| Any of the risks discussed below, or elsewhere in this Form 10-K or our other SEC filings, could have a material impact on our business, financial condition or results of operations |
| Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also impair our business operations |
| Our revenue and business would be harmed if Caterpillar ceased manufacturing and marketing products that relate to our Supply Agreement |
| Under the terms of the Supply Agreement we entered into with Caterpillar effective November 1, 2005, we agreed to supply Caterpillar with rubber track undercarriages for use on its five-model line of Caterpillar branded rubber tracked loaders called Multi-Terrain Loaders (“MTL Machines”) |
| The term of the Supply Agreement expires October 31, 2010 |
| The MTL Machines utilize Caterpillar’s skid steer technology and our rubber track undercarriage technology |
| All five models have been developed and are available to all Caterpillar dealers |
| The MTL Machines are assembled in Sanford, North Carolina, at Caterpillar’s skid steer loader facility |
| The undercarriages are manufactured at our facility in Cohasset, Minnesota |
| 9 _________________________________________________________________ [42]Table of Contents The successful manufacturing and marketing of the MTL Machines entail significant risks as described below: • The development and introduction of the MTL Machines were scheduled on an aggressive time table and there exists the possibility that this time table may not have detected all potential issues regarding the production or function of the machines |
| For example, in 2002, Caterpillar experienced production issues which caused them to stop production of the MTL Machines |
| As a result, we did not ship undercarriages to Caterpillar while the production issues were resolved, resulting in decreased revenue to us |
| Additional production or other issues may be experienced by Caterpillar or us in the future, which could cause our sales of undercarriages to Caterpillar to decrease or terminate while the issues are resolved |
| • The overall market for rubber track machines is relatively new and the benefits of rubber track machines are not currently widely known |
| Caterpillar and we believe the market potential for rubber track machines justifies the necessary investment in the MTL Machines |
| However, there is no assurance the MTL Machines will attract sufficient demand to warrant their continued production and produce the returns anticipated by us and Caterpillar |
| We will be relying significantly on Caterpillar for their continued interest in manufacturing and marketing the MTL Machines |
| In 2005, total sales to Caterpillar accounted for 39prca of our net sales |
| If Caterpillar stopped manufacturing the MTL Machines, stopped marketing the MTL Machines to its dealers or the Caterpillar dealers did not adequately promote the sale of the MTL Machines, our revenue would be decreased and our business would be harmed |
| • As part of the Supply Agreement, we may not knowingly sell our undercarriages to any party who shall manufacture, or resell an undercarriage to a party who shall manufacture a machine that substantially competes with the MTL Machines |
| • While Caterpillar has agreed it will purchase 100prca of its requirements for undercarriages, as defined, from us, the Supply Agreement contains no guarantee as to the quantity of undercarriages or service parts Caterpillar must purchase from us |
| • The Supply Agreement calls for specified prices for the undercarriages we sell to Caterpillar for the life of the contract, subject to adjustment for mutually agreed adjustments for abnormal cost changes outside of our control for certain cost fluctuations |
| If general raw material prices increase during the term of the Supply Agreement, or if we are unable to mutually agree on cost changes, the gross profit we may receive on the sale of undercarriages may be reduced |
| The Supply Agreement also calls for specified prices for the service parts we sell to Caterpillar for the life of the contract |
| Should the prices we pay to manufacture or purchase these service parts increase during the term of the Supply Agreement, the gross profit we may receive on the sale of these service parts may be reduced |
| Our business could be materially harmed if Caterpillar did not actively support and cooperate with us to provide us with various commercial services |
| As a result of our transactions with Caterpillar, we may rely on commercial services provided by or through Caterpillar for the provision of warranty services as they pertain to the MTL Machines |
| As a result, we may become dependent upon the cooperation of Caterpillar for the provision of these services |
| If Caterpillar were to decide not to actively support and cooperate with us to provide us with these services, our business could be materially harmed |
| Caterpillar has the ability to influence or control us, which could negatively affect other shareholders and could discourage offers by third parties to acquire us |
| As of February 28, 2006, Caterpillar owns approximately 23dtta2prca of the outstanding shares of our Common Stock |
| Accordingly, Caterpillar has the ability to influence our business and operations to a certain extent |
| In addition to its rights as a shareholder to influence us, under the Registration Rights Agreement, Caterpillar has the right to designate director nominees for election to the Board of Directors proportionate to its stock ownership interest, which increases Caterpillar’s ability to influence us |
| Currently, one of our nine directors has been designated by Caterpillar, for election to our Board despite the fact that Caterpillar would be entitled to designate two director nominees, assuming a board comprised of nine directors |
| If Caterpillar were to exercise its right to designate an additional director nominee, based on its current stock ownership interest, we anticipate that, assuming there were no vacancies on our board, we would expand the size of our board to accomodate the additional director nominee designated by Caterpillar |
| 10 _________________________________________________________________ [43]Table of Contents Given the significant percentage of the outstanding shares of our Common Stock owned by Caterpillar, third parties also may be discouraged from making an offer to acquire control or ownership of us |
| If Caterpillar begins selling, or is perceived to be selling, its shares of our Common Stock, the market price of our Common Stock may fall |
| As of February 28, 2006, Caterpillar owns approximately 23dtta2prca of the outstanding shares of our Common Stock |
| Under the Registration Rights Agreement, so long as the Supply Agreement remains in effect, Caterpillar has agreed not to sell or dispose of any of its ASV shares prior to January 1, 2009 |
| However, sales by Caterpillar of substantial amounts of our Common Stock, or the perception that such sales could take place, could negatively affect the market price of our Common Stock |
| If this happens, then stockholders may face difficulty in selling their shares and the price at which they sell their shares may be reduced |
| If we are unable to manage growth effectively, our business, results of operations and financial condition would be materially adversely affected |
| Our management has had limited experience in managing companies experiencing growth like ours |
| Further growth and expansion of our business will place additional demands upon our current management and other resources |
| We believe that future growth and success depends to a significant extent on our ability to be able to effectively manage our growth in several areas, including, but not limited to: (1) production facility expansion/construction; (2) entrance to new geographic and use markets; (3) international sales, service and production; and (4) employee and management development |
| No assurance can be given that our business will grow in the future and that we will be able to effectively manage such growth |
| If we are unable to manage growth effectively, our business, results of operations and financial condition would be materially adversely affected |
| A disruption or termination of our relationships with certain suppliers could have a material adverse effect on our operations |
| Certain of the components included in our products are obtained from a limited number of suppliers, including the rubber track component used on our products |
| Disruption or termination of supplier relationships could have a material adverse effect on our operations |
| We believe that alternative sources could be obtained, if necessary, but the inability to obtain sufficient quantities of the components or the need to develop alternative sources, if and as required in the future, could result in delays or reductions in product shipments which in turn may have an adverse effect on our operating results and customer relationships |
| A number of our competitors have more resources and more established reputations than us |
| If we do not compete effectively, our business will be harmed |
| Companies whose products compete in the same markets as the Posi-Track have substantially more financial, production and other resources than us, as well as established reputations within the industry and more extensive dealer networks |
| For 2005, sales of our Posi-Track products accounted for approximately 46prca of our net sales |
| Also, the growth potential of the markets being pursued has attracted more competitors |
| There can be no assurance that we will be able to compete effectively in the marketplace or that we will be able to establish a significantly dominant position in the marketplace before our competitors are able to develop similar products |
| If our rubber track vehicles do not continue to receive market acceptance, our operating results will be harmed |
| Our success is dependent upon increasing market acceptance of rubber track vehicles in the markets in which our products compete |
| Most small to medium sized tractor-type vehicles in competition with our Posi-Track products are wheeled vehicles and most track-driven vehicles are designed for specific limited tasks |
| The market for rubber track vehicles is relatively new and there can be no assurance that our products will gain sufficient market acceptance to enable us to sustain profitable operations |
| 11 _________________________________________________________________ [44]Table of Contents Our business could be harmed if the Commercial Alliance Agreement with Vermeer Manufacturing Inc |
| does not prove to be beneficial |
| Under the Vermeer Agreement, we will be the exclusive supplier of rubber track undercarriages and service parts to Vermeer for use on the Vermeer Machines |
| We had very limited production of some of these undercarriages in the fourth quarter of 2005 |
| The term of the Vermeer Agreement is eight years, with automatic one-year renewal periods unless either party gives the other party at least six months written notice of termination |
| The Vermeer Machines are new to the Vermeer product line and there is no assurance that they will gain market acceptance |
| Also, there is no assurance the Vermeer Machines will attract sufficient demand to warrant their continued production and produce the returns anticipated by Vermeer |
| We will be relying significantly on Vermeer for its continued interest in manufacturing and marketing the Vermeer Machines |
| We have agreed not to sell our undercarriages for use in direct competition to the Vermeer Machines |
| Our revenue could be impacted if the Vermeer Machines do not gain market acceptance as we would be unable to supply other manufacturers with undercarriages for equipment that would be in direct competition to the Vermeer Machines |
| If we are not able to manage and fully integrate the operations of Loegering Mfg |
| In October 2004, we acquired all the outstanding Common Stock of Loegering of Casselton, North Dakota for a combination of cash and shares of our Common Stock |
| We have not previously been involved in an acquisition of this nature, and there can be no assurance that we will be able to successfully manage and integrate the operations of Loegering |
| The process of fully integrating Loegering may be a difficult and time-consuming process |
| In particular, the process of combining sales and marketing forces, consolidating administrative functions, and coordinating product offerings can take longer, cost more, and provide fewer benefits than initially anticipated |
| Management may face difficulties, delays and costs as it works to retain customers, to minimize the risk of loss or reduction of customer orders due to the potential for market confusion, hesitation and delay, to coordinate infrastructure operations in an effective and efficient manner and to combine certain operations and functions using common information and communication systems, operating procedures, financial controls and human resource practices |
| To the extent any of these events occurs, the benefits of the transaction may be reduced, at least for a period of time |
| Our business may be adversely affected if we are unable to successfully develop new products or if new products developed are unable to gain market acceptance |
| We intend to increase our market penetration by developing and marketing new rubber-tracked vehicles and other new products |
| There can be no assurance that we will be able to successfully develop new products, or that any new products developed by us will gain market acceptance |
| One of the expected benefits of the Loegering acquisition is future sales of its proprietary VTS product, which we expect to account for a majority of Loegering’s net sales for 2006 |
| If we are unable to achieve our expected sales of the VTS product, or if adequate quantities of raw materials to meet the expected demand for this product are not available, the benefits of the transaction may be reduced or delayed for a period of time |
| Our business may also be adversely affected if the VTS product does not gain market acceptance as quickly as we anticipate or at all |
| A cyclical, economic downturn in the construction and farm equipment industries could materially harm our business |
| The construction and farm equipment industries, in which our products 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 our products may be affected by the seasonal nature of the activities in which they are used and by overall economic conditions in general |
| Therefore, an economic downturn in the 12 _________________________________________________________________ [45]Table of Contents construction and farm equipment industries, which could result in part based upon seasonal factors, could materially harm our business |
| The loss of the services of any key member of our management could have a material adverse effect on our ability to achieve our objectives |
| Our future success depends to a significant extent upon the continued service of certain key personnel, including our Chief Executive Officer, Gary Lemke |
| We have key-person life insurance on the life of Mr |
| Lemke, but we do not have an employment agreement with Mr |
| The loss of the services of any key member of our management could have a material adverse effect on our ability to achieve our objectives |
| We may face product liability claims, which could result in losses in excess of our insurance coverage or in our inability to obtain adequate insurance coverage in the future |
| Like most manufacturing companies, we may be subject to significant claims for product liability and may have difficulty in obtaining product liability insurance or be forced to pay high premiums |
| We currently have product liability insurance and have not been subject to material claims for product liability |
| However, there can be no assurance that we will be able to obtain adequate insurance in the future or that our present or future insurance would prove adequate to cover potential product claims |
| Our business would be adversely affected if we are not able to protect our intellectual property rights or if we get involved in litigation relating to our intellectual property rights |
| We currently hold four patents on certain aspects of the suspension and drive mechanisms used in certain of our products |
| We have also filed additional patent applications |
| There can be no assurance that the patents will be granted or that patents under any future applications will be issued, or that the scope of the current or any future patent will exclude competitors or provide competitive advantages to us, that any of our patents will be held valid if subsequently challenged or that others will not claim rights in or ownership to the patents and other proprietary rights held by us |
| Furthermore, there can be no assurance that others have not developed or will not develop similar products, duplicate any of our products or design around such patents |
| Litigation, which could result in substantial cost to and diversion of effort by us, may be necessary to enforce patents issued to us, to defend us against claimed infringement of the rights of others or to determine the ownership, scope or validity of our and other’s proprietary rights |
| We may be unable to manufacture our products if either of our manufacturing facilities is damaged, destroyed or becomes otherwise inoperable |
| Our products are manufactured exclusively at our manufacturing facilities in Grand Rapids and Cohasset, Minnesota and at our Loegering facility in Casselton, North Dakota |
| In the event that any of these manufacturing facilities were to be damaged or destroyed or become otherwise inoperable, we may be unable to manufacture our products for sale until the facility is either repaired or replaced, either of which could take a considerable period of time |
| Although we maintain business interruption insurance, there can be no assurance that such insurance would adequately compensate us for the losses we would sustain in the event that our manufacturing facilities were unavailable for any reason |
| We are subject to extensive governmental regulations, and compliance with such regulations is costly |
| Our operations, products and properties are subject to environmental and safety regulations by governmental authorities |
| We may be liable under environmental laws for waste disposal and releases into the environment |
| In addition, our products are subject to regulations regarding emissions and other environmental and safety requirements |
| While we believe that compliance with existing and proposed environmental and safety regulations will not have a material adverse effect on our financial condition or results of operations, there can be no assurance that future regulations or the cost of complying with existing regulations will not exceed current estimates |