UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2000 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 Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the 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 As of May 5, 2000, 9,699,786 shares of the registrant's Common Stock were issued and outstanding. PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS A.S.V., INC. CONSOLIDATED BALANCE SHEETS March 31, December 31, 2000 1999 ----------- ------------ (Unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents ........................... $ 423,252 $ 743,184 Short-term investments .............................. 1,248,941 1,247,696 Accounts receivable, net ............................ 10,872,157 8,661,049 Inventories ......................................... 30,624,115 32,391,256 Prepaid expenses and other .......................... 819,859 811,076 ----------- ----------- Total current assets 43,988,324 43,854,261 Property and equipment, net ............................ 4,778,063 4,795,674 ----------- ----------- Total Assets $48,766,387 $48,649,935 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Line of credit ...................................... $ 2,980,000 $ 4,080,000 Current portion of long-term liabilities ............ 79,857 254,412 Accounts payable .................................... 2,429,347 1,775,883 Accrued liabilities Compensation ...................................... 191,066 252,708 Warranties ........................................ 450,000 450,000 Commission ........................................ 373,865 306,831 Other ............................................. 282,816 237,134 Income taxes payable ................................ 212,083 -- ----------- ----------- Total current liabilities 6,999,034 7,356,968 ----------- ----------- LONG-TERM LIABILITIES, less current portion ............ 2,177,147 2,197,046 ----------- ----------- COMMITMENTS AND CONTINGENCIES .......................... -- -- SHAREHOLDERS' EQUITY Capital stock, $.01 par value: Preferred stock, 11,250,000 shares authorized; no shares outstanding ........................... -- -- Common stock, 33,750,000 shares authorized; 9,692,565 shares issued and outstanding in 2000; 9,686,457 shares issued and outstanding in 1999 . 96,926 96,865 Additional paid-in capital .......................... 30,936,866 30,859,403 Retained earnings ................................... 8,556,414 8,139,653 ----------- ----------- 39,590,206 39,095,921 ----------- ----------- Total Liabilities and Shareholders' Equity $48,766,387 $48,649,935 =========== =========== See notes to consolidated financial statements. 2 A.S.V., INC. CONSOLIDATED STATEMENTS OF EARNINGS Three months ended March 31, 2000 and 1999 2000 1999 ------------ ------------ Net sales ................................ $ 11,183,584 $ 8,462,645 Cost of goods sold ....................... 8,650,914 6,225,518 ------------ ------------ Gross profit .................... 2,532,670 2,237,127 Operating expenses: Selling, general and administrative ... 1,670,323 1,113,159 Research and development .............. 135,148 108,208 ------------ ------------ Operating income ................ 727,199 1,015,760 Other income (expense) Interest expense ...................... (93,203) (65,903) Other, net ............................ 29,765 84,090 ------------ ------------ Income before income taxes ...... 663,761 1,033,947 Provision for income taxes ............... 247,000 385,000 ------------ ------------ NET EARNINGS .................... $ 416,761 $ 648,947 ============ ============ Net earnings per common share: Basic ............................... $ .04 $ .07 ============ ============ Diluted ............................. $ .04 $ .07 ============ ============ Weighted average number of common shares outstanding: Basic ............................... 9,688,861 9,314,156 ============ ============ Diluted ............................. 9,955,040 9,679,889 ============ ============ See notes to consolidated financial statements. 3 A.S.V., INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Three months ended March 31, 2000 and 1999 2000 1999 ------------ ------------ Cash flows from operating activities: Net earnings ....................................................... $ 416,761 $ 648,947 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation ................................................... 104,025 85,500 Interest accrued on capital lease obligation ................... 12,072 12,072 Deferred income taxes .......................................... (25,000) (30,000) Effect of warrant earned ....................................... 37,800 37,800 Changes in assets and liabilities: Accounts receivable .......................................... (2,211,108) (1,498,274) Inventories .................................................. 1,767,141 (7,368,328) Prepaid expenses and other ................................... 16,217 419,080 Accounts payable ............................................. 653,464 326,357 Accrued expenses ............................................. 51,074 81,118 Income taxes payable ......................................... 232,083 235,747 ------------ ------------ Net cash provided by (used in) operating activities ........ 1,054,529 (7,049,981) ------------ ------------ Cash flows from investing activities: Purchase of property and equipment ................................. (86,414) (130,193) Purchase of short-term investments ................................. (1,245) (3,516,383) ------------ ------------ Net cash used in investing activities ...................... (87,659) (3,646,576) ------------ ------------ Cash flows provided by financing activities: Principal payments on line of credit, net .......................... (1,100,000) (3,535,000) Principal payments on long-term liabilities ........................ (206,526) (195,511) Proceeds from sale of common stock and warrant, net of offering costs .................................................. -- 17,551,558 Proceeds from exercise of stock options ............................ 21,891 139,109 Retirements of common stock ........................................ (2,167) (35,912) ------------ ------------ Net cash provided by (used in) financing activities ........ (1,286,802) 13,924,244 ------------ ------------ Net increase (decrease) in cash and cash equivalents .................. (319,932) 3,227,687 Cash and cash equivalents at beginning of period ...................... 743,184 308,565 ------------ ------------ Cash and cash equivalents at end of period ............................ $ 423,252 $ 3,536,252 ============ ============ Supplemental disclosure of cash flow information: Cash paid for interest ............................................. $ 107,389 $ 83,063 Cash paid for income taxes ......................................... 259 15,264 ============ ============ Supplemental disclosure of non-cash investing and financing activities: Tax benefit from exercise of stock options ......................... $ 20,000 $ 150,000 ============ ============ See notes to consolidated financial statements. 4 A.S.V., INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2000 (Unaudited) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Interim Financial Information The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal, recurring adjustments) considered necessary for a fair presentation have been included. Results for the interim periods are not necessarily indicative of the results for an entire year. NOTE 2. INVENTORIES Inventories consist of the following: March 31, December 31, 2000 1999 ------------ ------------- Raw materials, semi-finished and work in process inventory: $ 17,901,496 $ 19,531,208 Finished goods: 7,449,285 7,574,115 Used equipment held for resale 5,273,334 5,285,933 ------------ ------------ $ 30,624,115 $ 32,391,256 ============ ============ 5 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANAYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations In January 1999, the Company closed on a strategic alliance with Caterpillar Inc. ("Caterpillar") whereby Caterpillar purchased, for an aggregate purchase price of $18 million, one million newly issued shares of the Company's Common Stock and a warrant to purchase 10,267,127 newly issued shares of the Company's Common Stock (the "Transaction"). In connection with the Transaction, the Company received, among other items, access to Caterpillar's worldwide dealer network through which it can distribute its products. Since the closing of the Transaction with Caterpillar, the Company has been working closely with Caterpillar and its dealers to introduce the Company's products to those Caterpillar dealers not currently selling and servicing the Posi-Track product line. The Company spent much of 1999 meeting with potential Caterpillar dealers and educating them on the benefits of a rubber tracked machine. The Company also put in place many systems that it believes will help Caterpillar dealers interface with the Company. In September 1999, the Company's computer systems were integrated with Caterpillar's computer systems. This allows Caterpillar dealers to order machines, attachments, parts and process warranty claims on-line in a manner similar to how they perform these tasks with Caterpillar factories. As of April 2000, 52 Caterpillar dealers and 15 independent dealers representing over 360 locations in the United States, Canada and Australia sell and service the Company's machines. The Company anticipates it will expand further into Australia, Canada and Central and South America in 2000. As a result of the Transaction, the Company's near term revenues, profitability and other financial results are expected to be lower than if the Transaction had not been entered into. The decline is related to a number of factors, including (i) the commission to be paid to Caterpillar for sales made to Caterpillar dealers, (ii) transition issues affecting orders from the preexisting non-Caterpillar affiliated dealers, and (iii) certain other costs of implementing the Transaction and the agreements contemplated by the Commercial Alliance Agreement. Over the longer term, however, management believes that the Company will be able to achieve improved financial results due to the Transaction and the Commercial Alliance Agreement. The following table sets forth certain Statements of Earnings data as a percentage of net sales: Three Months Ended March 31, 2000 1999 ------ ------ Net sales..................................... 100.0% 100.0% Cost of goods sold............................ 77.4% 73.6% Gross profit.................................. 22.6% 26.4% Selling, general and administrative expenses.. 14.9% 13.2% Operating income.............................. 6.5% 12.0% Interest expense.............................. 0.8% 0.8% Net income.................................... 3.7% 7.7% Net Sales. For the three months ended March 31, 2000, net sales were approximately $11,184,000, a 32% increase compared with the three months ended March 31, 1999. This increase was due to the increased sales of Posi-Track vehicles, primarily the 4810 model, and related accessories. The 4810 model was introduced in the third quarter of 1999 and represented approximately 77% of all machines sold in the first quarter of 2000. The Company believes the increased sales of the 4810 model is due to the greater dealer and customer acceptance of this new model. The 4810 model uses a greater number of Caterpillar components, including a Caterpillar engine, than any other previous model. In addition, the Company had a greater number of dealer locations selling and servicing its Posi-Track products in 2000 compared with 1999. As of April 2000, the Company had approximately 52 Caterpillar dealers, primarily in the United States, selling Posi-Tracks, compared with 24 as of April 1999. The number of total dealer locations (Caterpillar and independent) also increased significantly, with approximately 360 total dealer locations as of April 2000, compared with approximately 200 as of April 1999. However, due to the training, education and orientation process associated with new dealers, sales did not increase at the same rate as the increase in dealer locations. Also, net sales increased due to the Company expanding its international sales by making its first shipments to Mexico in the first quarter of 2000. Finally, used equipment sales also increased in the first quarter of 2000 as a result of increased marketing efforts. 6 Gross Profit. Gross profit for the three months ended March 31, 2000 increased to approximately $2,533,000 compared with approximately $2,237,000 in 1999. However, the gross profit percentage decreased from 26.4% in 1999 to 22.6% in 2000. The increase in gross profit is due to the increased sales volume for 2000. The decreased gross profit percentage can be attributed to a lesser number of units produced in 2000, which resulted in higher fixed costs per unit, and also a greater amount of used equipment sold in 2000, which generally carries a lower gross profit percentage than new machines. On September 1, 1999, the Company's warranty policy changed with respect to all machines sold after that date. This was accomplished at the same time as the integration of the Company's computer system with Caterpillar's computer system to allow Caterpillar dealers to process warranty claims on-line, eliminating the need to file paper warranty claims. The changes in the Company's warranty policy include the elimination of reimbursing dealers labor relating to warranty repairs, eliminating travel costs relating to warranty repairs and the elimination of the 15% warranty discount provided on parts used in warranty repairs. In addition, should a Caterpillar manufactured part, such as an engine, fail during the warranty period, Caterpillar is responsible for providing the warranty on that part. The Company believes the changes to its warranty policy will help it better manage its warranty costs in the future. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased from approximately $1,113,000, or 13.2% of net sales in 1999, to approximately $1,670,000, or 14.9% of net sales in 2000. These increases are due primarily to additional dealer support programs put in place during the second half of 1999, including the hiring of field service reps during the fourth quarter of 1999. Also the Company paid a greater commission to Caterpillar in 2000 due to increased sales to Caterpillar dealers and a full quarter of commissionable sales in 2000, compared with only two months in 1999. The commission paid to Caterpillar increased from approximately $190,000 in the first quarter of 1999 to approximately $374,000 in the first quarter of 2000. Research and Development. Research and development expenses increased from approximately $108,000 in 1999 to approximately $135,000 in 2000. The increase is due to the Company devoting more resources to future product alternatives, primarily a new smaller machine which is expected to go into initial production in the second quarter of 2000. 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 increased from approximately $66,000 for the first quarter of 1999 to approximately $93,000 for the first quarter of 2000. The increase was due to greater utilization of the Company's line of credit to fund current operations in 2000. Net Income. Net income for the first quarter of 2000 was approximately $417,000, as compared with approximately $649,000 for the first quarter of 1999. The decrease was a result of increased sales, offset by a decreased gross profit percentage, increased operating expenses and increased interest expense. Liquidity and Capital Resources At March 31, 2000, the Company had working capital of approximately $36,989,000 compared with approximately $36,497,000 at December 31, 1999, an increase of approximately $492,000. This increase was due mainly to an increase in accounts receivable as the Company experienced a 32% rise in sales in the first quarter of 2000 over 1999. In addition, the Company has offered extended payment terms, generally less than 150 days, on certain sales of its products, thereby causing accounts receivable, along with working capital, to increase. This working capital increase was offset in part by decreased inventory, primarily raw materials, as the Company has reduced its investment in raw materials. Working capital was also impacted by reduced borrowings on its line of credit, which decreased $1,100,000 during the first quarter of 2000, which was a result of reduced inventory purchases and increased collection of its accounts receivable. The Company has introduced a new smaller concept machine, intended for the landscape and homeowner markets. Weighing approximately 2,600 pounds, this machine is significantly smaller than any of the Company's previous models. The Company intends to build its first production run of this machine in the second quarter of 2000. The machine is expected to be sold through multiple distribution channels and will have a retail price of approximately $20,000. The Company believes its existing cash and marketable securities, together with cash expected to be provided by operations and available, unused credit lines, will satisfy the Company's projected working capital needs and other cash requirements for at least the next twelve months. 7 The statements set forth above under "Liquidity and Capital Resources" and elsewhere in this Form 10-Q which are not historical facts are forward-looking statements including the statements regarding the Company's anticipated production of its new model machine, anticipated reduced warranty costs, expected revenue, profitability and other financial results in 2000 and beyond and the Company's capital needs. These forward-looking statements involve risks and uncertainties, many of which are outside the Company's control and, accordingly, actual results may differ materially. Factors that might cause such a difference include, but are not limited to, lack of market acceptance of new or existing products, inability to attract new dealers for the Company's products, unexpected delays in obtaining raw materials, unexpected delays in the manufacturing process, unexpected additional expenses or operating losses or the activities of competitors. Additional factors include the Company's ability to realize the anticipated benefits from the relationship with Caterpillar and the factors set forth in the Risk Factors filed as Exhibit 99 to the Company's Report on Form 10-Q for the three months ended June 30, 1999. Any forward-looking statements provided from time-to-time by the Company represent only management's then-best current estimate of future results or trends. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has no history of, and does not anticipate in the future, investing in derivative financial instruments, derivative commodity instruments or other such financial instruments. Transactions with international customers are entered into in U.S. dollars, precluding the need for foreign currency hedges. Additionally, the Company invests in money market funds and fixed rate U.S. government and corporate obligations, which experience minimal volatility. Thus, the exposure to market risk is not material. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit Number Description ------- ----------- 3.1 Second Restated Articles of Incorporation of the Company (a) 3.1a Amendment to Second Restated Articles of Incorporation of the Company filed January 6, 1997 (e) 3.1b Amendment to Second Restated Articles of Incorporation of the Company filed May 4, 1998 (h) 3.2 Bylaws of the Company (a) 3.3 Amendment to Bylaws of the Company adopted April 13, 1999 (l) 8 4.1 Specimen form of the Company's Common Stock Certificate (a) 4.3 * 1994 Long-Term Incentive and Stock Option Plan (a) 4.4 Warrant issued to Leo Partners, Inc. on December 1, 1996 (d) 4.5 * 1996 Incentive and Stock Option Plan (e) 4.6 * 1996 Incentive and Stock Option Plan, as amended (f) 4.7 * 1998 Non-Employee Director Stock Option Plan (f) 4.8 Securities Purchase Agreement dated October 14, 1998 between Caterpillar Inc. and the Company (h) 4.9 Warrant issued to Caterpillar Inc. on January 29, 1999 (i) 4.10 Voting Agreement dated as of October 14, 1998 by certain shareholders of the Company and Caterpillar Inc. (h) 10.1 Development Agreement dated July 14, 1994 among the Iron Range Resources and Rehabilitation Board, the Grand Rapids Economic Development Authority ("EDA") and the Company (b) 10.2 Lease and Option Agreement dated July 14, 1994 between the EDA and the Company (b) 10.3 Option Agreement dated July 14, 1994 between the EDA and the Company (b) 10.4 Supplemental Lease Agreement dated April 18, 1997 between the EDA and the Company (e) 10.5 Supplemental Development Agreement dated April 18, 1997 between the EDA and the Company (e) 10.6 Line of Credit dated May 22, 1997 between Norwest Bank Minnesota North, N.A. and the Company (e) 10.7 * Employment Agreement dated October 17, 1994 between the Company and Thomas R. Karges (c) 10.8 Consulting Agreement between the Company and Leo Partners, Inc. dated December 1, 1996 (d) 10.9 Extension of Lease Agreement dated May 13, 1998 between the EDA and the Company (g) 10.10 First Amendment to Credit Agreement dated September 30, 1998 between Norwest Bank Minnesota North, N.A. and the Company (g) 10.11 Commercial Alliance Agreement dated October 14, 1998 between Caterpillar Inc. and the Company (h) 10.13 Management Services Agreement dated January 29, 1999 between Caterpillar Inc. and the Company (j) 10.14 Marketing Agreement dated January 29, 1999 between Caterpillar Inc. and the Company (j) 10.15 Third Amendment to Credit Agreement dated June 9, 1999 between Norwest Bank Minnesota North, N.A. and the Company (k) 11 Statement re: Computation of Per Share Earnings 22 List of Subsidiaries (a) 27 Financial Data Schedule for the three months ended March 31, 2000 99 Risk Factors (k) 9 (a) Incorporated by reference to the Company's Registration Statement on Form SB-2 (File No. 33"61284C) filed July 7, 1994. (b) Incorporated by reference to the Company's Post-Effective Amendment No. 1 to Registration Statement on Form SB-2 (File No. 33"61284C) filed August 3, 1994. (c) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB for the quarter ended September 30, 1994 (File No. 33-61284C) filed November 11, 1994. (d) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1996 (File No. 0-25620) filed electronically March 28, 1997. (e) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1997 (File No. 0-25620) filed electronically August 13, 1997. (f) Incorporated by reference to the Company's Definitive Proxy Statement for the year ended December 31, 1997 (File No. 0-25620) filed electronically April 28, 1998. (g) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (File No. 0-25620) filed electronically August 12, 1998. (h) Incorporated by reference to the Company's Current Report on Form 8-K (File No. 0-25620) filed electronically October 27, 1998. (i) Incorporated by reference to the Company's Current Report on Form 8-K (File No. 0-25620) filed electronically February 11, 1999. (j) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 (File No. 0-25620) filed electronically March 26, 1999. (k) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 (File No. 0-25620) filed electronically August 9, 1999. (l) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 (File No. 0-25620) filed electronically November 12, 1999. * Indicates management contract or compensation plan or arrangement. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended March 31, 2000. 10 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. A.S.V., Inc. Dated: May 12, 2000 By /s/ Gary Lemke --------------------------------- Gary Lemke President Dated: May 12, 2000 By /s/ Thomas R. Karges --------------------------------- Thomas R. Karges Chief Financial Officer (principal financial and accounting officer) 11 EXHIBIT INDEX Exhibit Method of Filing - ------- ---------------- 11 Statement re: Computation of Per Share Earnings Filed herewith electronically 27 Financial Data Schedule Filed herewith electronically 12