,000 square feet to its production facility increasing its total production space to approximately 95,000 square feet. Approximately 5,000 square feet of the existing production facility was reallocated to the Company's sales and administrative offices. The Company's existing lease has been revised to included additional lease payments for the expanded facilities. See "Item 2. Description of Property". 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. MARKETS 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 for use with an industry standard quick-attach mechanism which allows attachments used by one manufacturer to be used on vehicles manufactured by another. Prior to the wide-spread use of skid-steers and the various attachments, most of the tasks performed by skid-steers were performed by single-function vehicles. The skid-steer's ability to perform a number of 2 functions previously performed by multiple vehicles not only reduces the number of vehicles that must be purchased, but also makes it more convenient to transport equipment to and from work sites. 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 in 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 skid-steer exerts ten times or more ground pressure than a Posi-Track MD-70 or HD 4500 which makes a skid-steer less suitable for operation on landscaped or groomed ground. Recognizing the benefits of track 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, the Posi-Track MD-70 and HD 4500 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 the Posi-Track models, which is a concern for landscapers because the more compact the soil, the more difficult it is for plants to grow. The Posi-Track models can also be adapted to perform special functions in the landscaping industry. For example, the Company manufactured 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. Agricultural. The Posi-Track MD-70 and HD 4500 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 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. The Posi-Track MD-70 and HD 4500 are being used in several grape vineyards in California's Napa Valley as a replacement to four-wheel drive tractors. Trail Grooming and Maintenance. Both the Posi-Track and Track Truck are used for maintaining trails such as snowmobile, cross-country ski, biking and hiking trails. The Company manufactures an attachment for the Track Truck and the Posi-Track DX 4530 which is designed to efficiently groom snowmobile trails and can also be used to groom cross-country ski trails. The Posi-Track is used with a mower attachment to clear and maintain trails for biking, hiking and other purposes. The Company believes the Track Truck has captured a significant portion of the United States snowmobile trail grooming equipment market since its introduction in 1985. The newly introduced Posi-Track DX 4530 is currently being sold into some of the same markets and serves some of the same functions as the Track Truck. Utility. The Track Truck and Posi-Track DX 4530 are used in the utility industry for access to off-road utility sites that would be otherwise inaccessible with traditional vehicles. Utility companies may need to access remote areas to repair downed power lines, inspect gas lines or to repair or maintain other remotely located equipment. These areas may only be accessible through snow, ice, mud, swamps, bogs, or rough, hilly or rocky terrain. The Track Truck and Posi-Track DX 4530 are able to access and transport tools, equipment and personnel to those sites. Wildlife Management. All Posi-Track models and the Track Truck are used in wildlife management by Federal agencies and the departments of natural resources of a number of states. The Posi-Track models are used to mow trails for wildlife and to mow clearings so that grass, clover and other vegetation needed for wildlife can grow. The Posi-Track MD-70 and HD 4500 are also used to clear cattails and other unwanted vegetation from swamps to provide access for feeding 3 ducks and other waterfowl. Both vehicles are used 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 MD-70 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 its Posi-Track MD-70 under the General Service Administration which allows Federal governmental agencies to purchase the MD-70 and HD 4500 without going through a competitive bidding process. Other. The versatility of the Posi-Track MD-70 and HD 4500 has allowed for their use in areas where a typical skid-steer vehicle could not operate. A grain export company is using Posi-Track MD-70'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 two primary product lines, the Posi-Track product line and the Track Truck product line. All products under these two product lines 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 on the Posi-Track and Track Truck products provides the traction, stability and mobility of tracked vehicles, but does not damage surfaces. In addition, the Posi-Track has extremely low ground pressure which means it will not cause significant soil compaction. The Company began manufacturing the Track Truck in 1984. The current Track Truck model is the HP 2800. 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. In October, the Company began selling the Posi-Track DX 4530 (previously named the HD 125), the largest of all the Posi- Track models produced. The DX 4530 has features not found on either the MD-70 or HD 4500 models. The rubber tracks used on the Company's products are made of molded rubber reinforced with layers of nylon, Kevlar and fiberglass rods. The HD 4500 and DX 4530 feature a maintenance-free suspension with no grease fittings, while the MD-70 and the Track Truck are built upon a suspension that requires periodic maintenance. The Posi-Track model MD-70 and the Track Truck model HP 2800 each have a 70 horsepower, 4-cylinder Isuzu diesel engine and dual hydrostatic transmission and both can be equipped with an optional 4-cylinder Isuzu turbo diesel engine. The Posi-Track model HD 4500 utilizes John Deere engines available in either an 80 horsepower 4-cylinder diesel engine or a 115 horsepower 4-cylinder turbo diesel engine. The Posi-Track DX 4530 uses a 125 horsepower, 4-cylinder John Deere turbo diesel engine. Posi-Track Models MD-70 and HD 4500. The Company believes the MD-70 and HD 4500 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. The MD-70 and HD 4500 Posi-Tracks are also designed to be used with a dozer attachment. In addition, their three-point hitch 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 1.5 pounds per square inch for the MD- 70, compared to approximately 35 pounds per square inch for a typical wheeled skid-steer weighing approximately the same as a Posi-Track. The HD 4500, which weighs approximately 2,000 pounds more than the MD-70, exerts ground pressure of approximately 2.6 pounds per square inch. 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 4 conditions. The Posi-Track's low ground pressure also reduces compaction which decreases the need for frequent tilling and conditioning of the soil. The Posi-Track MD-70 and HD 4500 are multi-purpose vehicles which the Company believes are attractive to customers principally because of their: . Size. The Posi-Track MD-70, with a loader, weighs approximately 6,600 pounds and has an approximate ground pressure of less than 2 pounds per square inch. The Posi-Track HD 4500, with a loader, weighs approximately 8,500 pounds and has an approximate ground pressure of 3 pounds per square inch. . 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. The MD-70 accepts a category one three-point hitch, while the HD 4500 accepts a category two three-point hitch. A dozer blade and backhoe are also available for each model. . Price. The current retail price of a Posi-Track MD-70 is approximately $34,700 for a base model and approximately $39,100 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 MD- 70. The current retail price of a Posi-Track HD 4500 is approximately $41,500 for a base model and approximately $46,700 with a loader, bucket and quick-attach mechanism. . Ease of Operation. A reversible driver's seat allows an operator to face either end of the vehicle for better control. The Posi-Track is maneuverable and can easily turn in its 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. Due to the positive response the Company has received regarding the maintenance-free suspension on the HD 4500, the Company plans to offer this same suspension as another model under its Posi-Track product line. The Company anticipates it will offer the MD-70 with either the existing suspension or the maintenance-free suspension. The Company expects the MD-70 with the maintenance-free suspension will sell for approximately $3,000 more than the existing MD-70. This optional suspension is expected to be available in the third quarter of 1998. Posi-Track Model DX 4530 In response to customer desires for a larger, rubber tracked utility vehicle, the Company introduced the Posi-Track model DX 4530 (previously referred to as the HD 125) in February 1997, with the first sales occurring in the fourth quarter of 1997. The DX 4530 incorporates certain features of the Posi-Track and the Track Truck. Built on a larger, maintenance-free rubber track suspension, the DX 4530 has a roomy, two-person, fully-enclosed, steel cab. The DX 4530 comes standard with a quick-attach mechanism to accept a variety of front-end attachments. The DX 4530 is being sold into the trail grooming and land management markets. The Company believes the DX 4530 will be attractive to certain markets due to the following: . Maintenance-Free Suspension. The suspension of the DX 4530 is built on the same concept as that of the HD 4500 which has been designed so that it does not require periodic greasing of the bearings. . More Powerful Engine. The DX 4530 is powered by a 125 horsepower John Deere PowerTec turbo diesel engine. 5 . User Friendliness. The DX 4530 has a larger, more spacious steel cab with many interior features found on pickup trucks, including high- back bucket seats, tilt and telescopic steering wheel and stereo cassette radio. The large amount of glass in the cab provides for good visibility. The DX 4530 incorporates the Company's patented Posi-Turn steering system which utilizes a steering wheel rather than levers to steer the vehicle. . Features. The DX 4530 comes standard with a quick-attach mechanism so it can accept a variety of attachments including brush cutters, backhoes, buckets, trenchers and dozer blades. It also has hydraulic controls mounted inside the cab to allow for the use of trail grooming attachments. The Company believes the DX 4530 can be sold into the snowmobile trail grooming market as well as those seeking a vehicle to access remote work sites, such as utilities, construction companies, real estate developers and governmental agencies. The retail selling price for the DX 4530 is $74,500. The Company's total sales of the DX 4530 and related accessories was approximately $1,000,000 in 1997, all of which occurred in the fourth quarter. The Company anticipates sales of the DX 4530 will be greatest during the fourth quarter of the Company's fiscal year as a major market for the DX 4530 will be the snowmobile trail grooming market. All of the units sold in 1997 were sold direct to the end user by the Company's in-house sales force, although the Company anticipates marketing the DX 4530 through certain Posi-Track dealers beginning in 1998. The Company also sells optional attachments and accessories for the DX 4530. Certain of the options, such as a trail groomer attachment, are made and stocked at the Company's manufacturing facility while others are manufactured by others to the Company's specifications and integrated into the overall design of the DX 4530. Track Truck Vehicle. The Track Truck is designed for utility use on snow, mud, swamps, sand, brush, rocks and bogs. The Track Truck has a body similar to a pickup truck with two front wheels and two rear tracks similar to the Posi-Track. The Track Truck's wheels reduce the jarring and pitching usually experienced with other track-driven vehicles on rough and hilly terrain, which creates a more comfortable ride and reduces driver fatigue. Unlike other tracked vehicles, which use levers for steering, the Track Truck has a steering wheel. The Track Truck's Posi-Turn patented power steering system enables the steering wheel to vary power to the tracks while also turning the front wheels. The Company believes that the Track Truck is a unique product and is attractive to customers principally because of its: . Size. The Track Truck is smaller and more maneuverable than other track-driven vehicles currently on the market. Each Track Truck is about the size of a pickup truck and weighs approximately 4,200 pounds. . Price. The current retail price of a Track Truck is approximately $43,000. The retail prices of other track-driven vehicles generally exceed $80,000. . Safety. The front wheels of the Track Truck stabilize it on steep grades and a roll-bar provides certified roll-over protection. . User Friendliness. The cab's structure and features, including a steering wheel instead of levers, are very similar to those of a pickup truck and are familiar to most users. The Track Truck is available with a radio and other features generally available on trucks. The front wheels stabilize the ride making it more comfortable than other tracked vehicles. The Company also sells options and accessories for the Track Truck. The options and accessories are either made and stocked at the Company's manufacturing facility or manufactured by others to the Company's specifications and are integrated into the overall design of the Track Truck. For instance, the snowmobile trail groomer option comes attached to the Track Truck with the required controls placed in the climate controlled cab of the vehicle. Other options include a snow plow, trailer and van body style. The Company can also manufacture custom-designed units for specialty purposes. One such unit was built for use by airport fire-fighters and was equipped with a water pump, hoses and other fire-fighting equipment. 6 SALES AND MARKETING In the United States and limited areas of Canada and New Zealand, the Company sells and distributes the MD-70 and HD 4500 Posi-Track primarily through independent construction and farm equipment dealers. For 1997, the Company distributed the DX 4530 Posi-Track through in-house sales and marketing efforts. Beginning in 1998, the Company will begin distributing the DX 4530 through selected Posi-Track dealers in the United States. The Company sells and distributes the Track Truck in the United States through both independent dealers and 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 MD- 70 and HD 4500 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 including 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 MD-70 Posi-Tracks have generally been greater in the spring and summer while sales of the Track Truck have generally been greater in the fall. The Company anticipates the sales cyclicality of the HD 4500 will be similar to the MD-70 and sales cyclicality of the DX 4530 will be similar to the Track Truck. The Company believes the versatility of its products and their suitability for multiple purposes may reduce these factors. As of March 1998, the Company has 91 Posi-Track dealer locations and three Track Truck dealer locations. Of these figures, three Posi-Track dealer locations are located in Canada and one is located in New Zealand. As of March 1997, the Company had 48 Posi-Track dealer locations and two Track Truck dealer locations in the United States and one Posi-Track dealer location in Canada. The Company intends to continue its marketing efforts in an attempt to attract more dealers in the United States for its vehicles. The Company believes that it may need as many as 200-250 dealers in the United States comprising approximately 500 dealer locations in order to adequately cover the available market. There are currently in excess of 500 Bobcat(R) dealers in the United States. It is the Company's intent to establish dealers in those areas of the United States were there are currently no Posi-Track dealers before significantly expanding its international dealership network. Currently, the Company requires prospective dealers to purchase a minimum of three vehicles to become one of the Company's dealers. The Company's dealership agreements require the dealer to advertise and promote the Company's products and provide service and warranty work. Dealership agreements may be terminated upon 30 days' notice by either party. In 1997, the Company had sales to two dealers which totaled approximately 27% of the Company's net sales. In 1996, sales to these two dealers totaled approximately 21% of the Company's total net sales. In 1995, sales to one of these dealers accounted for approximately 13% of the Company's total sales. The Company believes the loss of either of these dealers would not have a significant effect on its future operations as the Company believes new dealers could be obtained where these two dealers are located. As of March 16, 1998, the Company has pre-sold production of approximately $8.2 million of Posi-Track units and related accessories. The Company anticipates these units will be produced and shipped by the end of its second quarter 1998. As of March 21, 1997, the Company had pre-sold production of approximately $7 million. The 1998 pre-sold production figure represents primarily HD 4500 Posi-Tracks, while the 1997 figure was primarily MD-70 Posi- Tracks. The Company believes the reason for the shift in orders is due to the increasing demand for the HD 4500 with its more powerful engine, greater lifting capacities and maintenance-free suspension. 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. In January 1996, the Company entered into an agreement with John Deere Credit whereby John Deere Credit will provide floor plan financing to the Company's Posi-Track dealers. In 1997, approximately 10% of the Company's sales were financed through John Deere Credit. In 1996, approximately 9% of the Company's sales were financed through John Deere Credit. Prior to 1996, the Company had an arrangement with Bombardier Capital, Inc. (BCI), pursuant to which BCI would finance the sale of the Company's vehicles to its dealers. In 1995, approximately 7%, of the Company's sales were financed through this arrangement with BCI. Company- related financings to the end purchasers were less than 1% of the Company's sales for the years 1995 through 1997. 7 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 27, 1998, the total amount owed to John Deere Credit by dealers under the Company's agreement was approximately $1,095,000. COMPETITION The markets in which the Posi-Track MD-70 and HD 4500 compete 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, 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. The markets in which the Posi-Track DX 4530 and Track Truck compete generally are comprised of all-terrain vehicles, principally larger, track- driven vehicles other than snowmobiles. The Company believes that the principal participants in the general all-terrain vehicle market include Bombardier, Inc. of Canada, Tucker Corporation and LMC Corporation. The Company believes that the products most closely competitive with the DX 4530 and Track Truck are larger than these two products, do not provide the same level of maneuverability and are significantly more costly. 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. 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 Posi-Track MD-70 warranty covers defects in materials and workmanship for a period of one year from the delivery date or 500 operating hours, whichever occurs first. The Posi-Track HD 4500 warranty covers defects in materials and workmanship for a period of one year from the delivery date with no hour limit. The Track Truck and DX 4530 warranty covers defects in material or workmanship for a period of two years from the delivery date or 1,000 operating hours, whichever occurs first. Components which are not manufactured by the Company are subject only to the warranty of the manufacturer of the component. 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 and loader, are manufactured specifically for the Company. The remaining parts, such as the Posi-Track and Track Truck 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 will receive 25% of 8 any royalties under such license. The Company has registered the trademark "Track Truck" with the U.S. Patent and Trademark Office and claims common law trademark rights in the names "Posi-Track", "Posi-Turn" and "Snow Saver." 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 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, 1997, 1996 and 1995, the Company spent approximately $217,000, $171,000 and $81,000, 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 in the amount of $1,000,000 per claim and in the aggregate. The Company has a commercial umbrella insurance policy which provides an additional $10,000,000 of coverage per claim and in the aggregate. 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 12, 1998, the Company had 89 employees, three of whom are part- time, and one independent contractor who is part-time. The Company's employees and independent contractor include four in management, 13 in administration, nine in sales and marketing and 63 in manufacturing and engineering. The Company believes its relations with its employees are good. None of the Company's employees is represented by a labor union. 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 (EDA). The Grand Rapids facility has been the Company's primary production and office facility since it was first occupied by the Company in May 1995. The lease has been recorded as a capital lease for financial statement and income tax purposes. 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 $160,000, but can be reduced or forgiven over a period of eight years if certain minimum employment levels are met and maintained during the applicable year. These facilities were expanded from its original 40,000 square feet to its present size in 1997. In connection with the expansion of the Company's manufacturing facility, the EDA, on behalf of the Company, received financing for the expansion through a construction loan with a bank. The Company has guaranteed the repayment of the construction loan and is responsible for payment of the related interest at 9% through the construction phase. At December 31, 1997, advances totaling $1,302,749 were outstanding on the construction loan and have been reflected as a long-term liability on the Company's financial statements. After completion of the construction phase, the construction loan will be paid and the additional financing will be incorporated into the existing lease with the EDA. Payments on this additional financing will be spread over 20 years and are scheduled to begin April 1, 1998. The Company's lease payments for its original 40,000 square foot facility will remain unchanged and additional lease payments will be made for the added space. The original lease payments will be equal to approximately $38,000 per year for the period June 1997 through May 1999 and approximately $81,000 per year thereafter. The lease payments for the expanded portion of the facility are equal to the retirement of the $1.6 million debt incurred by the EDA to finance the expansion. The $1.6 million debt is comprised of two parts: a $750,000 loan with an interest rate of 4% per year and payments based upon a fully amortizing 20 year term; and an $850,000 loan with an interest rate of 9% per year and payments based upon a 20 year amortization and a balloon payment due January 1, 2003. Payments under the $750,000 portion will be $4,585 per month and payments under the $850,000 portion will be $7,725 per month, 9 each beginning April 1, 1998. The Company is responsible for all real estate taxes, utilities and insurance on the leased property. With the occupancy of the facility in Grand Rapids, the Company became eligible to receive up to $200,000 of grant monies through the State of Minnesota over a three-year period, provided certain employment levels are attained. The Company received the first installment of grant monies of $50,000 in 1996 and the second installment of grant monies of $75,000 in 1997. Should the Company attain the employment levels specified in the grant, the Company will be eligible to receive $75,000 in 1998. In August 1997, the Company began renting a parcel of land consisting of 63 acres and six buildings with a total of 47,000 square feet for its research and development facility and for additional warehousing. The Company purchased this property in January 1998. The purchase price of this facility was $500,000, which was financed, in part, by the proceeds of approximately $150,000 from the sale of the Company's former production facility in Marcell, Minnesota. In addition the Company entered into a note payable with the seller for approximately $350,000 to be paid in two equal principal installments in January 1999 and January 2000, with interest payable quarterly at 8%. Prior to occupying the Grand Rapids facility, the Company's production and office facilities were located in Marcell, Minnesota. These facilities were sold to an unrelated party in December 1997 via a like-kind exchange. In 1996, the Company sold its Marcell research and development facility to an unrelated party. In addition to its facility in Marcell, the Company owns a 20-acre tract of land near Marcell used for testing its vehicles. The Company also owned three acres of land and a 9,000 square foot building in Grand Rapids used for research and development and warehousing. This Grand Rapids property was acquired in 1990 from Company President, Gary Lemke, pursuant to a contract for deed. The land and building on this property were under agreement for sale to an unrelated party when the building was completely destroyed by fire in December 1997. The building, and its contents valued at approximately $150,000, were covered by insurance. The Company has constructed a new building on this site and the sale to the same unrelated party closed in March 1998 resulting in a gain of approximately $20,000, which will be recognized in the first quarter of 1998. The Company believes that its properties are adequately covered by insurance. ITEM 3. LEGAL PROCEEDINGS During its 1997 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. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION The Company's common stock has been traded on the Nasdaq National Market(SM) under the ticker symbol ASVI since February 26, 1997. Prior to that date, the Company's common stock was traded on the Nasdaq Small Cap Market(SM) since the completion of its initial public offering, August 11, 1994. The following table sets forth sales price information for the periods indicated, as adjusted to reflect the Company's three-for-two stock split, effective January 21, 1997: Year Ended December 31, 1996 High Low - ----------------------------------- ------- ------- First Quarter $ 5.00 $ 4.17 Second Quarter 14.17 4.50 Third Quarter 13.33 8.67 Fourth Quarter 19.33 11.00 10 Year Ended December 31, 1997 High Low - ----------------------------------- ------ ------ First Quarter $26.00 $16.25 Second Quarter 26.75 17.00 Third Quarter 33.00 24.00 Fourth Quarter 30.50 22.50 The quotations reflect inter-dealer prices, without retail mark-up, mark- down or commissions, and may not represent actual transactions. HOLDERS As of March 10, 1998, the Company had approximately 178 holders of record of its Common Stock (not including beneficial holders). The Company believes it has in excess of 3,000 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) 1997 1996 1995 1994 1993 - -------------------------------- -------- -------- ------- ----------- ---------- Net Sales..................... $24,316 $12,266 $8,245 $4,806 $3,995 Net Income.................... 2,324 922 440 148 160 Net Income Per Share-Diluted.. .43 .18 .09 .04 .05 Total Assets.................. 19,215 13,410 6,322 4,885 2,663 Long-Term Liabilities......... 7,021 5,697 643 40 93 Shareholders' Equity.......... 9,957 6,287 5,078 4,609 1,093 Dividends Declared............ - - - - -
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, -------------------------- 1997 1996 1995 -------- ------- ------- Net sales.................................. 100.0% 100.0% 100.0% Cost of goods sold......................... 74.5 76.2 78.2 Gross profit............................... 25.5 23.8 21.8 Selling, general & administrative expense.. 9.2 10.8 12.4 Operating income........................... 15.4 11.6 8.4 Interest expense........................... 1.6 1.0 0.4 Net income................................. 9.6 7.5 5.3
Net Sales. Net sales for the year ended December 31, 1997 increased 98% compared with 1996 to approximately $24,316,000. This increase is due to the combination of increased sales of the Company's existing model Posi-Track, sales from the introduction of two new Posi-Track models, increased sales of parts and used equipment, offset in part by a decrease in Track Truck sales. Sales of the Company's existing model Posi-Track, the MD-70, and related accessories increased 61% in 1997, due primarily to the increase in the number of Posi-Track dealer locations and the increased market acceptance of the Posi-Track. At March 1998, the Company had 91 Posi-Track dealer locations, compared with 49 at March 1997. In 1997, the Company introduced two new Posi-Track models, the HD 4500 and the DX 4530 (previously referred to as the 11 HD 125). The Company began selling the HD 4500 in the third quarter of 1997 and had sales related to this product of approximately $4,047,000, the majority of which occurred in the fourth quarter. The Company began selling the DX 4530 in the fourth quarter of 1997 and had sales related to this product of approximately $992,000 in 1997. Sales of parts, used equipment and other increased 93% compared with 1996, due primarily to a 126% increase in the sale of parts as the number of vehicles in service continues to increase. Sales of used equipment increased 20% as the Company has a greater selection of used equipment to sell and increased marketing efforts were devoted to the sale of used equipment. Track Truck related sales decreased 34%, or approximately $380,000, due to the introduction of the Posi-Track DX 4530, which serves some of the same markets as the Track Truck. For the year ended December 31, 1996, net sales totaled approximately $12,266,000, a 49% increase over 1995. This increase is the combination of increased sales of the Company's Posi-Track vehicle and related accessories along with increased sales of parts and used equipment, offset by a reduction in the sales of Track Truck vehicles. Posi-Track related sales increased 63% over 1995 due to the continued expansion of the Posi-Track dealer network, a full year in the Company's larger 40,000 square foot manufacturing facility and full year sales to one large dealer which was added in mid-1995. In March 1997, the Company had 49 Posi-Track dealer locations compared with 43 in March 1996. Four of the ten largest Posi-Track dealers for 1996, based on sales volume, were added during 1996. These four represented total sales volume of approximately $1,900,000. In 1996, the Company was in a larger 40,000 square foot manufacturing facility the entire year, compared with eight months in 1995, thereby providing for increased production capacity. Also in 1996, the Company had two Posi-Track dealers that together accounted for 21% of the Company's net sales. In 1995, the Company had only one Posi-Track dealer with sales in excess of 10% of the Company's net sales. Track Truck related sales for 1996 decreased 18% as the Company did not experience, nor did it anticipate, any large foreign shipments as was experienced in 1995. Excluding foreign shipments, Track Truck unit sales actually increased 24% in 1996. Sales of parts and used equipment increased 57% due to the greater number of vehicles in service in 1996. Sales of used equipment increased 90% in 1996 due to the Company devoting more of its resources to marketing used equipment and a greater amount of used equipment. In connection with the expansion of its manufacturing facility and increase in the models in its product lines, the Company is anticipating continued growth in its net sales in excess of 50% for the twelve months ended December 31, 1998. Gross Profit. For the twelve months ended December 31, 1997, gross profit increased to approximately $6,202,000, or 25.5% of net sales, compared with approximately $2,925,000, or 23.8% of net sales, in 1996. The increase in gross profit is due to the 98% increase in net sales for 1997. The increase in the gross profit percentage is due to several factors. First, the Company began selling the model HD 4500 Posi-Track in the second half of 1997, which carries a higher selling price than the average vehicle sold in 1997 and also a higher gross profit margin. Second, the Company began selling the Posi-Track DX 4530, which also carries a higher selling price than the average vehicle sold in 1997, but also, was primarily sold direct to the end user, rather than through the Posi-Track dealer network. Third, greater efficiencies have been obtained in the production process as the number of units produced increased significantly in 1997. For 1996, gross profit increased to approximately $2,925,000, or 23.8% of net sales, compared with approximately $1,796,000, or 21.8% of net sales, in 1995. The increased gross profit amount can be attributed to the large increase in the Company's net sales for 1996. The increased gross profit percentage is due primarily to the increased efficiencies gained as the number of vehicles produced increases. In 1996, the Company produced approximately 42% more total units than in 1995. The Company also occupied a larger 40,000 square foot manufacturing facility for the entire twelve months of 1996 compared with approximately eight months for 1995, allowing for greater efficiencies in the production process. In addition, the Company was able to obtain better pricing on its purchases of raw materials as well as negotiate volume incentive discounts with several of its major vendors. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased for the twelve months ended December 31, 1997 to approximately $2,230,000 compared with $1,330,000 for 1996. However, as a percentage of net sales, these expenses decreased from 10.8% in 1996 to 9.2% for 1997. The increase in the expenses is due to increased sales and marketing efforts, increased financial and legal related costs and increased administrative costs from increased employment levels. The increased sales and marketing costs are primarily from additional sales personnel hired in 1997 and increased advertising and promotion expenditures. The increase in financial and legal related costs are due primarily to a full twelve months of amortization of a financial consulting agreement in 1997 compared with one month in 1996, and the additional legal costs incurred as the Company continues to expand its operations. The decreased percentage of selling, general and administrative expenses is due to the Company closely managing its costs as sales volume increases. 12 For 1996, selling, general and administrative expenses increased to approximately $1,330,000 from approximately $1,023,000 in 1995. As a percentage of net sales, these expenses decreased from 12.4 % of net sales in 1995 to 10.8% of net sales in 1996. The increased expenses were due to the following: increased sales and marketing costs, primarily advertising and travel costs; increased costs for administrative personnel hired to support the Company's increased activity; and the costs associated with a full year of occupancy in the Company's 40,000 square foot facility. The decreased percentage of selling, general and administrative expenses is due to the increased sales volume in 1996. Research and Development. Research and development expenses increased from approximately $171,000 in 1996 to $217,000 in 1997. This increase was due to the introduction of two new Posi-Track models in 1997 and the Company's desire to invest in new products and future product enhancements. For 1996, research and development expenses increased to approximately $171,000 compared with approximately $81,000 in 1995. The increase is due to the Company devoting more of its resources to this area in 1996 from increased profitability and other available funds. The research and development efforts in 1996 focused primarily on development of new products and enhancements to existing products. 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 $399,000, or 1.6% of net sales, in 1997 compared with $127,000, or 1.0% of net sales, in 1996 and approximately $36,000, or 0.4% of net sales, in 1995. The increase in 1997 is due primarily to a full year of interest expense for the Company's $5,000,000 convertible debentures which were issued in October 1996. The remaining increase in 1997 is due to construction loan interest (net of amount capitalized) incurred for the expansion of the Company's manufacturing facility. The increase in 1996 was also due to the additional interest expense from the convertible debentures. The Company anticipates its interest expense will increase in 1998 due to the additional debt incurred to expand its manufacturing facility and purchase additional facilities. Net Income. Net income for the twelve months ended December 31, 1997 was approximately $2,324,000, compared with approximately $922,000 in 1996 and $440,000 in 1995. The increases were due to increased sales and profitability on those sales, offset, in part, by increased operating expenses. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1997, the Company had working capital of approximately $13,342,000, compared with approximately $10,510,000 at December 31, 1996. This increase is due to a combination of several factors. Inventory increased approximately $6,514,000 as the Company increased production of its original model Posi-Track and introduced two new models in 1997. Accounts receivable increased approximately $729,000 due to increased sales volume. The Company used cash and short-term investments of approximately $3,740,000 to finance these increases, along with increases in accounts payable and accrued expenses of approximately $802,000. The Company also funded approximately $1,079,000 of capital expenditures through cash flow generated from operations. At December 31, 1996, the Company had working capital of approximately $10,510,000, compared with approximately $4,372,000 at December 31, 1995. Approximately $5,000,000 of the total increase of approximately $6,138,000 was from proceeds of the Company's private placement of convertible debentures. The remainder of the increase was due primarily to the increase in the Company's accounts receivable and inventories offset in part by increased levels of accounts payable and accrued liabilities from the overall volume increase in 1996. In connection with the expansion of the Company's manufacturing facility, the Grand Rapids Economic Development Authority (EDA), on behalf of the Company, received financing for the expansion through a construction loan with a bank. The Company has guaranteed the repayment of the construction loan and is responsible for payment of the related interest at 9% through the construction phase. At December 31, 1997, advances totaling $1,302,749 were outstanding on the construction loan and have been reflected as a long-term liability on the Company's financial statements. After completion of the construction phase, the construction loan will be paid and the additional financing will be 13 incorporated into the existing lease with the EDA. Payments on this additional financing will be spread over 20 years and are scheduled to begin April 1, 1998. 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 the next twelve months. Beyond that period, it may be necessary to obtain additional capital resources. The Company has not determined whether the composition of these additional resources would be in the form of additional debt, convertible securities, equity securities or a combination. The Company has increased its number of employees approximately 50% in the last twelve months. In order to meet its anticipated sales levels for 1998, the Company expects it will increase its employees by approximately 10-30% over the next twelve months. It is anticipated nearly all the additional employees will be in the production area. The Company believes the local work force is adequate to supply the additional employees it needs. Impact of the Year 2000 Issue. The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Some of the Company's computer programs that have date- sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process critical business transactions including recording of sales, manufacture of products, inventory management and distribution, preparation of invoices and collection of accounts receivables and many other normal business activities. The Company has begun to identify all releveant software that may affect the Company's operations through surveys and examinations. Based on risk assessments that have been completed for the majority of the Company's operations, the Company must upgrade some of its existing software to ensure that the computer systems will properly utilize dates beyond December 31, 1999. The Company expects to convert its business operations to new Year 2000 compatible software by the end of 1998. The cost of these conversions is not expected to have a material impact on the Company. However, there can be no guarantee the software of other companies on which the Company's systems rely will be timely converted, or that a failure to convert by another company, or a conversion that is incompatible with the Company's systems, would not have a material adverse effect on the Company. 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 and 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 additional expenses or operating losses or the activities of competitors. Any forward-looking statements provided from time-to-time by the Company represents only management's then-best current estimate of future results or trends. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The disclosures required by this item are not required by the Company for its fiscal year ended December 31, 1997. 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, 1997 and 1996 Consolidated Statements of Earnings for the years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements 14 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 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 1998 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 1998 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 1998 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 1998 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, 1997, 1996 and 1995 Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 1997, 1996 and 1995 (a)(3) EXHIBITS Exhibit Number Description ------ ----------- 3.1 Second Restated Articles of Incorporation of the Company (a) 15 3.1a Amendment to Second Restated Articles of Incorporation of the Company (e) 3.2 Bylaws of the Company (a) 4.1 Specimen form of the Company's Common Stock Certificate (a) 4.2 * 1987 Stock Option Plan (a) 4.3 * 1994 Long-Term Incentive and Stock Option Plan (a) 4.4 Form of Warrant issued to Summit Investment Corporation (b) 4.5 Form of Debenture issued October 1996 (d) 4.6 Warrant issued to Leo Partners, Inc. on December 1, 1996 (e) 4.7 * 1996 Incentive and Stock Option Plan (f) 10.1 Development Agreement dated July 14, 1994 among the Iron Range Resources and Rehabilitation Board ("IRRRB"), the Grand Rapids Economic Development Agency ("EDA") and the Company (b) 10.2 Lease and Option Agreement dated July 14, 1994 between the Grand Rapids Economic Development Agency and the Company (b) 10.3 Option Agreement dated July 14, 1994 between the EDA and the Company (b) 10.4 Grant Contract dated July 1, 1994 between the Company and the IRRRB (b) 10.5 Letter Credit Agreement dated June 15, 1994 between the Security State Bank of Hibbing and the Company (a) 10.6 Supplemental Lease Agreement dated April 18, 1997 between the EDA and the Company (f) 10.7 Supplemental Development Agreement dated April 18, 1997 between the EDA and the Company (f) 10.8 Line of Credit dated May 22, 1997 between Norwest Bank Minnesota North, N.A. and the Company (f) 10.9 * Employment Agreement dated October 17, 1994 between the Company and Thomas R. Karges (c) 10.10 Consulting Agreement between the Company and Leo Partners, Inc. dated December 1, 1996 (e) 11 Statement re: Computation of Per Share Earnings 22 List of Subsidiaries (a) 23 Consent of Grant Thornton LLP, independent auditors 24 Power of Attorney (Included on Signature Page) 27.1 Financial Data Schedule for the year ended December 31, 1997 27.2 Restated Financial Data Schedule for the nine months ended September 30, 1997 16 27.3 Restated Financial Data Schedule for the six months ended June 30, 1997 27.4 Restated Financial Data Schedule for the three months ended March 31, 1997 27.5 Restated Financial Data Schedule for the year ended December 31, 1996 27.6 Restated Financial Data Schedule for the nine months ended September 30, 1996 27.7 Restated Financial Data Schedule for the six months ended June 30, 1996 (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 Quarterly Report on Form 10-QSB for the quarter ended September 30, 1996 (File No. 0- 25620) filed electronically November 13, 1996. (e) 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. (f) 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. * 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, 1997. 17 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 27, 1998 - ------------------------------------ ---------------------------- 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. Each person whose signature to this report on Form 10-K appears below hereby constitutes and appoints Gary Lemke and Thomas R. Karges, and each of them, as his or her true and lawful attorney-in-fact and agent, with full power of substitution, to sign on his or her behalf individually and in the capacity stated below and to perform any acts necessary to be done in order to file all amendments to this report on Form 10-K, and any and all instruments or documents filed as part of or in connection with this report on Form 10-K or the amendments thereto and each of the undersigned does hereby ratify and confirm all that said attorney- in-fact and agent, or his substitutes, shall do or cause to be done by virtue hereof. /s/ Philip C. Smaby Date: March 27, 1998 - ------------------------------------ ---------------------------- By: Philip C. Smaby, Chairman of the Board and Director /s/ Jerome T. Miner Date: March 27, 1998 - ------------------------------------ ---------------------------- By: Jerome T. Miner, Vice-Chairman of the Board and Director /s/ Gary Lemke Date: March 27, 1998 - ------------------------------------ ---------------------------- By: Gary Lemke, President and Director (Chief Executive Officer) /s/ Edgar E. Hetteen Date: March 27, 1998 - ------------------------------------ ---------------------------- By: Edgar E. Hetteen, Vice President and Director /s/ James Dahl Date: March 27, 1998 - ------------------------------------ ---------------------------- By: James Dahl, Director /s/ Leland T. Lynch Date: March 27, 1998 - ------------------------------------ ---------------------------- By: Leland T. Lynch, Director /s/ Karlin S. Symons Date: March 27, 1998 - ------------------------------------ ---------------------------- By: Karlin S. Symons, Director /s/ R. E. Turner, IV Date: March 27, 1998 - ------------------------------------ ---------------------------- By: R. E. Turner, IV, Director /s/ Thomas R. Karges Date: March 27, 1998 - ------------------------------------ ---------------------------- By: Thomas R. Karges, Chief Financial Officer 18 A.S.V., INC. AND SUBSIDIARY SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
BALANCE ADDITIONS BALANCE BEGINNING CHARGED TO END OF ACCRUED WARRANTY OF PERIOD EXPENSE DEDUCTIONS (A) PERIOD - ------------------ --------- ---------- -------------- -------- 1997 $100,000 $668,563 $568,563 $200,000 1996 $ - $194,923 $ 94,923 $100,000 1995 $ - $ 25,260 $ 25,260 $ -
(A) Warranty credits issued 19 A.S.V., INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996
ASSETS 1997 1996 ------ ----- CURRENT ASSETS Cash and cash equivalents $ 316,599 $ 3,042,494 Short-term investments 1,255,160 2,269,753 Accounts receivable (net of allowance for doubtful accounts of $20,000) 1,989,906 1,261,228 Inventories 11,674,027 5,160,353 Prepaid expenses and other 342,896 201,943 ----------- ----------- Total current assets 15,578,588 11,935,771 ----------- ----------- PROPERTY AND EQUIPMENT, NET 3,636,091 1,474,641 ----------- ----------- $19,214,679 $13,410,412 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 1,474,701 $ 779,609 Accrued liabilities Compensation 180,349 87,695 Interest 81,250 78,785 Warranties 200,000 100,000 Other 98,998 181,168 Income taxes payable 201,674 198,954 ----------- ----------- Total current liabilities 2,236,972 1,426,211 ----------- ----------- LONG-TERM LIABILITIES Convertible debentures 5,000,000 5,000,000 Capital lease obligation 717,859 697,068 Construction loan 1,302,749 -- ----------- ----------- 7,020,608 5,697,068 ----------- ----------- COMMITMENTS AND CONTINGENCIES -- -- SHAREHOLDERS' EQUITY Capital stock, $.01 par value: Preferred stock, 7,500,000 shares authorized; no shares outstanding -- -- Common stock, 22,500,000 shares authorized; shares issued and outstanding - 5,012,207 in 1997 and 4,810,659 in 1996 50,122 48,107 Additional paid-in capital 6,545,432 5,201,038 Retained earnings 3,361,545 1,037,988 ----------- ----------- 9,957,099 6,287,133 ----------- ----------- $19,214,679 $13,410,412 =========== ===========
The accompanying notes are an integral part of these statements. F-1 A.S.V., INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF EARNINGS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 ------ ------ ----- Net sales $ 24,315,591 $ 12,266,499 $ 8,244,565 Cost of goods sold 18,113,910 9,341,860 6,448,811 ------------ ------------ ------------ Gross profit 6,201,681 2,924,639 1,795,754 ------------ ------------ ------------ Operating expenses Selling, general and administrative 2,230,399 1,329,705 1,023,056 Research and development 216,888 171,340 80,569 ------------ ------------ ------------ 2,447,287 1,501,045 1,103,625 ------------ ------------ ------------ Operating income 3,754,394 1,423,594 692,129 ------------ ------------ ------------ Other income (expense) Interest income 223,111 99,706 32,215 Interest expense (398,589) (127,069) (36,300) Other, net 74,641 63,278 2,808 ------------ ------------ ------------ (100,837) 35,915 (1,277) ------------ ------------ ------------ Income before income taxes 3,653,557 1,459,509 690,852 Provision for income taxes 1,330,000 538,000 251,000 ------------ ------------ ------------ NET INCOME $ 2,323,557 $ 921,509 $ 439,852 ============ ============ ============ Net income per common share Basic $ .47 $ .19 $ .09 ============ ============ ============ Diluted $ .43 $ .18 $ .09 ============ ============ ============ Weighted average number of common shares outstanding Basic 4,910,744 4,787,692 4,741,502 ============ ============ ============ Diluted 5,933,767 5,267,170 4,964,111 ============ ============ ============
The accompanying notes are an integral part of these statements. F-2 A.S.V., INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
RETAINED COMMON STOCK ADDITIONAL EARNINGS ------------------- PAID-IN (ACCUMULATED SHARES AMOUNT CAPITAL DEFICIT) TOTAL --------- -------- ----------- ------------- ------------ Balance at December 31, 1994 4,733,859 $ 47,339 $ 4,884,612 $ (323,373) $ 4,608,578 Exercise of stock options 30,000 300 29,012 -- 29,312 Net income -- -- -- 439,852 439,852 ----------- -------- ----------- ----------- ----------- Balance at December 31, 1995 4,763,859 47,639 4,913,624 116,479 5,077,742 Exercise of stock options 46,800 468 78,814 -- 79,282 Tax benefit from exercise of stock options -- -- 196,000 -- 196,000 Warrant earned -- -- 12,600 -- 12,600 Net income -- -- -- 921,509 921,509 ----------- -------- ----------- ----------- ----------- Balance at December 31, 1996 4,810,659 48,107 5,201,038 1,037,988 6,287,133 EXERCISE OF STOCK OPTIONS 201,548 2,015 175,194 -- 177,209 TAX BENEFIT FROM EXERCISE OF STOCK OPTIONS -- -- 1,018,000 -- 1,018,000 WARRANT EARNED -- -- 151,200 -- 151,200 NET INCOME -- -- -- 2,323,557 2,323,557 ----------- -------- ----------- ----------- ----------- BALANCE AT DECEMBER 31, 1997 5,012,207 $ 50,122 $ 6,545,432 $ 3,361,545 $ 9,957,099 =========== ======== =========== =========== ===========
The accompanying notes are an integral part of these statements. F-3 A.S.V., INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 ------ ------ ----- Cash flows from operating activities: Net income $ 2,323,557 $ 921,509 $ 439,852 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 220,327 114,000 95,482 Interest accrued on capital lease obligation 20,791 46,417 29,912 Deferred income taxes (123,000) (49,000) (23,000) Effect of warrant earned 151,200 12,600 -- Changes in assets and liabilities Accounts receivable (728,678) (523,905) (292,811) Inventories (6,513,674) (1,474,378) (711,554) Prepaid expenses and other (17,953) (90,719) 66,686 Accounts payable 695,092 600,227 56,179 Accrued compensation 92,654 17,475 55,339 Accrued interest 2,465 78,785 -- Accrued warranties 100,000 100,000 -- Other accrued liabilities (82,170) 59,095 70,634 Income taxes payable 2,720 (30,637) 229,591 ----------- ----------- ----------- Net cash provided by (used in) operating activities (3,856,669) (218,531) 16,310 ----------- ----------- ----------- Cash flows from investing activities: Purchase of property and equipment (1,079,028) (232,231) (428,568) Purchase of short-term investments (746,985) (2,269,753) (361,282) Redemption of short-term investments 1,761,578 50,000 811,282 ----------- ----------- ----------- Net cash provided by (used in) investing activities (64,435) (2,451,984) 21,432 ----------- ----------- ----------- Cash flows from financing activities: Proceeds from convertible debenture -- 5,000,000 -- Principal payments on notes payable - related parties -- -- (63,193) Principal payments on long-term liabilities -- -- (24,114) Proceeds from exercise of stock options 177,209 79,282 29,312 Tax benefit related to exercise of options 1,018,000 196,000 -- ----------- ----------- ----------- Net cash provided by (used in) financing activities 1,195,209 5,275,282 (57,995) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents (2,725,895) 2,604,767 (20,253) Cash and cash equivalents at beginning of period 3,042,494 437,727 457,980 ----------- ----------- ----------- Cash and cash equivalents at end of period $ 316,599 $ 3,042,494 $ 437,727 =========== =========== =========== Supplemental disclosure of cash flow information: Cash paid for interest $ 350,072 $ 1,867 $ 6,538 Cash paid for income taxes 432,280 452,110 29,288 Supplemental disclosure of investing and financing activities: Asset acquired by incurring capital lease obligation $ 1,302,749 $ 7,444 $ 613,295
The accompanying notes are an integral part of these statements. F-4 A.S.V., INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company designs and manufactures track-driven, all-season vehicles and related accessories and attachments in one facility 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. A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows: 1. 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. 2. CASH EQUIVALENTS The Company considers all highly liquid temporary cash investments with an original maturity of three months or less to be cash equivalents. At December 31, 1997 and 1996, the Company had cash equivalents of approximately $48,000 and $2,772,000, which consisted of various highly liquid temporary cash investments. The fair value of these investments approximates cost. 3. SHORT-TERM INVESTMENTS The Company considers its short-term investments at December 31, 1997 and 1996 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. At December 31, 1997 and 1996, the fair value of all short-term investments approximated cost. 4. 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. 5. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. 6. 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. 7. WARRANTIES Provision for estimated warranty costs is recorded at the time of sale and periodically adjusted to reflect actual experience. 8. REVENUE RECOGNITION The Company recognizes revenue when products are shipped. 9. ADVERTISING EXPENSE The Company expenses advertising as incurred. Advertising expense was $320,545, $200,656 and $100,598 for 1997, 1996 and 1995. 10. STOCK OPTIONS The Company accounts for the issuance of stock options using the intrinsic value method. 11. ACCOUNTING ESTIMATES The preparation of the Company's 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. F-5 A.S.V., INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1997, 1996 AND 1995 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 12. NET INCOME PER COMMON SHARE On December 31, 1997, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128 - "Earnings per Share". As required by SFAS 128, all current and prior year net income per share data have been restated. The Company's basic net income per share amounts have been computed by dividing net income by the weighted average number of outstanding common shares. The Company's 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 $206,700 and $49,635 for 1997 and 1996, 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, 1997, 1996 and 1995, 1,023,023, 479,478 and 222,610 shares of common stock equivalents were included in the computation of diluted net income per share. Options to purchase 254,500 and 523,500 shares of common stock with a weighted average exercise price of $27.50 and $18.33 were outstanding at December 31, 1997 and 1996, 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. 13. NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board has issued SFAS 130, "Reporting Comprehensive Income," and SFAS 131, "Disclosures about Segments of an Enterprise and Related Information," which are effective for fiscal 1998. SFAS 130 will require the Company to display an amount representing total comprehensive income, as defined by the statement, as part of the Company's basic financial statements. Comprehensive income will include items such as unrealized gains or losses on certain investment securities. SFAS 131 will require the Company to disclose financial and other information about its business segments, their products and services, geographic areas, major customers, sales, profits, assets and other information. The adoption of these statements is not expected to have a material effect on the consolidated financial statements of the Company. NOTE B - SHORT-TERM INVESTMENTS Short-term investments consist primarily of a diversified portfolio of taxable and tax exempt governmental agency and municipal bonds as of December 31, 1997. The contractual maturities of available for sale debt securities at December 31, 1997 are as follows: $767,041 due within one year, $488,119 due after one year through five years. NOTE C - INVENTORIES Inventories consist of the following: DECEMBER 31, -------------------------- 1997 1996 ------------ ----------- Production parts and materials $ 7,776,128 $2,789,440 Finished goods and service parts 2,903,257 1,475,162 Used equipment held for resale 994,642 895,751 -------- -------- $11,674,027 $5,160,353 NOTE D - PROPERTY AND EQUIPMENT Property and equipment consist of the following: DECEMBER 31, -------------------------- 1997 1996 ------------ ----------- Land $ 32,367 $ 32,367 Buildings and improvements 2,888,972 1,103,741 Tooling 285,314 147,563 Machinery and equipment 970,289 612,510 Vehicles 200,908 126,748 -------- -------- 4,377,850 2,022,929 Less accumulated depreciation 741,759 548,288 -------- -------- $3,636,091 $1,474,641 F-6 A.S.V., INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1997, 1996 AND 1995 NOTE E - LINES OF CREDIT During 1997, the Company entered into a $2,000,000 line of credit agreement with a bank. This line of credit is collateralized primarily by inventories and accounts receivable. The interest rate is variable at prime (8.5% as of December 31, 1997). As of December 31, 1997, there were no outstanding advances under this line of credit. NOTE F - LONG-TERM LIABILITIES CONVERTIBLE DEBENTURES During October 1996, the Company issued $5,000,000 of unsecured senior convertible debentures which carry interest at 6.5% and are due October 15, 2006. The debentures are convertible at any time into the Company's common stock at $11.00 per share, approximately the fair market value of the stock at the time the debentures were sold. Interest is payable quarterly. The Company may redeem the debentures any time after October 15, 2001. CAPITAL LEASE OBLIGATION The Company leases its manufacturing and office building from the Grand Rapids Economic Development Authority ("the City") over a twenty-year period, which commenced May 1995. Terms of the lease agreement provide for no rent in the first two years, rental payments of approximately $38,000 per year in years three and four and approximately $81,000 per year in years five through twenty. The Company has an option to purchase the facility at any time during the lease period for the present value of the remaining lease payments plus the purchase price of the land. The purchase price of the land is $160,000, but can be reduced if certain minimum employment levels are met and maintained. Future minimum lease payments under this capital lease obligation at December 31, 1997 are as follows: 1998 $ 34,740 1999 62,769 2000 80,534 2001 80,534 2002 80,534 Thereafter 999,960 -------- Total payments 1,339,071 Amounts representing interest 621,212 Present value of minimum capitalized lease payments $ 717,859 ======== Assets and accumulated amortization related to the capital lease were $620,739 and $41,258 at December 31, 1997 and $620,739 and $25,740 at December 31, 1996. During 1996, the Company received approval for a financing package for the expansion of its manufacturing facility in Grand Rapids, Minnesota. The City, on behalf of the Company, received financing for the expansion of the facility through a construction loan with a bank. The Company has guaranteed the loan and paid the interest at 9% through the construction phase. At December 31, 1997, advances totaling $1,302,749 were outstanding on the construction loan and have been reflected as a liability in the financial statements. After completion of the construction phase the construction loan will be paid and the additional financing will be rolled into the existing lease with the City. Payments will be spread over the remainder of the original twenty year period with the lease payments adjusted for the additional financing. The Company expects to close on the additional financing in early 1998. NOTE G - PROVISION FOR INCOME TAXES The provision for income taxes consists of the following: YEAR ENDED DECEMBER 31, --------------------------- 1997 1996 1995 ------ ------ ----- Current Federal $1,294,500 $520,500 $250,000 State 158,500 66,500 24,000 -------- ------- ------- 1,453,000 587,000 274,000 Deferred (123,000) (49,000) (23,000) --------- -------- -------- $1,330,000 $538,000 $251,000 ========= ======= ======= Deferred income taxes relate to the tax effect of temporary differences as follows: DECEMBER 31, --------------------- 1997 1996 -------- ------- Accruals and reserves $201,200 $67,400 Other (6,200) 4,600 The net deferred tax asset is included with prepaid expenses and other in the financial statements. F-7 A.S.V., INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1997, 1996 AND 1995 NOTE G - PROVISION FOR INCOME TAXES - Continued The following is a reconciliation of the Federal statutory income tax rate to the effective tax rate: 1997 1996 995 ------ ------ ---- Statutory federal rate 34.0% 34.0% 34.0% State income taxes, net of federal benefit 2.6 3.0 2.3 Research and development credit - - (1.2) Other (.2) (.1) 1.2 ---- ---- ---- 36.4% 36.9% 36.3% ==== ==== ==== 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 capital. NOTE H - 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 187,500 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 750,000 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. This plan has similar terms and vesting requirements as the 1994 Plan. Option transactions under the plans during each of the three years in the period ended December 31, 1997 are summarized as follows: WEIGHTED AVERAGE EXERCISE SHARES PRICE -------- --------- Outstanding at December 31, 1994 382,500 $ 1.57 Granted 75,000 4.30 Exercised (30,000) .98 -------- ---- Outstanding at December 31, 1995 427,500 2.10 Granted 541,500 18.07 Exercised (46,800) 1.69 -------- ----- Outstanding at December 31, 1996 922,200 11.67 Granted 309,500 26.55 Exercised (206,800) 1.52 Canceled (2,250) 4.67 ------- ----- 1,022,650 $18.11 ========= ====== A total of 5,244 shares were tendered in the exercise of options in 1997. At December 31, 1997, 1996 and 1995, 279,275, 262,575 and 256,875 options were exercisable with a weighted average exercise price of $10.61, $1.78 and $1.55. The following information applies to grants that are outstanding at December 31, 1997: OPTIONS OUTSTANDING ---------------------------------------- WEIGHTED- NUMBER AVERAGE WEIGHTED- RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISE AT CONTRACTUAL EXERCISE PRICES PERIOD END LIFE PRICE - -------------------- ----------- ------------- ----------- $ 2.08 - $ 3.13 107,900 2.4 years $ 2.14 3.83 - 5.75 74,250 3.7 years 4.48 18.25 - 27.38 586,000 5.9 years 18.69 27.50 254,500 6.5 years 27.50 ---------- 1,022,650 ========== OPTIONS EXERCISABLE ----------------------------- NUMBER WEIGHTED- RANGE OF EXERCISABLE AVERAGE EXERCISE AT EXERCISE PRICES PERIOD END PRICE - ---------------------- ----------- --------- $ 2.08 - $ 3.13 98,525 $ 2.14 3.83 - 5.75 40,500 4.51 18.25 - 27.38 140,250 18.33 ------- 279,275 ======= F-8 A.S.V., INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1997, 1996 AND 1995 NOTE H - SHAREHOLDERS' EQUITY - Continued The weighted average fair value of the options granted during 1997 and 1996 is $15.10 and $9.49. 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 1997 and 1996; zero dividend yield; expected volatility of 48.80%; risk-free interest rate of 5.90% and 6.16% and expected life of 6.56 and 5.56 years. The Company's pro forma net income and net income per common share for 1997 and 1996, had the fair value based method been used, are set forth below. 1997 1996 ---------- ----------- Net income As reported $2,323,557 $921,509 Pro forma 537,255 860,685 Net income per common share Basic As reported $.47 $.19 Pro forma .11 .18 Diluted As reported $.43 $.18 Pro forma .12 .17 The effect was not material to the Company's 1995 pro forma net income. STOCK WARRANT In connection with the Company's public offering, a warrant was issued to the Underwriter to purchase up to 180,000 shares of the Company's common stock at the exercise price of $2.60 per share. The warrant is exercisable until August 11, 1999 and contains certain anti-dilution provisions. The warrant has not been exercised as of December 31, 1997. NOTE I - CONSULTING AGREEMENT Effective December 1, 1996, the Company entered into a five-year consulting agreement with a consulting firm. In connection with the agreement, the Company issued a warrant for the purchase of 225,000 shares of the Company's common stock at $11.00 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, 1997. The fair value of the warrant granted is $3.36 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 J - COMMITMENTS AND CONTINGENCIES In 1996 and 1997, the Company entered into agreements with a financing company (the "Creditor"), whereby the Creditor extends credit to the Company's dealers to finance goods sold to the dealers. The agreements require 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, 1997 and 1996, approximately $1,197,000 and $690,000 was outstanding in credit that had been extended to the Company's dealers. F-9 A.S.V., INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1997, 1996 AND 1995 NOTE K - MAJOR CUSTOMER During 1997 and 1996, 26.8% and 21.0% of total sales were made to two unaffiliated customers, each accounting for over 10% of net sales. In 1995, one of these customers accounted for 13.3% of net sales. At December 31, 1997 and 1996, the accounts receivable from these customers were $48,123 and $165,098. NOTE L - EMPLOYEE BENEFIT PLAN The Company adopted a 401(k) employee savings and profit sharing plan on July 1, 1995 which provides for employee salary deferrals of up to $9,500 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 1997, 1996 and 1995 were $22,898, $15,881 and $6,647. NOTE M - SUBSEQUENT EVENT On January 22, 1998, the Company purchased property for an exchanged property with a value of $149,457 and a promissory note for $350,543. The note is payable in two equal annual installments of $175,271 beginning January 22, 1999. Interest at 8% is payable quarterly beginning April 22, 1998. REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors A.S.V., Inc. and Subsidiary We have audited the accompanying consolidated balance sheets of A.S.V., Inc. and Subsidiary as of December 31, 1997 and 1996, 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, 1997. 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 generally accepted auditing standards. 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. and Subsidiary as of December 31, 1997 and 1996, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. GRANT THORNTON LLP Minneapolis, Minnesota February 19, 1998 F-10 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. and Subsidiary referred to in our report dated February 19, 1998, which is included in the Annual Report of A.S.V., Inc. on Form 10-K for the year ended December 31, 1997, we have also audited Schedule II for each of the three years in the period ended December 31, 1997. 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 19, 1998 F-11
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 27.1 Financial Data Schedule for the year ended December 31, 1997 Filed herewith electronically 27.2 Restated Financial Data Schedule for the nine months ended September 30, 1997 Filed herewith electronically 27.3 Restated Financial Data Schedule for the six months ended June 30, 1997 Filed herewith electronically 27.4 Restated Financial Data Schedule for the three months ended March 31, 1997 Filed herewith electronically 27.5 Restated Financial Data Schedule for the year ended December 31, 1996 Filed herewith electronically 27.6 Restated Financial Data Schedule for the nine months ended September 30, 1996 Filed herewith electronically 27.7 Restated Financial Data Schedule for the six months ended June 30, 1996 Filed herewith electronically
EX-11 2 COMPUTATION OF EARNINGS PER SHARE A.S.V., INC. AND SUBSIDIARY EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 ---------- ---------- ---------- BASIC Earnings Net income $2,323,557 $ 921,509 $ 439,852 ========== ========== ========== Shares Weighted average number of common shares outstanding 4,910,744 4,787,692 4,741,502 ========== ========== ========== Earnings per common share $ .47 $ .19 $ .09 ========== ========== ========== DILUTED Earnings Net income $2,323,557 $ 921,509 $ 439,852 Add after tax interest expense applicable to 6.5% convertible debentures 206,700 49,635 - ---------- ---------- ---------- Net income applicable to common stock $2,530,257 $ 971,144 $ 439,852 ========== ========== ========== Shares Weighted average number of common shares outstanding 4,910,744 4,787,692 4,741,502 Assuming exercise of options and warrants reduced by the number of shares which could have been purchased with the proceeds from the exercise of such options and warrants 568,478 370,449 222,609 Assuming conversion of 6.5% convertible debentures 454,545 109,029 - ---------- ---------- ---------- Weighted average number of common and common equivalent shares outstanding 5,933,767 5,267,170 4,964,111 ========== ========== ========== Earnings per common share $ .43 $ .18 $ .09 ========== ========== ==========
EX-23 3 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated February 19, 1998, accompanying the consolidated financial statements included in the Annual Report of A.S.V., Inc. on Form 10-K for the year ended December 31, 1997. We hereby consent to the incorporation by reference of said report in the Registration Statements of A.S.V., Inc. on Forms S-8 (File No. 33-94248, effective June 30, 1995, File No. 33-94250, effective July 3, 1995, File No. 33-43075, effective December 23, 1997). GRANT THORNTON LLP Minneapolis, Minnesota March 23, 1998 EX-27.1 4 FDS YEAR ENDED 12/31/1997
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF EARNINGS FOUND ON PAGES F-1 AND F-2 OF THE COMPANY'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997, IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 316,599 1,255,160 2,009,906 20,000 11,674,027 15,578,588 4,377,850 741,759 19,214,679 2,236,972 7,020,608 0 0 50,122 9,906,977 19,214,679 24,315,591 24,315,591 18,113,910 18,113,910 2,447,287 0 398,589 3,653,557 1,330,000 2,323,557 0 0 0 2,323,557 .47 .43 Includes addback of after-tax effect on interest expense for convertible Debentures.
EX-27.2 5 RESTATED FDS NINE MOS. 09/30/1997
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF EARNINGS FOUND ON PAGE 2 AND 3 OF THE COMPANY'S FORM 10-QSB FOR THE YEAR TO DATE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 398,516 2,760,670 1,359,558 20,000 9,120,765 14,183,937 2,998,320 663,177 16,519,080 1,971,053 5,715,819 0 0 50,057 8,782,151 16,519,080 16,287,812 16,287,812 12,354,266 12,354,266 1,784,255 0 278,969 2,131,467 810,000 1,321,467 0 0 0 1,321,467 .302 .249 Includes add back of after-tax effect of interest expense for convertible Debentures for 1997.
EX-27.3 6 RESTATED FDS SIX MOS. 06/30/1997
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF EARNINGS FOUND ON PAGES 2 AND 3 OF THE COMPANY'S FORM 10-QSB FOR THE YEAR TO DATE, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 630,380 3,766,840 1,162,256 20,000 7,480,497 13,286,658 2,739,464 614,177 15,411,945 2,253,630 5,716,938 0 0 49,097 7,392,280 15,411,945 10,059,000 10,059,000 7,697,483 7,697,483 1,127,060 0 185,940 1,259,435 479,000 780,435 0 0 0 780,435 .18 .15
EX-27.4 7 RESTATED FDS THREE MOS ENDED 03/31/1997
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF EARNINGS FOUND ON PAGES 2 AND 3 OF THE COMPANY'S FORM 10-QSB FOR THE YEAR TO DATE, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 2,260,307 3,270,993 1,197,649 20,000 6,171,165 13,139,640 2,340,307 575,177 14,904,770 2,391,254 5,708,582 0 0 48,292 6,756,642 14,904,770 4,651,185 4,651,185 3,582,043 3,582,043 532,995 0 92,952 508,542 193,000 315,542 0 0 0 315,542 .08 .06
EX-27.5 8 RESTATED FDS YEAR ENDED 12/31/1996
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF EARNINGS FOUND ON PAGES F-1 AND F-2 OF THE COMPANY'S FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 3,042,494 2,269,753 1,281,228 20,000 5,160,353 11,935,771 2,022,929 548,288 13,410,412 1,426,211 5,697,068 0 0 48,107 6,239,026 13,410,412 12,266,499 12,266,499 9,341,860 9,341,860 1,501,045 0 127,069 1,459,509 538,000 921,509 0 0 0 921,509 .20 .18
EX-27.6 9 RESTATED FDS NINE MOS ENDED 09/30/1996
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF EARNINGS FOUND ON PAGES 2 AND 3 OF THE COMPANY'S FORM 10-QSB FOR THE YEAR TO DATE, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 404,051 50,000 1,356,203 30,000 4,440,692 6,346,989 1,919,933 517,957 7,748,965 1,165,534 681,925 0 0 32,034 5,869,472 7,748,965 8,652,737 8,652,737 6,690,520 6,690,520 1,048,322 10,000 35,719 973,201 370,000 603,201 0 0 0 603,201 .19 .18
EX-27.7 10 RESTATED FDS SIX MOS. ENDED 06/30/1996
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF EARNINGS FOUND ON PAGES 2 AND 3 OF THE COMPANY'S FORM 10-QSB FOR THE YEAR TO DATE, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 1,071,777 50,000 921,067 30,000 3,400,463 5,537,100 1,894,332 502,234 6,929,198 793,119 672,530 0 0 32,009 5,431,540 6,929,198 5,343,971 5,343,971 4,148,661 4,148,661 664,993 10,000 23,749 529,157 201,100 328,057 0 0 0 328,057 .10 .10
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