10-K 1 c75623e10vk.txt FORM 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, 2002 [ ] 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 Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark if the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). [X] Yes [ ] No Based on the closing sale price at June 28, 2002 of $11.92, the aggregate market value of the registrant's Common Stock held by nonaffiliates was $80,152,500. As of March 14, 2003, 10,063,901 shares of the registrant's Common Stock were issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE: ------------------------------------ Portions of the registrant's Proxy Statement for its May 30, 2003 Annual Meeting, which will be filed by April 30, 2003, 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 "ASV" or the "Company." ASV designs, manufactures and sells track-driven all-season vehicles. The Company has three principal product lines, the Posi-Track(TM) product line, the R-Series product line and the Multi-Terrain Loader, or MTL undercarriage product line. All of these product lines use a rubber track suspension system that takes advantage of the benefits of both traditional rubber wheels and steel tracks. Rubber track vehicles provide the traction, stability and low ground pressure necessary for operation on soft, wet, muddy, rough, boggy, slippery, snowy or hilly terrain, but, unlike steel track vehicles, can be driven on groomed, landscaped and paved surfaces without causing damage. The Company's products are versatile machines used in the construction, agricultural, landscaping, trail grooming and maintenance, vineyard, military, wildlife management and other markets. The Company has the following models in its Posi-Track product line: the MD-70, the 2800 series, the HD 4500 series and the 4810. The Company has six models in its R-Series product line, the RC-30(TM), the R-50(TM), the RC-50(TM), the RC-30 Turf Edition, the RC-50 Turf Edition and the RC-100. The Company manufactures undercarriages for use by Caterpillar Inc. (Caterpillar) on its MTL product line. The Company also private label manufactures its RC-30 product for Polaris Industries Inc. (Polaris). The Company has also produced two models of machines primarily for over-the-snow applications, the Track Truck(R) and the Posi-Track DX 4530. Track Truck is a registered trademark, and Posi-Track, RC-30, R-50, RC-50, Maximum Traction Support System, Posi-Turn and Snow Saver are trademarks, of ASV, Inc. This Annual Report also contains trademarks of other companies. CURRENT YEAR DEVELOPMENTS Agreement with Caterpillar In October 2000, the Company and Caterpillar entered into an alliance agreement to jointly develop and manufacture a new product line of Caterpillar rubber track skid steer loaders called Multi-Terrain Loaders, or MTLs. The product line, which includes five new models, features Caterpillar's patented skid steer loader technology and ASV's patented Maximum Traction Support System(TM) rubber track undercarriage. The machines complement existing models in both ASV's and Caterpillar's current product lines. They are being sold through the Caterpillar dealer network. The Company began manufacturing the undercarriage for use on two of the MTLs in the second quarter of 2001. The Company began manufacturing the undercarriage for use on two additional MTLs in the second quarter of 2002, with production of the undercarriage for the last MTL model started in the first quarter of 2003. Stock Repurchase Plan In September 2001, the Company authorized a stock buy-back program under which ASV may repurchase up to $5 million of its common stock in the open market. Under this program, which expired in September 2002, the Company repurchased 71,780 shares of its own common stock at an aggregate purchase price of approximately $756,000. In October 2002, the Company authorized a new stock buy-back program under which ASV may repurchase up to $5 million of its common stock in the open market. The Company is funding the repurchases with available funds. The repurchase program is expected to last not more than twelve months or until such amount of common stock is repurchased. As of March 14, 2003, the Company had repurchased 110,700 shares of its common stock under this new buy-back program at an aggregate purchase price of approximately $1,004,000. The Company intends to continue actively repurchasing our shares as conditions permit. Rental Marketing Emphasis In October 2002, the Company began an emphasis to market its RC-30 and RC-50 All Surface Loader models to the rental market. In its marketing, the Company identifies rental facilities that have a desire to rent these products. The Company has partnered with an unaffiliated finance company to provide lease financing to the rental facilities. New Models In January 2003, the Company introduced two new models in its R-Series product line, the RC-30 Turf Edition and the RC-50 Turf Edition. The R-Series Turf Edition products have smooth, green, rubber tracks that allow the equipment to leave grass virtually untouched, while also providing excellent traction for digging and grading. ASV expects the Turf Edition products to be available in the second quarter of 2003. In January 2003, the Company introduced a new model in its R-Series product line, the RC-100. The RC-100 is the largest model in the R-Series product line, with more features and power than any other R-Series product. The Company began production of the RC-100 in March 2003. Agreement with Jacobsen In February 2003, the Company announced it had entered into a sales alliance with Jacobsen (a Textron company). Under the alliance, Jacobsen direct dealers will market the ASV RC-30 and RC-50 Turf Edition(TM) all-surface loaders designed for the golf and sports turf markets. The R-Series Turf Edition All-Surface Loaders will be available primarily through Jacobsen dealers. Jacobsen and ASV entered into a formal marketing agreement in March 2003. EXPLANATORY NOTE With the increased production and sales volume of the Company's Posi-Track crawler/tractors (specifically the MD-70, the 2800 series, the HD 4500 series and the 4810) over the last several years, and the introduction of the R-Series product line, sales of the Company's original product, the Track Truck, and its Posi-Track DX 4530 have declined. These two models are sold primarily for over-the-snow applications and have a much more limited market than the Company's crawler/tractor models or R-Series products. In 2002 and 2001, sales of the Track Truck and the Posi-Track DX 4530 accounted for less than 1.0% of the Company's net sales. Therefore, unless specifically mentioned, the following discussion will pertain only to the Posi-Track crawler/tractors and the R-Series products. Hereafter, the term Posi-Track will refer to the crawler/tractor models. MARKETS FOR THE COMPANY'S PRODUCTS The Company believes the products in its Posi-Tracks and R-Series product lines are very versatile and can be used in a wide variety of applications. The following represents several of the primary markets where the Company's products are currently used. Construction. The construction industry currently depends heavily on skid-steer vehicles for a wide variety of functions. Skid-steers are small four-wheeled vehicles that were originally designed and used primarily as loaders, but in the last decade have become increasingly more popular for a variety of functions and more versatile with the availability of attachments such as backhoes, forklifts, breakers, planers, rakes and augers. Most skid-steer attachments are designed to be used with an industry standard quick-attach mechanism which allows attachments to be used on all similarly equipped vehicles. The primary disadvantage of skid-steer vehicles is that they are wheeled vehicles and are not designed for operation on wet, soft, slippery or rough ground, which means that they are inherently limited as to when and where they can function. Skid-steers often sit idle in the winter and spring or after rain because the ground is not suitable for their operation. A wheeled skid-steer exerts ten times or more ground pressure than a Posi-Track or R-Series product, which makes a skid-steer less suitable for operation on landscaped or groomed ground. Recognizing the benefits of tracked vehicles, a few manufacturers have created tracks that can be placed around a skid-steer's wheels. Add-on tracks are generally steel; however, rubber add-on tracks are now available due to the limitations imposed by steel tracks. Although rubber add-on tracks can decrease a skid-steer's ground pressure somewhat, the overall design of a Posi-Track or R-Series product gives it more versatility and less ground pressure than a skid-steer with add-on tracks. In addition to the tasks performed by skid-steers, Posi-Tracks are used for construction jobs performed by small steel track dozers. A skid-steer's design lacks the power, traction and stability necessary for moving dirt and other materials efficiently. Therefore, dozers have remained single purpose machines and, because of their steel tracks and significant ground pressure, cannot be operated on soft, groomed, landscaped or paved surfaces. Landscaping. Like the construction industry, the landscaping industry depends heavily on small dozers and skid-steers with loaders, backhoes, rakes and other attachments. Landscapers have also been limited by these machines on soft, wet, muddy, hilly or rough terrain or on groomed or paved surfaces, thereby affecting productivity. Skid-steers and dozers cause greater soil compaction than a Posi-Track or R-Series product, which is a concern for landscapers because the more compact the soil, the more difficult it is for plants to grow. The Posi-Track and R-Series product can also be adapted to perform special functions in the landscaping industry. For example, the Company manufactures attachments for the Posi-Track and R-Series product which are used for laying a specially cut continuous roll of sod. The sod is held in front of the vehicle and unrolls as the vehicle moves forward, laying the sod on the ground. The vehicle'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. Posi-Tracks are used in the agricultural industry to perform the functions of small tractors. The Posi-Tracks' three-point hitch and reversible seating allow it to be used with pull-type attachments such as tillers, plows, disks and cultivators. The Posi-Track's hydraulic power take off shaft allows it to be used for farming chores such as grinding and unloading feed. Its low ground pressure and rubber tracks allow it to be used on wet, soft, muddy ground that would not be possible with traditional wheeled tractors, thereby increasing the number of productive days. In addition, the Posi-Track's low ground pressure reduces compaction of soil. Agricultural applications of Posi-Tracks include grape vineyards, specialty crop farms (celery, strawberries) and tree nurseries. In most agricultural applications, Posi-Tracks are being used as a replacement to four-wheel drive tractors. Trail Grooming and Maintenance. The Posi-Track is used for maintaining trails such as snowmobile, cross-country ski, biking and hiking trails. The Posi-Track is used with a mower attachment to clear and maintain trails for biking, hiking and other purposes. Wildlife Management. Posi-Tracks are used in wildlife management by Federal agencies and the departments of natural resources of a number of states. They are used to mow trails for wildlife and to mow clearings so that grass, clover and other vegetation needed for wildlife can grow. They are also used to clear cattails and other unwanted vegetation from swamps to provide access for feeding ducks and other waterfowl. Posi-Tracks have also been equipped for use in the management of controlled burning or the maintenance of fire lines to prevent the spread of forest fires and for access to remote sites for a variety of other purposes. Military Applications. The Posi-Track model MD-70 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, clearing bomb ranges of overgrown vegetation and security vehicles. For these types of applications, the Company is selling the Posi-Track MD-70 to the Department of the Defense who has it equipped with the necessary robotics and video equipment to provide for the remote operation. The Company has been awarded a supply contract number for several of its Posi-Track models by the Department of the Defense which allows Federal governmental agencies to purchase them without going through a competitive bidding process. PRODUCTS The Company's principal products are contained in three primary product lines, the Posi-Track product line, the R-Series product line and the MTL undercarriage product line. All products under these 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 tracks utilized provide the traction, stability and mobility of tracked vehicles, but do not damage surfaces. In addition, all machines produced have extremely low ground pressure which means they will not cause significant soil compaction. The rubber tracks used on the Company's products are made of molded rubber reinforced with layers of nylon and polyester cord. The majority of the Company's Posi-Track products and its R-Series products feature a maintenance-free suspension with no grease fittings. The Company's products utilize diesel engines manufactured by Caterpillar and Isuzu. The following table contains a summary of the Company's products:

YEAR MODEL NAME INTRODUCED SPECIAL FEATURES ---------- ---------- ------------------------------------------- POSI-TRACK MODELS: MD-70 1991 First rubber tracked crawler/tractor by ASV. Low ground pressure, bi-directional drive and loader capabilities. HD 4500 1997 Larger than MD-70. Maintenance-free suspension. Currently manufactured in limited quantities for select markets. DX 4530 1997 Largest Posi-Track. Used primarily in over-the-snow application. 2800 Series 1998 Size, weight and operating capabilities of the MD-70 plus maintenance-free under carriage. 4810 1999 Caterpillar engine and other Caterpillar components (replacement to HD 4500 series). R-SERIES MODELS: RC-30 2000 Significantly smaller than current model Posi-Tracks. Marketed to landscape, rental and landowner markets. Polaris 2001 Private label version of RC-30 sold by ASL-300 Polaris. R-50 and 2002 Designed to compete with skid-steers with RC-50 engines in the 44 to 50 hp range, weighing between 4,500 and 5,500 lbs. with an operating capacity of 1,350 to 1,600 lbs.

R-SERIES MODELS (CONTINUED): RC-30 and RC-50 2003 Smooth track version of the RC-30 and Turf Edition RC-50. Expected to be sold primarily through the Jacobsen dealer network and R-Series dealers. RC-100 2003 Largest model R-Series product. Two speed drive motors, hydraulic quick-attach mechanism, turbo-charged engine. OTHER PRODUCTS: MTL 2001 ASV's undercarriages sold to Caterpillar Undercarriages for use in Caterpillar's MTL product line. MTLs are being sold by Caterpillar through the Caterpillar dealer network. The vast majority of the Company's future production is expected to be devoted to the R-Series products and those products specified in the Caterpillar and Polaris alliances. The Company may, from time to time, build its other models on an as needed basis. Posi-Track Crawler/Tractor Models The Company believes its Posi-Tracks are ideal replacements to skid-steers, small dozers and small tractors and can perform many of the jobs handled by these vehicles without the disadvantages they possess. Their standard quick-attach mechanism enables them to operate the attachments used by skid-steers. They are also designed for use with a dozer attachment. In addition, their three-point hitch attachment and reversible seating allow them to function as a small tractor. The Posi-Track's weight is distributed over its two tracks, which have a ground surface of approximately 102 x 18 inches per track, which results in an average ground pressure of approximately 2-3 pounds per square inch, compared to approximately 35 pounds per square inch for a typical wheeled skid-steer weighing approximately the same as a Posi-Track. The Posi-Track's low ground pressure allows it to operate on wet, soft, slippery, rough and hilly terrain. Conventional wheeled vehicles may not be able to operate or may be destructive in these conditions. The Posi-Track's low ground pressure also reduces compaction which decreases the need for frequent tilling and conditioning of the soil. Posi-Tracks are multi-purpose vehicles which the Company believes are attractive to customers principally because of their: - Size. Posi-Tracks equipped with a loader, weigh approximately 7,400 to 8,500 pounds, depending on model, and have an approximate ground pressure of 3 pounds per square inch. The overall size of a Posi-Track is comparable to a typical skid steer. - Features. The Posi-Track's loader includes a quick-attach mechanism which allows for use of a wide range of attachments, manufactured both by the Company and others such as a bucket, forklift, rake, mower and snowblower. Posi-Tracks can accept a category one or category two three-point hitch, depending on model. A dozer blade and backhoe are also available for all Posi-Tracks. Most Posi-Tracks now feature maintenance-free undercarriages. - Price. The current retail price of a Posi-Track ranges from approximately $43,000 for a model 2800 with a loader, bucket and quick-attach mechanism to approximately $55,000 for a 4810 with a loader, bucket and quick-attach mechanism. Although the most common skid-steer vehicles have a slightly lower base price, comparably equipped skid-steers cost approximately the same as a Posi-Track 2800. - Ease of Operation. Certain Posi-Tracks feature a reversible driver's seat which allows an operator to face either end of the vehicle for better control. All Posi-Track models are maneuverable and can easily turn in their own length. In addition to the attachments already available on the market from other manufacturers, the Company also manufactures and sells attachments for the Posi-Track for special functions not performed by other competing vehicles. Because skid-steers are not designed for performing dozer functions, dozers have traditionally been separate, single-function vehicles. However, because of its rubber track and design, the Posi-Track is able to perform dozer functions with the dozer attachment manufactured and sold by the Company. The Company also modifies a mower attachment for the Posi-Track and designs, manufactures and sells other attachments for special purposes. R-Series Products The Company has six models in its R-Series product line, the RC-30(TM), the R-50(TM), the RC-50(TM), the RC-30 Turf Edition, the RC-50 Turf Edition and the RC-100. The RC-30 All Surface Loader The Company began sales of its RC-30 All Surface Loader in the third quarter of 2000. Weighing approximately 3,000 pounds and built on a rubber track suspension similar to the Posi-Track, the RC-30 is being marketed towards the landscape, rental and landowner markets. The basic design of the RC-30 is similar to that of a Posi-Track with its weight distributed over two tracks smaller than those found on a Posi-Track. The RC-30 has tracks which have a ground surface of approximately 55 x 11 inches per track, resulting in an average ground pressure of approximately 2-3 pounds per square inch. This low ground pressure provides the RC-30 with the same advantages in various operating environments as a Posi-Track. The RC-30 is also a multi-purpose vehicle which the Company believes is attractive to customers principally because of their: - Size. The RC-30 occupies approximately the same size footprint as an all-terrain vehicle, with a width of approximately 46 inches and a length of approximately 91 inches without any attachment on the loader. The width allows the RC-30 to fit between the fender wells of a full-size pick-up truck. The size of the RC-30 allows it to maneuver in compact areas, easily turning within its own length. - Features. The RC-30's loader includes a quick-attach mechanism which allows for use of a wide range of attachments, manufactured for the Company by others such as a bucket, forklift, rake, backhoe and snowblower. - Price. The current retail price of an RC-30 is approximately $22,500 with a loader, bucket and quick-attach mechanism. The Company believes its current retail price makes the RC-30 very competitive against similarly equipped skid-steers. - Ease of Operation. The RC-30 is a ride-on machine equipped with pilot-operated hydraulic controls. Gauges and switches are in the heads-up position for easy view and reach. Safety features include full ROPS/FOPS canopy, lap bar, seat belt and parking brake. The R-50 and RC-50 All Surface Loaders In January 2002, the Company introduced two new models in its R-Series product line, the R-50 and the RC-50. These two products are expected to compete with skid-steers utilizing engines in the 44 to 50 horsepower range, weighing between 4,500 and 5,500 pounds with an operating capacity of 1,350 to 1,600 pounds. The Company began production of the RC-50 in March 2002 and the R-50 in April 2002. The design of the R-50 and RC-50 is similar to that of the RC-30, but in a larger machine. The R-50 and RC-50 have tracks which have a ground surface of approximately 59 x 15 inches per track, resulting in an average ground pressure of approximately 2-3 pounds per square inch. The R-50 and RC-50 have a larger engine, greater operating capacity, increased lift and dump heights and greater speed than the RC-30. The R-50 and RC-50 share the same benefits of low ground pressure as the RC-30 and Posi-Tracks. The main difference between the two models is the type of track and loader controls each machine utilizes. The R-50 and RC-50 are multi-purpose vehicles which the Company believes are attractive to customers principally because of their: - Size. The R-50 and RC-50 are similar in size to mid-size skid steers. This size skid steer is one of the most popular in the skid-steer market. - Features. The R-50 and RC-50's loader includes a quick-attach mechanism similar to that found on skid-steers. This allows for the use of a wide range of attachments, primarily manufactured for the Company by others such as a bucket, forklift, rake, backhoe and snowblower. - Price. The current retail price of an R-50 and RC-50 is approximately $28,000-$29,000 with a loader and quick-attach mechanism. The Company believes its current retail prices make the R-50 and RC-50 very competitive against similarly equipped skid-steers. - Ease of Operation. The R-50 and RC-50 is a ride-on machine equipped with pilot-operated hydraulic controls. Gauges and switches are in the heads-up position for easy view and reach. Safety features include full ROPS/FOPS canopy, lap bar, seat belt and parking brake. The RC-30 and RC-50 Turf Editions In January 2003, the Company introduced two new models in its R-Series product line, the RC-30 Turf Edition and the RC-50 Turf Edition. The R-Series Turf Edition products have smooth, green, rubber tracks that allow the equipment to leave grass virtually untouched, while also providing excellent traction for digging and grading. ASV expects the Turf Edition products to be available in the second quarter of 2003. The RC-100 In January 2003, the Company introduced a new model in its R-Series product line, the RC-100. The RC-100 is the largest model in the R-Series product line, with more features and power than any other R-Series product. The Company began production of the RC-100 in March 2003. The RC-100 is expected to be marketed to the construction and industrial user due to its size, power and features. The RC-100 utilizes a Caterpillar 100-horsepower turbo-diesel engine and has two speed drive motors to facilitate faster cycle times. The RC-100 features standard high-flow hydraulics to power attachments requiring this feature. The RC-100 shares the same basic design as the other products in the R-Series product line, but in a larger version. The RC-100 has tracks which have a ground surface of approximately 72 x 18 inches per track, resulting in an average ground pressure of approximately 3-4 pounds per square inch. The current retail price of an RC-100 is approximately $48,000 with a loader and quick-attach mechanism. The Company believes its current retail price makes the RC-100 very competitive against similarly equipped skid-steers. Over-the-Snow Models The Company manufactures two additional models, the Track Truck and the DX 4530, which are primarily marketed towards over-the-snow applications, such as snow trail grooming for snowmobile and ski trails. With the increased popularity and production of the Company's Posi-Track crawler/tractor models, the R-Series products and the MTL undercarriages, the production and sales of the over-the-snow models has greatly decreased over the last several years. In 2002 and 2001, sales related to over-the-snow models accounted for less than 1.0% of the Company's net sales. The Company anticipates it may manufacture the Track Truck in the future, but only on a build to order basis. SALES AND MARKETING The Company sells its products through Caterpillar dealers in the United States and Canada and also through independent equipment dealers in the United States, Canada, Australia, New Zealand and Portugal. As of March 1, 2003, 52 Caterpillar dealers and 101 independent dealers sell and service the Company's products. The MTL products, which are Caterpillar products that incorporate the Company's undercarriages, are available only through Caterpillar dealers. For 2002, all 69 Caterpillar dealers in North America were able to carry the MTL product line. In 2003, the MTL product line is available to Caterpillar dealers on a worldwide basis. In 2002, sales to Caterpillar accounted for 31.7% of the Company's net sales, while in 2001, sales to Caterpillar accounted for 17.8% of its net sales. In 2001, the Company also made sales to an unaffiliated customer that accounted for 16.4% of the Company's net sales. The Polaris version of the RC-30 is available only through Polaris dealers, with the distribution of this product handled by Polaris. Polaris has a North American dealer network of approximately 2,000 dealers, along with 52 international distributors in 125 countries. In October 2002, the Company began a program to market its RC-30 and RC-50 products directly to rental facilities. Under this program, ASV identifies rental facilities that will lease ASV machines from an unaffiliated finance company. ASV records the sale of the machines to the finance company when they are delivered to the rental facility and receives payment from the finance company at that time. The lease agreement between the rental facility and the finance company provides the rental facility a 90-day period during which any rental income generated is split between the rental facility and ASV. After the 90-day period has expired, the rental facility has the option of terminating the lease, in which case ASV is responsible for the costs associated with transferring the machines to another rental facility. If the rental facility elects to continue the lease, ASV will refund any rental payments received during the 90-day period. At the end of the four-year lease, should the rental facility elect not to purchase the leased machines, ASV has guaranteed to pay a residual value equal to 25% of the original selling price of the financed equipment should the rental facility choose not to make the residual payment. At that point, ASV would take possession of the equipment. As of December 31, 2002, the total amount of future residual payments the Company may be required to make in the event of nonpayment by rental facilities totaled approximately $185,000. The Company believes the value of the related equipment will equal or exceed the amount of residual payment. Accordingly, the Company does not anticipate any loss will be incurred should any residual payments need to be made. The construction, agricultural and landscape equipment industries, in which the Posi-Track and R-Series products compete, have historically been cyclical. Sales of construction, agricultural and landscape equipment are generally affected by the level of activity in the construction and agricultural industries as well as farm production and demand, weather conditions, interest rates, construction levels (especially housing starts) and general economic conditions. 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 Company's products have generally been greater in the spring and summer. The Company has arrangements with several finance companies to finance the sale of the Company's vehicles to its dealers and end purchasers. In addition, during 2001, the Company offered extended payment terms on the sale of its products to its dealers, generally not exceeding 180 days. The Company has also agreed to assist one finance company with the costs related to remarketing certain financed equipment should it become necessary for the finance company to take possession of the equipment in the event of nonpayment by the debtor. As of March 14, 2003, the Company was not obligated to the finance company for any costs related to the remarketing of any financed equipment due to nonpayment by the debtor. As of March 14, 2003, the Company had orders for approximately $16.0 million of its products. As of March 15, 2002, the Company had orders for approximately $6.4 million of its products. In 2003, the Company intends to focus its marketing efforts on increasing the number of dealer outlets for its products and also increase the number of rental facilities that have the R-Series products available for rent. AFFILIATION WITH CATERPILLAR 1998-1999 Agreements On October 14, 1998, ASV entered into a Securities Purchase Agreement (the "Purchase Agreement") with Caterpillar. The transactions contemplated by the Purchase Agreement were approved by the Company's shareholders on January 28, 1999 and closed January 29, 1999. Pursuant to the Purchase Agreement, Caterpillar acquired, for an aggregate purchase price of $18,000,000, one million newly issued shares of the Company's Common Stock and a warrant to purchase an additional 10,267,127 newly issued shares of the Company's Common Stock at a price of $21.00 per share. The Purchase Agreement provided that, upon closing, the size of the Company's Board of Directors would be increased and the Company's Board of Directors appointed two members designated by Caterpillar. In connection with entering into the Purchase Agreement, the Company and Caterpillar entered into several ancillary agreements. First, the Company and Caterpillar entered into a commercial alliance agreement (the "Commercial Alliance Agreement") pursuant to which Caterpillar is providing the Company access to its worldwide dealer network and has made various management, financial and engineering resources available to the Company. In addition, Caterpillar and the Company entered into various other agreements pursuant to which Caterpillar and the Company will supply each other with certain components, Caterpillar will agree to allow the Company to use certain of its trademarks and trade dress in the event certain conditions are met and Caterpillar and the Company will agree to share certain technologies, all at certain costs. Material terms of these ancillary agreements are described below. The Commercial Alliance Agreement. The Commercial Alliance Agreement provides that the Company and Caterpillar will enter into certain agreements, each of which is discussed below. Marketing Agreement. The Marketing Agreement requires Caterpillar to provide the Company with access to its worldwide distribution network, in part, by promoting the sale of the Company's products to Caterpillar's dealers. Caterpillar is promoting ASV's products in North America and may gradually extend such promotion throughout other parts of the world. In addition, under the Marketing Agreement, Caterpillar handles orders for the Company's products and administer its warranties. In consideration for Caterpillar's services under the Marketing Agreement, ASV pays Caterpillar a commission equal to 5% of the dealer net price for complete machines (currently the 4810 model only) and 3% for replacement parts and Company-branded attachments sold to Caterpillar dealers plus the costs of certain services provided by Caterpillar. The Marketing Agreement was entered into between Caterpillar and the Company on January 29, 1999. Trademark and Trade Dress License Agreement. The Marketing Agreement provides that the Company and Caterpillar enter into a Trademark and Trade Dress License Agreement (the "License Agreement") at such time as the Company's products have been evaluated by Caterpillar and have been found to meet Caterpillar's quality and safety standards in accordance with Caterpillar's established testing and validation procedures. If entered into, the License Agreement will provide, in part, that Caterpillar will grant to the Company the non-exclusive, non-transferable right and license to use certain trademarks of Caterpillar on the Company's products for a fee equal to a percentage of the dealer net price for products sold to dealers with such trademarks. The term of the License Agreement will be five years from the date of the signing of the License Agreement, unless earlier terminated by mutual consent of the Company and Caterpillar. The Company anticipates that such an evaluation of its products by Caterpillar prior to entering into the License Agreement may take from two to four years, or longer. The Company and Caterpillar have currently chosen to focus on joint product offerings with the Caterpillar trademark (i.e. the MTL product line) rather than pursue this portion of the Marketing Agreement at the current time. Management Services Agreement. Under the Management Services Agreement, Caterpillar has made available to the Company general management support in connection with the day-to-day operation of its business, commercial development and marketing research services, financial planning services, such other administrative services as Caterpillar and the Company may subsequently agree to in writing, and manufacturing and engineering services. In consideration for Caterpillar's obligations under the Management Services Agreement, the Company pays Caterpillar a fee equal to Caterpillar's fully-loaded cost, as defined in the Management Services Agreement, plus an administrative surcharge (or such other fee as the parties may agree upon). The Management Services Agreement remains in effect indefinitely until otherwise terminated by the parties and was entered into between Caterpillar and the Company on January 29, 1999. Other Agreements. The Commercial Alliance Agreement also provides that the Company and Caterpillar enter into several additional agreements relating to (i) services to be provided to the Company by Caterpillar, (ii) the supply of components to Caterpillar by the Company and to the Company by Caterpillar and (iii) the license of technology by the Company to Caterpillar. None of these agreements have been entered into, although Caterpillar has provided certain services and supplied certain parts to the Company without the formal agreements contemplated by the Commercial Alliance Agreement in place. The Company and Caterpillar do not currently anticipate pursuing events that would create the need to enter into any of these agreements. The parties also agreed to enter into a Joint Venture Agreement pursuant to which ASV and Caterpillar would establish a 50-50 joint venture company to design and develop a line of agricultural tractors utilizing key aspects of the parties' respective technology and know-how. Caterpillar and the Company had preliminary discussions regarding the Joint Venture, but since that time, Caterpillar has elected to change its strategy regarding production of agricultural tractors. Rather than producing complete tractors, Caterpillar has elected to provide components (i.e. engines, transmissions, etc.) to other manufactures for incorporation into their products. As such, ASV does not anticipate that it will be produce agricultural tractors under this Joint Venture Agreement with Caterpillar. 2000 Agreements In October 2000, the Company entered into another Securities Purchase Agreement with Caterpillar pursuant to which Caterpillar purchased 500,000 newly issued shares of ASV Common Stock at $18 per share. The Company also amended its original warrant issued to Caterpillar reducing the number of shares of ASV common stock available for purchase under the original warrant by 500,000 shares. The amended warrant with Caterpillar provides for the purchase of 9,767,127 newly issued shares of the Company's Common Stock at a price of $21.00 per share. The amended warrant is exercisable at any time until January 29, 2009, except that it may expire with respect to a portion of the shares in the event the Company meets certain revenue levels and certain other conditions are met. Also in October 2000, the Company and Caterpillar entered into an alliance agreement under which they plan to jointly develop and manufacture a new product line of Caterpillar rubber track skid steer loaders called Multi-Terrain Loaders (MTLs). The product line, which is expected to include five new models, will feature Caterpillar's patented skid steer loader technology and ASV's patented Maximum Traction Support System rubber track undercarriage. The machines will complement existing models in both ASV's and Caterpillar's current product lines. The MTLs are not a commissionable product under the Commercial Alliance Agreement. The Company began manufacturing undercarriages for the first two MTL models in 2001. The undercarriage for the next two MTL models went into production in the second quarter of 2002. The MTLs are being sold through the Caterpillar dealer network. As of March 14, 2003, Caterpillar owns 15.9% of the Company's outstanding Common Stock (13.0% assuming the exercise of all outstanding options and warrants, exclusive of the amended warrant) and has the right to own up to 51.4% of the Company's outstanding Common Stock (assuming the exercise of all outstanding options and warrants) upon exercise of the amended warrant. COMPETITION The markets in which the Posi-Track competes are generally comprised of small to medium sized tractor-type vehicles including skid-steers. The market is dominated by large corporations producing models with substantial name recognition, including Case, which manufactures the Uniloader skid-steer, Ingersoll Rand which manufactures the Bobcat, Gehl, John Deere and Caterpillar. 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. Ingersoll Rand manufactures three models of rubber track skid steers, two of which are slightly larger than the Company's RC-50 and the other which is comparable to the Company's RC-100. Takeuchi of Japan manufactures two models of rubber track skid-steers, one of which is larger than the Company's RC-50 and the other which is comparable to the Company's RC-100. Takeuchi also private label manufactures these two models for Gehl and Mustang. The markets in which the RC-30 competes are also generally comprised of vehicles manufactured by large corporations producing models with substantial name recognition, including Toro, which manufactures the Dingo, as well as those companies listed above that manufacture skid-steer products. The Company expects its products to compete in the market based on, among other things: adaptability, versatility, performance, ease 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 warranty covers defects in materials and workmanship for one year from the delivery date to the first end user. The rubber tracks used on the Company's products carry a pro-rated warranty up to 1,500 hours of usage. Those components that are not manufactured by the Company are subject only to the warranty of the manufacturer of the component and may be greater in length than the limited warranty provided by the Company. The Company offers an extended warranty through an unaffiliated company. This unaffiliated company would be responsible for administering and paying all warranty claims under this extended warranty program. MANUFACTURING AND SUPPLIERS The Company manufactures and assembles its products at its facility in Grand Rapids, Minnesota. See "Item 2. Description of Property." The majority of the component parts are purchased from outside vendors. Certain parts, such as engines and transmissions, are standard "off-the-shelf" parts purchased by the Company and incorporated into its vehicles. Others, such as the rubber track, undercarriage components, machine chassis and loader, are manufactured specifically for the Company. Certain fabricated parts 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 the majority of component parts could occur without material disruption of the Company's business. However, certain parts, such as bogie wheels and rubber tracks, have a limited number of vendors and a disruption in supply could affect the Company's ability to deliver finished goods. INTELLECTUAL PROPERTY RIGHTS In 1986, a patent was issued to the Company with respect to the Posi-Turn power steering system. The steering system was invented by Gary Lemke, President of the Company, and his rights with respect to the invention were assigned by him to the Company. In connection with the assignment, the Company did not pay any compensation to Mr. Lemke, but agreed that in the event the Company licenses any of its rights under the patent to others, Mr. Lemke would receive 25% of any royalties under such license. This royalty agreement was terminated in January 1999, with no consideration paid to Mr. Lemke. During 2001, the Company was granted a patent by the U.S. Patent Office pertaining to its undercarriage and drive sprocket mechanism. The Company has also applied for additional patents pertaining to its undercarriage systems. There can be no guarantee that this patent will be a deterrent to other manufacturers from producing similar technology. The Company has registered the trademark Track Truck(R) with the U.S. Patent and Trademark Office and claims common law trademark rights in the names Posi-Track(TM), RC-30(TM), R-50(TM), RC-50(TM), Maximum Traction Support System(TM), Posi-Turn(TM) and Snow Saver(TM). Despite these protections, it may be possible for competitors or users to copy aspects of the Company's products. The Company believes that patent and trademark protection is less significant to its competitive position than the 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, 2002, 2001 and 2000, the Company spent approximately $1,803,000, $2,645,000 and $679,000, respectively, on research and development. The Company's research and development expenses have been incurred in connection with development of new models, enhancements to existing products and additional products to be offered through its alliances with Caterpillar and Polaris. The Company's research and development expenses increased substantially in 2002 and 2001 as it worked to develop the undercarriages for the Multi-Terrain Loader products with Caterpillar as well as worked on extensions of its own product line. The development of these undercarriages was completed in 2002 and the Company anticipates research and development expenses will decrease to approximately 1% of net sales in 2003. The Company anticipates its future research and development expenditures will be focused on improvements to its existing products and extensions of its product lines. INSURANCE The Company maintains product liability insurance as well as a commercial umbrella insurance policy in amounts the Company believes are adequate. The Company also maintains key-person life insurance in the amount of $1,000,000 on the life of Mr. Lemke. EMPLOYEES As of March 14, 2003, the Company had 112 employees, two of whom are part-time. The Company's employees include 3 in management, 20 in administration, 10 in sales and marketing and 79 in manufacturing, engineering and research and development. The Company believes its relations with its employees are good. None of the Company's employees is represented by a labor union. The Company also reimburses Caterpillar for the salary related costs of two Caterpillar employees that work at the Company's Grand Rapids facility. ITEM 2. DESCRIPTION OF PROPERTY The Company's manufacturing and office facilities are located in Grand Rapids, Minnesota. These facilities consist of approximately 95,000 square feet of production space and approximately 10,000 square feet of office space. The facilities are leased under a 20-year lease from the Grand Rapids Economic Development Authority. The lease agreement provides for monthly rental payments to January 2018, with a balloon payment of approximately $543,000 in December 2006. The Grand Rapids facility has been the Company's primary production and office facility since the original 40,000 square foot facility was first occupied by the Company in May 1995. The facility was expanded to its present size in 1997. The Company has an option to purchase the facility at any time at the present value of the remaining lease payments plus the current purchase price of the land on which the facility was constructed. The purchase price of the land is currently $122,500, but can be reduced or forgiven over a remaining period of four years if certain minimum employment levels are met and maintained during the applicable year. The Company also owns a parcel of land located in Grand Rapids, MN consisting of 63 acres and six buildings with a total of 47,000 square feet, which it uses for its research and development facility and additional warehousing. The Company believes that its properties are adequately covered by insurance. ITEM 3. LEGAL PROCEEDINGS ASV is a party to certain claims arising in the ordinary course of business. In the opinion of management, the outcome of such claims will not materially affect ASV's current or future financial position or results of operation. 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 trades on the Nasdaq Stock Market(R) under the ticker symbol ASVI. The following represents the high and low sales price for the periods indicated:

Year Ended December 31, 2002 High Low ---------------------------- ---- --- First Quarter $ 13.70 $10.50 Second Quarter 12.70 10.80 Third Quarter 11.80 7.90 Fourth Quarter 10.20 6.55

Year Ended December 31, 2001 High Low ---------------------------- ---- --- First Quarter $ 12.69 $ 8.00 Second Quarter 13.80 10.70 Third Quarter 15.50 9.80 Fourth Quarter 12.65 8.75

The above figures reflect inter-dealer prices, without retail mark-up, mark-down or commissions, and may not represent actual transactions. HOLDERS As of March 14, 2003, the Company had approximately 262 holders of record of its Common Stock (not including beneficial holders). The Company believes it has approximately 3,400 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. SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS EQUITY COMPENSATION PLAN INFORMATION

PLAN CATEGORY NUMBER OF SECURITIES WEIGHTED AVERAGE NUMBER OF SECURITIES REMAINING TO BE ISSUED UPON EXERCISE PRICE OF AVAILABLE FOR FUTURE ISSUANCE UNDER EXERCISE OF OUTSTANDING OPTIONS, EQUITY COMPENSATION PLANS OUTSTANDING OPTIONS, WARRANTS AND RIGHTS (EXCLUDING SECURITIES WARRANTS AND RIGHTS REFLECTED IN COLUMN (a)) (a) (b) (c) --------------------------- ------------------------ ------------------------ --------------------------------------- EQUITY COMPENSATION PLANS APPROVED BY 1,423,062 $13.67 1,989,437 SECURITY HOLDERS EQUITY COMPENSATION PLANS NOT APPROVED BY 337,500 $ 7.33 ---- SECURITY HOLDERS TOTAL 1,760,562 $12.45 1,989,437

RECENT SALES OF UNREGISTERED SECURITIES; USE OF PROCEEDS FROM REGISTERED SECURITIES None. ITEM 6. SELECTED FINANCIAL DATA

(Dollar amounts in thousands, YEAR ENDED DECEMBER 31, except per share data) 2002 2001 2000 1999 1998 --------------------------------------------------------------------------------------------------------- Net Sales.............................. $ 44,237 $ 50,081 $ 43,860 $ 36,168 $ 39,019 Net Earnings........................... 1,353 756 1,451 1,412 3,366 Net Earnings Per Share-Diluted......... .13 .07 .15 .14 .40 Total Assets........................... 57,210 57,941 55,006 48,650 29,533 Long-Term Liabilities.................. 1,980 2,013 2,117 2,197 2,464 Shareholders' Equity................... 50,467 50,571 49,763 39,096 19,515

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CRITICAL ACCOUNTING POLICIES The following discussion and analysis of the Company's financial condition and results of operations is based upon its financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgements that affect the reported amounts of assets, liabilities and expenses, and related disclosures. On an on-going basis, management evaluates its estimates and judgements, including those related to accounts receivable, inventories and warranty obligations. By their nature, these estimates and judgements are subject to an inherent degree of uncertainty. Management bases its estimates and judgements on historical experience, observance of trends in the industry, information provided by customers and other outside sources and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies, among others, affect its more significant judgements and estimates used in the preparation of its consolidated financial statements. Revenue Recognition and Accounts Receivable. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collectibility is reasonably assured. The Company generally obtains oral or written purchase authorizations from customers for a specified amount of product at a specified price and considers delivery to have occurred at the time of shipment. ASV maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of ASV's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Inventories. Inventories are stated at the lower of cost or market, cost being determined on the first-in, first-out method. Adjustments to slow moving and obsolete inventories to the lower of cost or market are provided based on historical experience and current product demand. The Company evaluates the adequacy of the inventories carrying value quarterly. Warranties. ASV provides for the estimated cost of product warranties at the time revenue is recognized. While ASV engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers, ASV's warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from ASV's estimates, revisions to the estimated warranty liability may be required. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain Statements of Earnings data as a percentage of net sales:

YEAR ENDED DECEMBER 31, ----------------------- 2002 2001 2000 ---- ---- ---- Net sales....................................... 100.0% 100.0% 100.0% Gross profit.................................... 19.5 18.1 20.7 Selling, general & administrative expense....... 11.4 11.7 14.2 Research & development.......................... 4.1 5.3 1.5 Operating income................................ 4.0 1.1 5.0 Net earnings.................................... 3.1 1.5 3.3

Net Sales. For the year ended December 31, 2002, net sales totaled approximately $44,237,000, an 11.7% decrease over net sales for the year ended December 31, 2001 due to several offsetting factors. First, the Company had no machine sales of the private label version of the RC-30 All Surface Loader under its alliance with Polaris, the ASL-300, in 2002, which had accounted for approximately $7.9 million in 2001. Second, the Company had decreased sales of its 4810 and 2800 series Posi-Tracks, due to the introduction of additional MTL models in 2002 and the continued softness in the overall construction equipment sales market. Partially offsetting these decreases were increased MTL undercarriage sales of approximately $3.3 million, as ASV began supplying undercarriages for two additional MTL models that were introduced by Caterpillar in 2002. The Company also experienced increased sales of approximately $8.0 million from its R-Series product line due to the introduction of the RC-50 and R-50 products in the first quarter of 2002. In addition, sales of service parts increased in 2002 as the number of machines and undercarriages in the field continued to increase. Net sales for the year ended December 31, 2001 increased 14.2% to approximately $50,081,000, compared with approximately $43,860,000 in 2000. This increase was the result of several offsetting factors. First, the Company began shipping the Polaris ASL-300, during the first quarter of 2001. The ASL-300 accounted for approximately 26.8% of the Company's unit sales in 2001. Second, in the second quarter of 2001, the Company began shipping undercarriages to Caterpillar for the jointly developed MTL product line manufactured by Caterpillar. Shipments of these undercarriages accounted for 34% of the Company's unit sales for 2001. Offsetting these increases was a decrease in sales of the Company's model 4810 Posi-Track. Unit sales of the 4810 Posi-Track in 2001 were approximately one-half the unit sales in 2000. The Company believes this decrease was primarily attributable to the overall softening of the construction equipment market and the introduction of the MTL products. Unit sales of the Company's other products (2800 series, MD-70, HD 4500 and Track Truck) were approximately the same in 2001 as 2000. Gross Profit. For the year ended December 31, 2002, gross profit was approximately $8,622,000, or 19.5% of net sales, compared with approximately $9,056,000, or 18.1% of net sales for 2001. The decrease in gross profit was due primarily to the decreased sales for 2002. The increase in the gross profit percentage was due to the following offsetting factors. First, as discussed above, the Company had no Polaris ASL-300 sales in 2002, which carry a lower gross profit than the Company's other products, thereby causing an increase in the gross profit percentage for 2002 compared to 2001. Second, the Company had increased sales of service parts in 2002, which generally carry a higher gross profit than finished goods. Offsetting these increases, the Company sold a greater concentration of lower margin MTL undercarriages in 2002 as compared to 2001 as Caterpillar was not able to produce its two larger MTL models for the majority of 2002 due to a production issue unrelated to ASV's undercarriage. In addition, the Company experienced fewer sales of its higher margin model 4810 Posi-Track as discussed above. Gross profit for the year ended December 31, 2001 was approximately $9,056,000, or 18.1% of net sales, compared with approximately $9,065,000, or 20.7%, for 2000. The decrease in gross profit percentage was due primarily to a change in the sales mix experienced in 2001. During 2001, the Company had a high concentration of sales of the private label ASL-300, which carries a lower gross profit than any of the Company's other products, but requires significantly less sales and marketing costs. The Company experienced fewer sales of its higher margin model 4810 Posi-Track due primarily to industry wide softening of construction equipment sales and the introduction of the MTL products. Finally, the Company continued to offer discounts off standard dealer net terms to reduce its inventory of the 2800 series Posi-Track. Offsetting this decrease was a warranty reimbursement benefit. During the fourth quarter of 2001, ASV negotiated a warranty reimbursement program with one of its suppliers, whereby the Company will receive product at no cost in the future to compensate ASV for warranty claims incurred during 2001 plus any claims not yet filed. ASV recognized a benefit of $542,600 under this program in the fourth quarter of 2001 as an offset to warranty costs incurred during the year. Selling, General and Administrative Expenses. For the year ended December 31, 2002, selling, general and administrative expenses decreased 14.1% to approximately $5,029,000 compared with approximately $5,858,000 for the year ended December 31, 2001. The decreased level of expenses was due to the following two items. First, in 2001, the Company established a remarketing reserve of $250,000. The Company established this reserve for costs associated with remarketing existing machines at one customer's locations, some of which were ultimately returned to the Company. ASV had originally anticipated these machines would be remarketed to other dealers, but instead chose to have certain of these machines returned to ASV for use in its program of marketing to rental facilities. As these machines were returned to ASV and reflected as sales returns with a corresponding decrease in gross profit of approximately $184,000, a portion of the remarketing reserve was no longer needed. The Company reversed the portion of the remarketing reserve that related to the returned machines, which decreased selling, general and administrative expenses by approximately $184,000 in 2002. Second, the Company had decreased commissions to Caterpillar as the number of commissionable products sold to Caterpillar dealers decreased in 2002. Selling, general and administrative expenses decreased 5.7% to approximately $5,858,000 for the year ended December 31, 2001, compared with approximately $6,211,000 for 2000. The decreased level of expenses was due primarily to decreased commissions paid to Caterpillar as a result of the change in sales mix experienced during 2001. The Company pays no commission to Caterpillar on the sale of any MTL undercarriages, the RC-30 or the ASL-300. Offsetting this decrease was the establishment of a remarketing reserve of $250,000 in the fourth quarter of 2001. This reserve relates to costs associated with remarketing existing machines at the locations of one dealer. Research and Development. For the year ended December 31, 2002, research and development expenses decreased $843,000 to approximately $1,803,000, compared with approximately $2,645,000 for the year ended December 31, 2001. This decrease was due primarily to the completion of the development, testing and integration of the final undercarriages used in Caterpillar's MTL product line. Research and development expenses increased 289.5% in 2001 to approximately $2,645,000, compared with approximately $679,000 in 2000. The increase was due to the Company's alliance with Caterpillar for the continued development, testing and integration of the undercarriages for the MTL product line. In addition, during 2001, the Company was developing the newest models in its R-Series product line, the R-50 and the RC-50, which were introduced in January 2002. The Company anticipates research and development expenses will decrease again in 2003 as the development of the undercarriages for Caterpillar's MTL product line was completed in 2002. The Company anticipates its investment in research and development will approximate 1% of its net sales for 2003. Other Income (Expense). For the year ended December 31, 2002, interest expense decreased to approximately $126,000, compared with approximately $146,000 for the year ended December 31, 2001. The decrease was due to the Company refinancing approximately $784,000 of its long-term debt from 9.0% to 6.5% for a five-year term in December 2001. Interest expense was approximately $146,000 in 2001, compared with approximately $267,000 in 2000. The decrease in 2001 was due to decreased line of credit usage. This was a result of the proceeds received from the sale of common stock to Caterpillar in the fourth quarter of 2000. Other income was approximately $264,000 for 2002, compared with approximately $529,000 for 2001 and approximately $302,000 for 2000. The decrease in 2002 was due primarily to lower interest income from lower interest rates and decreased short-term investments as the Company used these investments to fund operations in 2002. The increase in 2001 was due primarily to greater interest income from increased short-term investments. This resulted from increased cash flow, due primarily to the proceeds received from the sale of common stock to Caterpillar in the fourth quarter of 2000 Net Earnings. For the year ended December 31, 2002, net earnings increased to approximately $1,353,000, compared with approximately $756,000 in 2001. The increase in net earnings was due to lower operating expenses and an increased gross profit percentage, offset in part by decreased sales and an increased effective income tax rate. Net earnings for the year ended December 31, 2001 were approximately $756,000, compared with approximately $1,451,000 for 2000. Although net sales increased in 2001, this decrease resulted from a lower gross profit percentage and increased research and development expenses. Offsetting this decrease was a decrease in the Company's effective income tax rate in 2001 due to greater research and development tax credits. LIQUIDITY AND CAPITAL RESOURCES At December 31, 2002, the Company had working capital of approximately $47,366,000 compared with approximately $47,790,000 at December 31, 2001. While overall working capital remained relatively the same during the period, several components changed. First, cash and short-term investments decreased approximately $1,149,000 due primarily to funding operations during 2002. Second, accounts receivable decreased approximately $2,431,000 from better accounts receivable management and a greater use of finance companies to finance certain customer sales. Third, inventories increased approximately $3,221,000 from December 31, 2001. The majority of this increase was due to an increase in finished goods of approximately $3,055,000 due to lower than anticipated sales in the first and third quarter of 2002. In addition, the Company elected to produce the majority of the RC-30s and 2800 series Posi-Tracks it expected to need for 2002 when it could not complete MTL undercarriages during the first quarter. Current liabilities decreased approximately $593,000 at December 31, 2002 compared with December 31, 2001, due primarily to the Company having no income tax liability at December 31, 2002. This was due to Company utilizing the additional depreciation deduction available for income tax purposes, as well as the utilization of a research and development tax credit carryforward from 2001. In October 2000, the Company and Caterpillar entered into an alliance agreement to jointly develop and manufacture a new product line of Caterpillar rubber track skid steer loaders called Multi-Terrain Loaders, or MTLs. The product line, which includes five new models, features Caterpillar's patented skid steer loader technology and ASV's patented Maximum Traction Support System(TM) rubber track undercarriage. The machines complement existing models in both ASV's and Caterpillar's current product lines. They are being sold through the Caterpillar dealer network. The Company recognizes as sales its cost for the undercarriage, as defined in the agreement, plus a portion of the gross profit that Caterpillar will recognize upon sale of the MTL to Caterpillar dealers, when the Company ships undercarriages to Caterpillar. The MTLs are not a commissionable product under the Company's Commercial Alliance Agreement with Caterpillar. The Company anticipates its 2003 sales of MTL undercarriages to Caterpillar could approach $30 million. In December 2000, the Company made a sale to one customer totaling approximately $4.0 million. During 2001, this customer did not make payments in accordance with the terms of its agreement with the Company, including approximately $800,000 of machines and attachments sold by the customer for which payment was not remitted to the Company. The Company has been working closely with this customer to develop a plan for the payment of the amounts owed. In January 2002, the Company and the customer entered into a note agreement for the value of the machines that had been previously sold by the customer for which payment was not remitted to the Company. The initial amount of the note was $800,000 and is due in 48 monthly installments plus interest at the prime rate plus 2%, beginning March 15, 2002. The customer has made payments on a timely basis under this note. Should the customer be successful in raising a minimum of $2.5 million through a private placement offering, the Company has agreed to convert $500,000 of the note balance to shares of convertible preferred stock in the private placement. The Company has also obtained a security interest in the machines that have not yet been sold by the customer. In addition, the customer has agreed to remit payment to the Company for any machines it sells, which the customer has been doing. In September 2002, the Company's stock buy-back program expired. Under that program, the Company repurchased 71,780 shares of its common stock at an aggregate purchase price of approximately $756,000. On October 7, 2002, the Company announced a new stock buy-back program whereby ASV may repurchase up to $5 million of its common stock in the open market. The Company is funding the repurchases with available funds. The repurchase program is expected to last to October 7, 2003 or until such amount of common stock is repurchased. As of March 14, 2003, the Company had repurchased 110,700 shares of its common stock under this new buy-back program at an aggregate purchase price of approximately $1,004,000. In October 2002, the Company began a program to market its RC-30 and RC-50 products directly to rental facilities. Under this program, ASV identifies rental facilities that will lease ASV machines from an unaffiliated finance company. ASV records the sale of the machines to the finance company when they are delivered to the rental facility and receives payment from the finance company at that time. The lease agreement between the rental facility and the finance company provides the rental facility a 90-day period during which any rental income generated is split between the rental facility and ASV. After the 90-day period has expired, the rental facility has the option of terminating the lease, in which case ASV is responsible for the costs associated with transferring the machines to another rental facility. If the rental facility elects to continue the lease, ASV will refund any rental payments received during the 90-day period. At the end of the four-year lease, should the rental facility elect not to purchase the leased machines, ASV has guaranteed to pay a residual value equal to 25% of the original selling price of the financed equipment should the rental facility choose not to make the residual payment. At that point, ASV would take possession of the equipment. As of December 31, 2002, the total amount of future residual payments the Company may be required to make in the event of nonpayment by rental facilities totaled approximately $185,000. The Company believes the value of the related equipment will equal or exceed the amount of residual payment. Accordingly, the Company does not anticipate any loss will be incurred should any residual payments need to be made. During 2001 and 2000, the Company provided extended term financing programs, generally not exceeding 180 days, to its customers. This extended term financing program contributed to the increase in the Company's accounts receivable balance in 2001. The Company did not utilize this type of program to the same extent in 2002. Instead, the Company affiliated itself with several finance companies that finance the sale of the Company's products. By using these finance companies, the Company receives payment for its products shortly after their shipment. The Company pays a portion of the interest cost associated with financing these shipments that would normally be paid by the customer, generally ranging from three to twelve months, depending on the amount of down payment made by the customer. The Company is also providing twelve-month terms for one machine to be used for demonstration purposes for each qualifying dealer. The Company believes this change in how the Company expects to receive payment for the sale of its products, its existing cash and marketable securities, together with its available, unused $10 million credit line, will satisfy the Company's projected working capital needs and other cash requirements for the next twelve months and for the foreseeable future. New Accounting Pronouncements. FIN 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, was released in November 2002. This Interpretation states that a guarantor is required to measure and recognize the fair value of the guarantee at inception. It must also provide new disclosures regarding the nature of any guarantees and certain other items, including product warranties. The disclosure requirements are effective for the Company for the year ending December 31, 2002. The initial recognition and measurement provisions are effective prospectively, that is, for guarantees issued or modified on or after January 1, 2003. Management does not believe the adoption of this pronouncement will have a material effect on the Company. The Company has disclosed the required information in the "Warranties" section of note A to the financial statements filed with this Annual Report on Form 10-K. SFAS 143, Accounting for Asset Retirement Obligations. This statement establishes standards for recognition and measurement of legal obligations associated with the retirement of a tangible long-lived asset that results from the acquisition, construction, or development and (or) normal operation of a long-lived asset. This statement is effective for the Company beginning January 1, 2003. Management does not believe the adoption of this pronouncement will have a material effect on the Company. SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities. This statement provides financial and reporting guidance for costs associated with exit or disposal activities, including one-time terminations benefits, contract termination costs other than for a capital lease, and costs to consolidate facilities or relocate employees. This statement is effective for the Company for all exit and disposal activities initiated after December 31, 2002. Management does not believe the adoption of this pronouncement will have a material effect on the Company. SFAS 148, Accounting for Stock-Based Compensation -- Transition and Disclosure, an amendment to FASB Statement No. 123, requires certain disclosures about stock-based compensation plan in the Company's policy note. The Statement also provides three transition methods for entities voluntarily adopting the fair value method in periods beginning before December 16, 2003. The amendments to the disclosure and transition provisions of Statement 123 are effective for the Company for the year ending December 31, 2002. The Company has disclosed the required information in the "Stock-Based Compensation" section of Note A to the financial statements filed with this Annual Report on Form 10-K. The statements set forth above under "Liquidity and Capital Resources" and elsewhere in this Form 10-K regarding ASV's plans to jointly develop and manufacture rubber-tracked machines with Caterpillar, including the number of models to be developed, the timing of their planned introduction, ASV's future product mix and ASV's future profitability and expense levels are forward-looking statements based on current expectations and assumptions, and entail various risks and uncertainties that could cause actual results to differ materially from those expressed in such forward-looking statements. Certain factors may affect whether these anticipated events occur including ASV's ability to successfully manufacture the machines, unanticipated delays, costs or other difficulties in the development and manufacture of the machines, market acceptance of the machines, general market conditions, corporate developments at ASV, Polaris or Caterpillar and ASV's ability to realize the anticipated benefits from its alliances with Polaris and Caterpillar. Any forward-looking statements provided from time-to-time by the Company represent only management's then-best current estimate of future results or trends. Additional information regarding these risk factors and uncertainties is detailed in the Risk Factors filed as Exhibit 99 to the Current Report on Form 10-Q for the period ended June 30, 2002. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has no history of, and does not anticipate in the future, investing in derivative financial instruments, derivative commodity instruments or other such financial instruments. Transactions with international customers are entered into in US dollars, precluding the need for foreign currency hedges. Additionally, the Company invests in money market funds and fixed rate U.S. government and corporate obligations, which experience minimal volatility. Thus, the exposure to market risk is not material. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA FINANCIAL STATEMENTS The following financial statements and financial schedules are attached as a separate section on pages F-1 through F-15 following the signature page and certifications of this Annual Report on Form 10-K: Consolidated Balance Sheets as of December 31, 2002 and 2001 Consolidated Statements of Earnings for the years ended December 31, 2002, 2001 and 2000 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2002, 2001 and 2000 Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000 Notes to Consolidated Financial Statements Report of Independent Certified Public Accountants SUPPLEMENTARY FINANCIAL INFORMATION The selected quarterly financial data is included in Note N to the financial statements filed with this Annual Report on Form 10-K. 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 2003 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 2003 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 AND RELATED STOCK HOLDER MATTERS 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 2003 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 2003 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. CONTROLS AND PROCEDURES The Company's Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation within 90 days of the filing date of this report, that the Company's disclosure controls and procedures are adequately designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in applicable rules and forms. There have not been any significant changes in the Company's internal controls or in other factors that could significantly affect those controls, subsequent to the date of such evaluation, including any corrective actions taken with regard to significant deficiencies and material weaknesses. ITEM 15. 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 on pages S-1 and S-2 immediately following the financial statements included in this Annual Report on Form 10-K: Report of Independent Certified Public Accountants on the Financial Statement Schedule for the years ended December 31, 2002, 2001 and 2000 Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 2002, 2001 and 2000 (a)(3) EXHIBITS

Exhibit Number Description ------ ----------- 3.1 Second Restated Articles of Incorporation of the Company (a) 3.1a Amendment to Second Restated Articles of Incorporation of the Company filed January 6, 1997 (d) 3.1b Amendment to Second Restated Articles of Incorporation of the Company filed May 4, 1998 (g) 3.2 Bylaws of the Company (a) 3.3 Amendment to Bylaws of the Company adopted April 13, 1999 (l) 4.1 Specimen form of the Company's Common Stock Certificate (a) 4.3 * 1994 Long-Term Incentive and Stock Option Plan (a) 4.4 Warrant issued to Leo Partners, Inc. on December 1, 1996 (d) 4.5 * 1996 Incentive and Stock Option Plan (e) 4.6 * 1996 Incentive and Stock Option Plan, as amended (f) 4.7 * 1998 Non-Employee Director Stock Option Plan (f) 4.8 * Amendment to 1998 Non-Employee Director Stock Option Plan (m) 4.9 Securities Purchase Agreement dated October 14, 1998 between Caterpillar Inc. and the Company (h) 4.10 Warrant issued to Caterpillar Inc. on January 29, 1999 (i) 4.11 Securities Purchase Agreement dated October 31, 2000 between Caterpillar Inc. and the Company (n) 4.12 Replacement Warrant issued to Caterpillar Inc. on October 31, 2000 (n) 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 June 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) 10.12 Management Services Agreement dated January 29, 1999 between Caterpillar Inc. and the Company (j) 10.13 Marketing Agreement dated January 29, 1999 between Caterpillar Inc. and the Company (j) 10.14 Third Amendment to Credit Agreement dated June 9, 1999 between Norwest Bank Minnesota North, N.A. and the Company (k) 10.15 Fourth Amendment to Credit Agreement dated June 1, 2000 between Norwest Bank Minnesota North, N.A. and the Company (m) 10.16** Multi-Terrain Rubber-Tracked Loader Alliance Agreement dated October 31, 2000 between Caterpillar Inc. and the Company (n) 10.17** Manufacturing and Distribution Agreement dated January 2, 2001 between Polaris Industries Inc. and the Company (o) 10.18 Fifth Amendment to Credit Agreement dated June 1, 20021 between Wells Fargo Bank Minnesota, N.A. and the Company (p) 10.19 Sixth Amendment to Credit Agreement dated June 1, 2002 between Wells Fargo Bank Minnesota, N.A. and the Company (q) 10.20 Seventh Amendment to Credit Agreement dated June 1, 2002 between Wells Fargo Bank Minnesota, N.A. and the Company (r) 11 Statement re: Computation of Per Share Earnings 22 List of Subsidiaries (a) 99.1 Risk Factors (q) 99.2 Certification of the Chief Executive Officer 99.3 Certification of the Chief Financial Officer ----------------------------------------------------------------- (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. (m) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 (File No. 0-25620) filed electronically August 10, 2000. (n) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 (File No. 0-25620) filed electronically November 13, 2000. (o) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 (File No. 0-25620) filed electronically March 30, 2001. (p) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 (File No. 0-25620) filed electronically August 13, 2001. (q) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 (File No. 0-25620) filed electronically August 14, 2002. (r) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 (File No. 0-25620) filed electronically November 14, 2002. * Indicates management contract or compensation plan or arrangement. ** Certain information contained in this document has been omitted and filed separately accompanied by a confidential request pursuant to Rule 24b-2 of the Securities Exchange Act of 1934. (b) REPORTS ON FORM 8-K The following current Reports on Form 8-K were filed by the Company during the quarter ended December 31, 2002: Current Report on Form 8-K dated October 7, 2002 reporting under Item 9. "Regulation FD Disclosure" that on October 7, 2002 ASV issued a press release announcing the implementation of a stock buy-back program whereby ASV may repurchase up to $5 million of its common stock on the open market. Current Report on Form 8-K dated October 14, 2002 reporting under Item 9. "Regulation FD Disclosure" that on October 14, 2002 ASV issued a press release disclosing a revision in its expected net sales and net earnings for third quarter 2002 and fiscal 2002. ASV also provided initial guidance in regards to its anticipated level of net sales and net earnings for 2003. In addition, the press release contained information regarding a conference call held October 14, 2002 during which ASV discussed the items described in the press release. Current Report on Form 8-K dated October 29, 2002 reporting under Item 9. "Regulation FD Disclosure" that on October 29, 2002 ASV issued a press release disclosing its financial results for the three and nine months ended September 30, 2002. In addition, the press release contained information regarding a conference call held October 29, 2002 during which ASV discussed its financial results for the three and nine months ended September 30, 2002 and its outlook for the balance of 2002 and fiscal 2003. 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 28, 2003 ---------------------------------------- --------------------- By: Gary Lemke, President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Gary Lemke Date: March 28, 2003 ---------------------------------------- --------------------- By: Gary Lemke, Chairman of the Board, President and Director (Chief Executive Officer) /s/ Jerome T. Miner Date: March 28, 2003 ---------------------------------------- --------------------- By: Jerome T. Miner, Vice-Chairman of the Board and Director /s/ Edgar E. Hetteen Date: March 28, 2003 ---------------------------------------- --------------------- By: Edgar E. Hetteen, Vice President and Director /s/ James Dahl Date: March 28, 2003 ---------------------------------------- --------------------- By: James Dahl, Director /s/ Leland T. Lynch Date: March 28, 2003 ---------------------------------------- --------------------- By: Leland T. Lynch, Director /s/ R. E. Turner, IV Date: March 28, 2003 ---------------------------------------- --------------------- By: R. E. Turner, IV, Director /s/ Richard A. Benson Date: March 28, 2003 ---------------------------------------- --------------------- By: Richard A. Benson, Director /s/ Robert Macier Date: March 28, 2003 ---------------------------------------- --------------------- By: Robert Macier, Director /s/ Thomas R. Karges Date: March 28, 2003 ---------------------------------------- --------------------- By: Thomas R. Karges, Chief Financial Officer CERTIFICATIONS I, Gary Lemke, President of A.S.V., Inc., certify that: 1. I have reviewed this annual report on Form 10-K of A.S.V., Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 28, 2003 /s/ Gary Lemke ---------------- ------------------------------- President I, Thomas R. Karges, Chief Financial Officer of A.S.V., Inc., certify that: 1. I have reviewed this annual report on Form 10-K of A.S.V., Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 28, 2003 /s/ Thomas R. Karges ---------------- ------------------------------- Chief Financial Officer FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS A.S.V., INC. DECEMBER 31, 2002 AND 2001 F-1 A.S.V., INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2002 AND 2001

ASSETS 2002 2001 ---------- ---------- CURRENT ASSETS Cash and cash equivalents $ 4,058,091 $ 5,221,591 Short-term investments 739,307 725,249 Accounts receivable (net of allowance for doubtful accounts of $75,000) 14,397,958 16,828,489 Inventories 31,834,620 28,614,053 Prepaid expenses and other 1,099,685 1,756,844 ---------- ---------- Total current assets 52,129,661 53,146,226 PROPERTY AND EQUIPMENT, net 5,080,536 4,794,578 ---------- ---------- $57,210,197 $57,940,804 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term liabilities $ 129,550 $ 106,008 Accounts payable 2,838,370 2,449,144 Accrued liabilities Compensation 265,649 269,919 Warranty reimbursements 555,200 879,900 Warranties 600,000 500,000 Other 374,707 646,636 Income taxes payable - 505,062 ---------- ---------- Total current liabilities 4,763,476 5,356,669 LONG-TERM LIABILITIES, less current portion 1,979,798 2,012,652 COMMITMENTS AND CONTINGENCIES - - SHAREHOLDERS' EQUITY Capital stock, $.01 par value: Preferred stock, 11,250,000 shares authorized; no shares issued or outstanding - - Common stock, 33,750,000 shares authorized; shares issued and outstanding -- 10,063,901 in 2002 and 10,205,306 in 2001 100,639 102,053 Additional paid-in capital 38,666,925 40,123,200 Retained earnings 11,699,359 10,346,230 ---------- ---------- 50,466,923 50,571,483 ---------- ---------- $57,210,197 $57,940,804 ========== ==========

The accompanying notes are an integral part of these financial statements. F-2 A.S.V., INC. CONSOLIDATED STATEMENTS OF EARNINGS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

2002 2001 2000 ------ ------ ------ Net sales $44,236,876 $50,081,376 $43,859,509 Cost of goods sold 35,614,846 41,025,009 34,794,783 ---------- ---------- ---------- Gross profit 8,622,030 9,056,367 9,064,726 Operating expenses Selling, general and administrative 5,029,307 5,857,867 6,210,514 Research and development 1,802,960 2,645,476 679,233 ---------- ---------- -------- Operating income 1,789,763 553,024 2,174,979 Other income (expense) Interest expense (126,098) (146,031) (266,890) Interest income 119,712 400,202 225,043 Other, net 144,752 128,473 76,457 ---------- ---------- -------- Income before income taxes 1,928,129 935,668 2,209,589 Provision for income taxes 575,000 180,000 758,680 ---------- ---------- -------- NET EARNINGS $ 1,353,129 $ 755,668 $ 1,450,909 ========== ======== ========== Net earnings per common share Basic $ .13 $ .07 $ .15 ========== ======== ========== Diluted $ .13 $ .07 $ .15 ========== ======== ========== Weighted average number of common shares outstanding Basic 10,170,645 10,215,855 9,782,919 ========== ========== ========== Diluted 10,229,057 10,352,468 9,966,661 ========== ========== ==========

The accompanying notes are an integral part of these financial statements. F-3 A.S.V., INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

Common stock Additional --------------------------------- paid-in Retained Shares Amount capital earnings Total ------------ ------------ ------------ ------------ ------------ Balance at December 31, 1999 9,686,457 $ 96,865 $ 30,859,403 $ 8,139,653 $ 39,095,921 Issuance of common stock, net of issuing costs 500,000 5,000 8,942,149 - 8,947,149 Exercise of stock options 26,750 267 95,288 - 95,555 Tax benefit from exercise of stock options - - 60,000 - 60,000 Cost of shares retired (3,210) (32) (37,355) - (37,387) Warrant earned - - 151,200 - 151,200 Net earnings - - - 1,450,909 1,450,909 ------------ ------------ ------------ ------------ ------------ Balance at December 31, 2000 10,209,997 102,100 40,070,685 9,590,562 49,763,347 Exercise of stock options 21,863 219 129,609 - 129,828 Tax benefit from exercise of stock options - - 55,000 - 55,000 Cost of shares retired (26,554) (266) (270,694) - (270,960) Warrant earned - - 138,600 - 138,600 Net earnings - - - 755,668 755,668 ------------ ------------ ------------ ------------ ------------ Balance at December 31, 2001 10,205,306 102,053 40,123,200 10,346,230 50,571,483 Exercise of stock options 18,000 180 64,449 - 64,629 Cost of shares retired (159,405) (1,594) (1,520,724) - (1,522,318) Net earnings - - - 1,353,129 1,353,129 ------------ ------------ ------------ ------------ ------------ Balance at December 31, 2002 10,063,901 $ 100,639 $ 38,666,925 $ 11,699,359 $ 50,466,923 ============ ============ ============ ============ ============

The accompanying notes are an integral part of these financial statements. F-4 A.S.V., INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

2002 2001 2000 ----------- ----------- ----------- Cash flows from operating activities: Net earnings $ 1,353,129 $ 755,668 $ 1,450,909 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization 474,583 441,684 413,268 Deferred income taxes 232,000 (25,000) 5,000 Warrant earned - 138,600 151,200 Tax benefit from stock option exercises - 55,000 60,000 Changes in assets and liabilities: Accounts receivable 2,430,531 (6,270,582) (1,896,858) Inventories (3,220,567) (549,055) 4,326,258 Prepaid expenses and other 158,381 (256,818) (198,608) Accounts payable 389,226 626,232 47,029 Accrued liabilities (500,899) 1,272,531 (222,749) Income taxes (238,284) (201,959) 236,679 ----------- ----------- ----------- Net cash provided by (used in) operating activities 1,078,100 (4,013,699) 4,372,128 ----------- ----------- ----------- Cash flows from investing activities: Purchase of property and equipment (760,541) (580,144) (273,712) Purchase of short-term investments (734,217) (1,766,960) (278,475) Redemption of short-term investments 720,159 2,319,993 247,889 ----------- ----------- ----------- Net cash used in investing activities (774,599) (27,111) (304,298) ----------- ----------- ----------- Cash flows from financing activities: Payments on line of credit, net - - (4,080,000) Proceeds from long-term liabilities 98,363 - - Principal payments on long-term liabilities (107,675) (80,328) (252,470) Proceeds from issuance of common stock, net - - 8,947,149 Proceeds from exercise of stock options 64,629 129,828 95,555 Retirement of common stock (1,522,318) (270,960) (37,387) ----------- ----------- ----------- Net cash provided by (used in) financing activities (1,467,001) (221,460) 4,672,847 ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents (1,163,500) (4,262,270) 8,740,677 Cash and cash equivalents at beginning of year 5,221,591 9,483,861 743,184 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 4,058,091 $ 5,221,591 $ 9,483,861 =========== =========== =========== Supplemental disclosure of cash flow information: Cash paid for interest $ 158,437 $ 180,640 $ 331,468 Cash paid for income taxes 1,112,000 390,765 473,322

The accompanying notes are an integral part of these financial statements. F-5 A.S.V., INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001 AND 2000 NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company designs and manufactures track-driven, all-season vehicles and related accessories and attachments in northern Minnesota. The Company sells its products through Caterpillar dealers in the United States and Canada and independent dealers in the United States, Canada, Australia, New Zealand and Portugal. A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows: Principles of Consolidation The consolidated financial statements include the accounts of A.S.V., Inc. and its wholly-owned subsidiary. All intercompany accounts and transactions have been eliminated in consolidation. Revenue Recognition The Company generally recognizes revenue on its product sales when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collectibility is reasonably assured. The Company generally obtains oral or written purchase authorizations from customers for a specified amount of product at a specified price and considers delivery to have occurred at the time of shipment. In 2000, pursuant to a contractual arrangement, revenues of approximately $4 million were recognized for completed products held at the Company's warehouse. The customer requested the Company hold the products as it had physical space limitations at its facilities. The products were delivered in 2001. Fair Value of Financial Instruments The financial statements include the following financial instruments: cash equivalents, short-term investments, accounts receivable, accounts payable and bank debt. At December 31, 2002 and 2001, the fair values of these financial instruments are not significantly different than their balance sheet carrying amounts. Cash Equivalents All highly liquid temporary cash investments with an original maturity of three months or less are considered to be cash equivalents. At December 31, 2002 and 2001, the Company had cash equivalents of approximately $3,992,000 and $4,930,000, which consisted of a money market account. The fair value of these investments approximates cost. The Company maintains its cash balance at one financial institution and, at times, this balance may be in excess of federally insured limits. Accounts Receivable The Company grants credit to customers in the normal course of business. Management performs on-going credit evaluations of customers. The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the Company's previous loss history, the customer's current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes-off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. Inventories Inventories are stated at the lower of cost (determined using the first-in, first-out method) or market. Adjustments of slow moving and obsolete inventories to the lower of cost or market are provided based on historical experience and current product demand. Property and Equipment Property and equipment are carried at cost. Depreciation is provided in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives. Buildings 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. F-6 A.S.V., INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 2002, 2001 AND 2000 NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued Warranties The Company provides a limited warranty to its customers. Provision for estimated warranty costs are recorded when revenue is recognized based on product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual failure rates, material usage or service delivery costs differ from the Company's estimates, revisions to the accrued warranty liability may be required. Changes in the Company's accrued warranty liability are as follows:

December 31, ----------------------- 2002 2001 --------- --------- Balance, beginning of year $ 500,000 $ 450,000 Expense related to accrual revisions for prior year warranties 100,000 50,000 Expense for new warranties issued 1,299,950 1,228,816 Warranty claims (1,299,950) (1,228,816) --------- --------- Balance, end of year $ 600,000 $ 500,000 ======== ========

During the fourth quarter of 2001, ASV negotiated a warranty reimbursement program with one of its suppliers, whereby the Company will receive product at no cost over a three-year period to compensate for warranty claims incurred during 2001 plus any claims not yet filed. During 2002 and 2001, ASV recognized a benefit of $324,700 and $542,600 under this program, recorded as an offset to warranty expense. Advertising Expense Advertising is expensed as incurred. Advertising expenses were approximately $308,000, $295,000 and $233,000 for 2002, 2001 and 2000. Shipping and Handling Costs The Company includes shipping and handling (including warehousing) costs incurred in connection with the distribution of replacement parts in selling, general and administrative expenses. Shipping and handling costs were approximately $838,000, $832,000 and $906,000 for 2002, 2001 and 2000. Research and Development All research and development costs are expensed as incurred. Employee Savings and Profit Sharing Plan The Company has an employee savings and profit sharing plan which permits participant salary deferrals up to certain limits set by law and provides for 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. Company contributions were approximately $42,000, $41,000 and $45,000 for 2002, 2001 and 2000. Stock-Based Compensation At December 31, 2002, the Company has three stock-based compensation plans, which are described more fully in Note I. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net earnings, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, using the assumptions described in note I, to its stock-based employee plans. F-7 A.S.V., INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 2002, 2001 AND 2000 NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued

Year ended December 31, --------------------------------------- 2002 2001 2000 ---------- --------- ---------- Net earnings, as reported $1,353,129 $ 755,668 $1,450,909 Deduct: Total stock-based employee compensation determined under fair value based methods for all awards 496,648 493,672 336,343 ---------- --------- ---------- Pro forma net earnings $ 856,481 $ 261,996 $1,114,566 ========== ========= ========== Earnings per share: Basic -- as reported $ 0.13 $ 0.07 $ 0.15 ========== ========= ========== Basis -- pro forma $ 0.08 $ 0.03 $ 0.11 ========== ========= ========== Diluted -- as reported $ 0.13 $ 0.07 $ 0.15 ========== ========= ========== Diluted -- pro forma $ 0.08 $ 0.03 $ 0.11 ========== ========= ==========

Accounting Estimates Preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, related revenues and expenses and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from these estimates. Net Earnings Per Common Share Basic net earnings per share is computed by dividing net earnings by the weighted average number of outstanding common shares. Diluted net earnings per share is computed by dividing net earnings 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, 2002, 2001 and 2000, 58,412, 136,613 and 183,742 shares of common stock equivalents were included in the computation of diluted net earnings per share. Options and warrants to purchase 11,166,939, 11,229,876 and 11,134,314, shares of common stock with a weighted average exercise price of $20.10, $20.13 and $20.21, were outstanding at December 31, 2002, 2001 and 2000, but were excluded from the computation of common share equivalents because they were anti-dilutive. Reclassifications Certain 2001 amounts have been reclassified to conform to the 2002 presentation. New Accounting Pronouncements FIN 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, was released in November 2002. This Interpretation states that a guarantor is required to measure and recognize the fair value of the guarantee at inception. It must also provide new disclosures regarding the nature of any guarantees and certain other items, including product warranties. The disclosure requirements are effective for the Company for the year ending December 31, 2002. The initial recognition and measurement provisions are effective prospectively, that is, for guarantees issued or modified on or after January 1, 2003. Management does not believe the adoption of this pronouncement will have a material effect on the Company. The Company has disclosed the required information in the "Warranties" section of note A. SFAS 143, Accounting for Asset Retirement Obligations. This statement establishes standards for recognition and measurement of legal obligations associated with the retirement of a tangible long-lived asset that results from the acquisition, construction, or development and (or) normal operation of a long-lived asset. This statement is effective for the Company beginning January 1, 2003. Management does not believe the adoption of this pronouncement will have a material effect on the Company. F-8 A.S.V., INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 2002, 2001 AND 2000 NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities. This statement provides financial and reporting guidance for costs associated with exit or disposal activities, including one-time terminations benefits, contract termination costs other than for a capital lease, and costs to consolidate facilities or relocate employees. This statement is effective for the Company for all exit and disposal activities initiated after December 31, 2002. Management does not believe the adoption of this pronouncement will have a material effect on the Company. SFAS 148, Accounting for Stock-Based Compensation -- Transition and Disclosure, an amendment to FASB Statement No. 123, requires certain disclosures about stock-based compensation plan in the Company's policy note. The Statement also provides three transition methods for entities voluntarily adopting the fair value method in periods beginning before December 16, 2003. The amendments to the disclosure and transition provisions of Statement 123 are effective for the Company for the year ending December 31, 2002. The Company has disclosed the required information in the "Stock-Based Compensation" section of Note A. NOTE B -- SHORT-TERM INVESTMENTS Short-term investments consist primarily of a diversified portfolio of taxable governmental agency bonds, which will mature in 2003. The Company considers the investments as "available-for-sale." At December 31, 2002 and 2001, cost was equal to fair value and no amount was included as a separate component of shareholders' equity. NOTE C -- INVENTORIES Inventories consist of the following:

December 31, -------------------------- 2002 2001 ----------- ----------- Raw materials, semi- finished and WIP inventory $16,502,994 $16,438,019 Finished goods 10,779,010 7,723,738 Used equipment held for resale 4,552,616 4,452,296 ---------- ---------- $31,834,620 $28,614,053 ========== ==========

NOTE D -- PROPERTY AND EQUIPMENT Property and equipment consist of the following:

December 31, ------------------------- 2002 2001 ---------- ---------- Land $ 132,635 $ 132,635 Buildings and improvements 3,695,152 3,691,018 Tooling 1,182,839 709,709 Machinery and equipment 2,146,664 2,030,936 Vehicles 409,739 317,042 --------- --------- 7,567,029 6,881,340 Less accumulated depreciation 2,486,493 2,086,762 --------- --------- $5,080,536 $4,794,578 ========= =========

NOTE E -- LINES OF CREDIT The Company has a $10,000,000 line of credit agreement with a bank which is due on demand or June 1, 2003. The interest rate is variable at prime less one half percent (effective rates of 3.75% and 4.25% as of December 31, 2002 and 2001). As of December 31, 2002 and 2001, there were no advances on this line of credit. The agreement requires the Company to maintain certain financial requirements including a minimum tangible net worth level and a cash flow coverage ratio. Management expects to renew the agreement at substantially the same terms and conditions. NOTE F -- LONG-TERM LIABILITIES Notes Payable The Company has three notes payable to a finance company totaling $95,084 at December 31, 2002. The notes require monthly payments through October 2007 and have an effective rate of interest of 0% at December 31, 2002. Capital Lease Obligation The Company leases its manufacturing and office building from the Grand Rapids Economic Development Authority. The agreement provides for monthly payments to 2018 and a balloon payment of approximately $543,000 in December 2006. F-9 A.S.V., INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 2002, 2001 AND 2000 NOTE F -- LONG-TERM LIABILITIES -- Continued Future minimum lease payments under this capital lease obligation at December 31, 2002 are as follows: 2003 $ 228,134 2004 228,134 2005 228,134 2006 766,131 2007 135,554 Thereafter 1,147,491 --------- Total payments 2,733,578 Amounts representing interest (weighted average 6.09%) 719,314 --------- Present value of minimum capitalized lease payments $2,014,264 ========= Assets related to the capital lease were $2,250,773 at December 31, 2002 and 2001. Accumulated amortization was $331,603 and $275,334 at December 31, 2002 and 2001. NOTE G - PROVISION FOR INCOME TAXES The provision for income taxes consists of the following:

Year ended December 31, -------------------------------- 2002 2001 2000 -------- -------- -------- Current Federal $301,000 $138,000 $683,680 State 42,000 67,000 70,000 ------- ------- ------- 343,000 205,000 753,680 Deferred 232,000 (25,000) 5,000 ------- -------- ------ $575,000 $180,000 $758,680 ======= ======= =======

Net deferred income tax assets relate to the tax effect of temporary differences as follows:

December 31, --------------------- 2002 2001 -------- -------- Accruals and reserves $292,000 $430,000 Other 36,000 130,000 ------- ------- $328,000 $560,000 ======= =======

The net deferred tax asset is included with prepaid expenses and other in the financial statements. The following is a reconciliation of the Federal statutory income tax rate to the effective tax rate:

2002 2001 2000 ------ ------ ------ Statutory federal rate 34.0% 34.0% 34.0% State income taxes, net of federal benefit 3.6 4.7 2.6 Research and development tax credit (4.9) (16.9) - Foreign tax credit (2.8) (4.2) - Other (0.1) 1.6 (1.5) ----- ---- ----- 29.8% 19.2% 35.1% ==== ===== ====

The Company realizes an income tax benefit from the exercise or early disposition of certain stock options. This benefit results in a decrease in current income taxes payable and an increase in additional paid-in capital. The Company generated and fully utilized research and development and foreign tax credits during 2002 and 2001. NOTE H -- TRANSACTIONS WITH CATERPILLAR Prior to 2000, the Company entered into a Securities Purchase Agreement (the Agreement) with Caterpillar Inc. (Caterpillar). Under the terms of the Agreement, Caterpillar acquired, for an aggregate purchase price of $18,000,000, one million newly issued shares of common stock and a warrant to purchase an additional 10,267,127 newly issued shares of common stock at a price of $21.00 per share. The warrant is exercisable at any time through January 2009 subject to partial termination in the event the Company achieves certain financial goals. As a result of the Agreement, the board of directors was increased with two members appointed by Caterpillar. In addition, the Agreement contains other provisions which allow Caterpillar to maintain its proportionate potential ownership and restricts acquisitions, loans and the payment of dividends, without approval of at least one of the Caterpillar designated members of the Board. F-10 A.S.V., INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 2002, 2001 AND 2000 NOTE H -- TRANSACTIONS WITH CATERPILLAR -- Continued The Company and Caterpillar also entered into a Commercial Alliance Agreement pursuant to which Caterpillar will provide the Company with access to its dealer network and will make various management, financial and engineering resources available to the Company. Included in the Commercial Alliance Agreement is a Marketing Agreement which provides, among other things, that the Company will pay Caterpillar a commission equal to 5% of the dealer net price for complete machines and 3% for replacement parts and Company-branded attachments for all sales made to Caterpillar dealers. In addition, if the Company's products are sold under the Caterpillar brand name, the Company will pay Caterpillar a trademark license fee equal to 3% of the net sales of these products to Caterpillar dealers. The Company and Caterpillar also entered into other ancillary agreements for the benefit of both companies. Total commission expense under the agreement was approximately $215,000, $464,000 and $1,072,000 in 2002, 2001 and 2000. In October 2000, the Company completed another Securities Purchase Agreement with Caterpillar in which Caterpillar purchased 500,000 newly issued shares of common stock at a price of $18.00 per share. The Company also amended its original warrant issued to Caterpillar reducing the number of shares of Company common stock available for purchase under the original warrant by 500,000 shares. Also in October 2000, the Company and Caterpillar entered into an alliance agreement to jointly develop and manufacture a new product line of Caterpillar rubber track skid steer loaders called Multi-Terrain Loaders, or MTLs. The product line, which includes five models, will feature Caterpillar's patented skid steer loader technology and ASV's patented Maximum Traction Support System (TM) rubber track undercarriage. The MTLs are being sold through the Caterpillar dealer network. The Company is manufacturing the undercarriage for use on four of the MTLs, with the development of the undercarriage for the remaining model continuing. In connection with this alliance agreement, the Company has agreed to reimburse Caterpillar for their research and development costs related to the MTLs as it pertains to the combination of the Caterpillar portion of the machines with the Company's undercarriages. Total research and development costs reimbursed to Caterpillar were approximately $1,000,000, $1,904,000 and $273,000 in 2002, 2001 and 2000. The Company does not anticipate any research and development costs related to the MTLs during 2003. At December 31, 2002, Caterpillar owned approximately 16% of the Company's outstanding common stock and had the right to own up to approximately 52% of the Company's common stock (assuming the exercise of all outstanding options and warrants) upon exercise of the amended warrant. The Company purchases parts used in its products from Caterpillar. The Company also reimburses Caterpillar for the salary related costs of two Caterpillar employees that work on the Company's behalf. In addition, the Company utilizes Caterpillar's warranty processing system to handle warranty claims on its machines and reimburses Caterpillar for the warranty expense incurred by Caterpillar dealers. During 2002, 2001 and 2000, total parts purchases, salary and warranty reimbursements were approximately $7,140,000, $6,877,000 and $3,828,000. Also, at December 31, 2002 and 2001, accounts payable to Caterpillar were approximately $1,213,000 and $909,000. When the Company ships undercarriages to Caterpillar it recognizes as sales its cost for the undercarriage, as defined in the agreement, plus a portion of the gross profit that Caterpillar will recognize upon sale of the MTL to Caterpillar dealers. During 2002 and 2001, 32% and 18% of net sales were made to Caterpillar. At December 31, 2002 and 2001, the accounts receivable balance due from Caterpillar was approximately $2,000,000 and $1,600,000. No sales were made to Caterpillar in 2000. F-11 A.S.V., INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 2002, 2001 AND 2000 NOTE I -- SHAREHOLDERS' EQUITY Stock Option Plans The Company has two stock option plans under which up to 3,375,000 shares of common stock are available for issuance. Stock options may be granted to any employee, including officers and directors of the Company, and certain non-employees, at a price not less than the fair market value of the Company's common stock on the date of grant. Options generally expire five to seven years from the date of grant. Options granted under the plans are generally exercisable in annual installments, beginning one year from the date of grant. Director Stock Option Plan The Company also has a stock option plan under which 450,000 shares of common stock are available for issuance. Stock options may be granted to directors who are not employees of the Company at a price not less than the fair market value of the Company's common stock on the date of grant. Options expire five years from date of grant and are exercisable in annual installments, beginning one year from the date of grant. The plan, as amended, provides that each eligible director shall receive an option to purchase 3,000 shares on the first business day of each calendar year. However, in 2000, options to purchase 5,000 shares were granted to each director. Option transactions under the plans during each of the three years in the period ended December 31, 2002 are summarized as follows:

Weighted Average Exercise Shares Price -------- ------- Outstanding at December 31, 1999 1,297,114 $13.91 Granted 149,500 15.40 Exercised (26,750) 3.57 Canceled (31,500) 16.49 --------- Outstanding at December 31, 2000 1,388,364 14.21 Granted 143,500 11.71 Exercised (21,863) 5.93 Canceled (63,250) 13.46 --------- Outstanding at December 31, 2001 1,446,751 14.12 Granted 159,500 10.95 Exercised (18,000) 3.59 Canceled (165,189) 16.11 --------- Outstanding at December 31, 2002 1,423,062 $13.67 ========= =====

At December 31, 2002, 2001 and 2000, 1,145,937, 1,205,501 and 1,208,802 options were exercisable with a weighted average exercise price of $14.00, $14.20 and $13.96. The following information applies to grants that are outstanding at December 31, 2002:

Options outstanding ----------------------------------------- Weighted- Number average Weighted- Range of outstanding remaining average exercise at contractual exercise prices period end life price -------------------- -------------- ------------- ------------ $ 3.22 11,250 0.3 years $ 3.22 $ 8.38 -- $12.25 950,687 2.3 years 11.96 $13.25 -- $18.33 461,125 2.5 years 17.43 --------- 1,423,062 $ 13.67 ========= ======

Options exercisable ------------------------------------- Number Weighted- Range of exercisable average exercise at exercise prices period end price ------------------------ ----------- --------- $ 3.22 11,250 $ 3.22 $ 8.38 -- $12.25 730,937 12.19 $13.25 -- $18.33 403,750 17.58 --------- 1,145,937 $14.00 ========= =====

The weighted average fair values of the options granted during 2002, 2001 and 2000 are $5.47, $6.34 and $7.76. 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 2002, 2001 and 2000; zero dividend yield; expected volatility of 40.8%, 47.3% and 42.5%, risk-free interest rate of 4.71%, 4.33% and 4.93% and expected lives of 6.85, 6.79 and 6.60 years. Shares Repurchased and Retired In October 2002, the Company authorized a new stock buy-back program under which the Company may repurchase up to $5,000,000 of its common stock on the open market. The Company is funding the repurchases with available funds. The repurchase program is not expected to last more than twelve months or until such amount of common stock is repurchased. F-12 A.S.V., INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 2002, 2001 AND 2000 NOTE I -- SHAREHOLDERS' EQUITY -- Continued In September 2001, the Company authorized a stock buy-back program under which the Company could repurchase up to $5,000,000 of its common stock in the open market. This program was replaced in 2002 by the above-mentioned program. During 2002, 2001 and 2000, in connection with repurchase agreements, the Company repurchased 159,405, 26,554 and 3,210 shares of stock for total consideration of $1,522,318, $270,960 and $37,387. NOTE J -- RELATED PARTY TRANSACTION The Company uses a public relations firm that is affiliated with one of the Company's directors. Total fees paid to this firm in 2002, 2001 and 2000 were approximately $188,000, $202,000 and $201,000. NOTE K -- CONSULTING AGREEMENT The Company entered into a five year consulting agreement and issued a ten year warrant for the purchase of 337,500 shares of the Company's common stock at $7.33 per share, expiring December 1, 2006. 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, 2002. The fair value of $2.24 per share was calculated on the date of grant using the average of the Black-Scholes and Shelton options-pricing models. Compensation costs were amortized over the life of the consulting agreement of $138,600 in 2001 and $151,200 in 2000. The compensation cost was fully amortized in 2001. NOTE L -- COMMITMENTS AND CONTINGENCIES Litigation The Company is subject to litigation in the normal course of its business. Management believes the outcome of such litigation will not have a material adverse effect on the operations or financial position of the Company. NOTE L -- COMMITMENTS AND CONTINGENCIES -- Continued Lease Residual Guarantee The Company has guaranteed certain residual amounts of equipment financed by customers, generally 25% of the financed amount at the end of four years. Should the Company be required to make this payment, it will take title of the financed equipment. As of December 31, 2002, the total amount of future residual payments the Company may be required to make in the event of nonpayment by the customer was approximately $185,000. The Company believes the value of the acquired equipment will equal or exceed the amount of residual payment. Accordingly, the Company does not anticipate any loss will be incurred should any residual payment need to be made. Note Receivable The Company has a note receivable from a customer which is included with accounts receivable (balance of approximately $633,000 at December 31, 2002). The note bears interest at prime plus 2% (effective rate of 6.25% at December 31, 2002). The note is due in 48 monthly installments beginning March 2002. If the customer is successful in raising a minimum of $2.5 million through a private placement offering, the Company has agreed to convert $500,000 of the note balance to shares of convertible preferred stock in the private placement. NOTE M -- MAJOR CUSTOMERS Other than sales to Caterpillar (see note H), the Company had sales to one unaffiliated customer in 2001, which accounted for 16% of sales. No other customers accounted for over 10% of sales in the years presented. At December 31, 2001, the accounts receivable balance from the unaffiliated customer was approximately $706,000. F-13 A.S.V., INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 2002, 2001 AND 2000 NOTE N -- SUPPLEMENTARY FINANCIAL INFORMATION (unaudited) The following table summarizes quarterly, unaudited financial data for 2002 and 2001.

2002 ------------------------------------------ Quarters 1st 2nd 3rd 4th -------- --------- --------- --------- --------- (Dollars in thousands, except per share data) Net sales $ 6,178 $14,714 $11,475 $11,870 Gross profit 1,425 3,472 2,122 1,603 Net earnings (366) 1,014 527 178 (loss) Net earnings (loss) per common share Basic (.04) .10 .05 .02 Diluted (.04) .10 .05 .02

2001 ------------------------------------------ Quarters 1st 2nd 3rd 4th -------- --------- --------- --------- --------- (Dollars in thousands, except per share data) Net sales $12,955 $14,226 $12,053 $10,848 Gross profit 2,207 2,048 2,205 2,597 Net earnings 204 91 93 368 Net earnings per common share Basic .02 .01 .01 .04 Diluted .02 .01 .01 .04

F-14 [GRANT THORNTON LOGO] REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors A.S.V., Inc. We have audited the accompanying consolidated balance sheets of A.S.V., Inc. as of December 31, 2002 and 2001, 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, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 consolidated financial statements referred to above, present fairly, in all material respects, the financial position of A.S.V., Inc. as of December 31, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. /S/ GRANT THORNTON LLP Minneapolis, Minnesota February 21, 2003 F-15 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE Board of Directors A.S.V., Inc. In connection with our audit of the consolidated financial statements of A.S.V., Inc. referred to in our report dated February 21, 2003, which is included in the Annual Report of A.S.V., Inc. on Form 10-K for the year ended December 31, 2002, we have also audited Schedule II for each of the three years in the period ended December 31, 2002. In our opinion, this schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be set forth therein. /S/ GRANT THORNTON LLP Minneapolis, Minnesota February 21, 2003 S-1 A.S.V., INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

BALANCE ADDITIONS BALANCE BEGINNING CHARGED TO END OF ACCRUED WARRANTIES OF PERIOD EXPENSE DEDUCTIONS (A) PERIOD ------------------ --------- ------- -------------- ------ 2002 $500,000 $1,399,550 $1,299,550 $600,000 2001 $450,000 $1,278,816 $1,228,816 $500,000 2000 $450,000 $964,947 $964,947 $450,000

(A) Warranty credits issued S-2 EXHIBIT INDEX

EXHIBIT METHOD OF FILING ------- ---------------- 11 Statement re: Computation of Per Share Earnings Filed herewith electronically 23 Consent of Grant Thornton LLP, independent certified public accountants Filed herewith electronically 99.1 Certification of the Chief Executive Officer Filed herewith electronically 99.2 Certification of Chief Financial Officer Filed herewith electronically