##### Table of Contents



UNITED
STATESSECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2006
 Commission file number: 0-25620
 A.S.V., Inc.
  Minnesota
    
    41-1459569(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 840 Lily Lane 
P.O. Box 5160
Grand Rapids, MN 55744
    
    (218) 327-3434(Address of principal executive offices, 
including zip code)
    
    (Registrants telephone number,
including area code)
 Not Applicable  (Former name, former address and former fiscal year, if changed since last report)
 þ o
  o þ o
 o þ




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TABLE OF CONTENTS  PART I  FINANCIAL INFORMATIONITEM 1  FINANCIAL STATEMENTSITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 4. CONTROLS AND PROCEDURESPART II  OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGSITEM 1A. RISK FACTORSITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSITEM 3. DEFAULTS UPON SENIOR SECURITIESITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSITEM 5. OTHER INFORMATIONITEM 6. EXHIBITSSIGNATURESStatement re: Computation of Per Share EarningsCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906    Table of Contents  
 
 PART I  FINANCIAL INFORMATION
ITEM 1  FINANCIAL STATEMENTS
 A.S.V., INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands, except share data)
 September 30,
    
    
    December 31,2006
    
    
    2005ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    19,934
    
    
    $
    35,517Short-term investments
    
    
    220
    
    
    
    1,224Accounts receivable, netTrade
    
    
    40,694
    
    
    
    33,706Caterpillar Inc.
    
    
    9,823
    
    
    
    10,087Inventories
    
    
    66,086
    
    
    
    52,362Deferred income taxes
    
    
    4,175
    
    
    
    3,545Other current assets
    
    
    966
    
    
    
    1,083Total current assets
    
    
    141,898
    
    
    
    137,524PROPERTY AND EQUIPMENT, net
    
    
    27,825
    
    
    
    20,907LONG-TERM INVESTMENTS
    
    
    14,170
    
    
    
    7,995OTHER NON-CURRENT ASSET
    
    
    370
    
    
    
    535INTANGIBLES, net
    
    
    7,797
    
    
    
    7,874GOODWILL
    
    
    8,386
    
    
    
    8,386$
    200,446
    
    
    $
    183,221LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIESCurrent portion of long-term liabilities
    
    $
    40
    
    
    $
    71Accounts payable
    
    
    17,538
    
    
    
    15,498Accrued liabilitiesWarranties
    
    
    5,942
    
    
    
    5,077Other
    
    
    2,845
    
    
    
    2,195Income taxes payable
    
    
    
    
    
    
    855Total current liabilities
    
    
    26,365
    
    
    
    23,696LONG-TERM LIABILITIES, less current portion
    
    
    44
    
    
    
    138DEFERRED INCOME TAXES
    
    
    1,450
    
    
    
    1,300COMMITMENTS AND CONTINGENCIES
    
    
    
    
    
    
    SHAREHOLDERS EQUITYCapital stock, $.01 par value:Preferred stock, 5,000,000 shares authorized; no shares issued or outstanding
    
    
    
    
    
    
    Common stock, 70,000,000 shares authorized; shares issued and outstanding -
26,673,220 in 2006; 26,988,187 in 2005
    
    
    267
    
    
    
    270Additional paid-in capital
    
    
    87,215
    
    
    
    92,327Retained earnings
    
    
    85,105
    
    
    
    65,490172,587
    
    
    
    158,087$
    200,446
    
    
    $
    183,221
  2




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A.S.V., INC.
 CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(In thousands, except earnings per share data)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net salesTrade
    
    $
    42,209
    
    
    $
    42,013
    
    
    $
    133,895
    
    
    $
    109,820Caterpillar
    
    
    20,789
    
    
    
    27,206
    
    
    
    66,129
    
    
    
    69,271Total net sales
    
    
    62,998
    
    
    
    69,219
    
    
    
    200,024
    
    
    
    179,091Cost of goods sold
    
    
    49,143
    
    
    
    51,932
    
    
    
    152,869
    
    
    
    135,179Gross profit
    
    
    13,855
    
    
    
    17,287
    
    
    
    47,155
    
    
    
    43,912Operating expenses:Selling, general and administrative
    
    
    5,817
    
    
    
    4,326
    
    
    
    16,564
    
    
    
    12,010Research and development
    
    
    406
    
    
    
    453
    
    
    
    1,185
    
    
    
    1,321Operating income
    
    
    7,632
    
    
    
    12,508
    
    
    
    29,406
    
    
    
    30,581Other income (expense)Interest income
    
    
    384
    
    
    
    312
    
    
    
    1,287
    
    
    
    941Interest expense
    
    
    
    
    
    
    (30
    )
    
    
    
    
    
    
    (86
    )Other, net
    
    
    12
    
    
    
    1
    
    
    
    22
    
    
    
    52Income before income taxes
    
    
    8,028
    
    
    
    12,791
    
    
    
    30,715
    
    
    
    31,488Income taxes
    
    
    2,950
    
    
    
    4,790
    
    
    
    11,100
    
    
    
    11,760NET EARNINGS
    
    $
    5,078
    
    
    $
    8,001
    
    
    $
    19,615
    
    
    $
    19,728Net earnings per common shareBasic
    
    $
    .19
    
    
    $
    .30
    
    
    $
    .73
    
    
    $
    .74Diluted
    
    $
    .19
    
    
    $
    .29
    
    
    $
    .72
    
    
    $
    .71Weighted average number of common shares outstandingBasic
    
    
    26,669,269
    
    
    
    26,849,654
    
    
    
    26,918,270
    
    
    
    26,787,977Diluted
    
    
    26,871,671
    
    
    
    27,800,299
    
    
    
    27,424,305
    
    
    
    27,684,154
  3




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A.S.V., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
 Nine months ended September 30,2006
    
    
    2005Cash flows from operating activities:Net earnings
    
    $
    19,615
    
    
    $
    19,728Adjustments to reconcile net earnings to net cash
provided by operating activities:Depreciation
    
    
    2,112
    
    
    
    1,505Amortization
    
    
    77
    
    
    
    77Deferred income taxes
    
    
    (480
    )
    
    
    (900
    )Stock-based compensation expense
    
    
    2,198
    
    
    
    Tax benefit from stock option exercises
    
    
    1,200
    
    
    
    860Changes in assets and liabilitiesAccounts receivable
    
    
    (6,724
    )
    
    
    (7,412
    )Inventories
    
    
    (13,724
    )
    
    
    (15,827
    )Other assets
    
    
    282
    
    
    
    562Accounts payable
    
    
    2,040
    
    
    
    2,961Accrued liabilities
    
    
    1,515
    
    
    
    2,216Income taxes payable
    
    
    (855
    )
    
    
    1,865Net cash provided by operating activities
    
    
    7,256
    
    
    
    5,635Cash flows from investing activities:Purchase of property and equipment
    
    
    (9,030
    )
    
    
    (10,978
    )Purchase of short-term investments
    
    
    (116
    )
    
    
    (2,350
    )Purchase of long-term investments
    
    
    (6,175
    )
    
    
    (2,081
    )Redemption of short-term investments
    
    
    1,120
    
    
    
    9,563Net cash used in investing activities
    
    
    (14,201
    )
    
    
    (5,846
    )Cash flows provided by financing activities:Principal payments on long-term liabilities
    
    
    (125
    )
    
    
    (147
    )Costs from issuance of common stock
    
    
    
    
    
    
    (36
    )Proceeds from exercise of stock options, net
    
    
    1,538
    
    
    
    1,742Retirement of common stock
    
    
    (10,051
    )
    
    
    (110
    )Net cash provided by (used in) financing activities
    
    
    (8,638
    )
    
    
    1,449Net increase (decrease) in cash and cash equivalents
    
    
    (15,583
    )
    
    
    1,238Cash and cash equivalents at beginning of period
    
    
    35,517
    
    
    
    27,438Cash and cash equivalents at end of period
    
    $
    19,934
    
    
    $
    28,676Supplemental disclosure of cash flow information:Cash paid for interest
    
    $
    
    
    
    $
    87Cash paid for income taxes
    
    $
    11,501
    
    
    $
    9,894
  4




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A.S.V., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 September 30, 2006
 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Principles of Consolidation
  Revenue Recognition
  Research and Development
  Interim Financial Information
  Warranties
   Three Months ended September 30,2006
    
    
    2005(In thousands)Balance, beginning of period
    
    $
    6,013
    
    
    $
    3,486Expense for new warranties issued
    
    
    1,332
    
    
    
    1,198Warranty claims
    
    
    (1,403
    )
    
    
    (518
    )Balance, end of period
    
    $
    5,942
    
    
    $
    4,166
 5




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##### Table of Contents



A.S.V., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED
(UNAUDITED)
 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  continued
 Net Earnings Per Common Share
   Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Common stock equivalents
    
    
    202,402
    
    
    
    950,645
    
    
    
    506,035
    
    
    
    896,177Anti-dilutive options
    
    
    564,163
    
    
    
    
    
    
    
    328,554
    
    
    
    109,833
 Reclassification
  NOTE
2. INVENTORIES
  September 30,
    
    
    December 31,2006
    
    
    2005(In thousands)Raw materials, service parts
and work-in-process
    
    $
    53,676
    
    
    $
    42,122Finished goods
    
    
    11,245
    
    
    
    8,922Used equipment held for resale
    
    
    1,165
    
    
    
    1,318$
    66,086
    
    
    $
    52,362
 NOTE 3. STOCK-BASED COMPENSATION
  Share-Based Payment Accounting for Stock Issued
to Employees,
 6




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A.S.V., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED
(UNAUDITED)
 NOTE 3. STOCK-BASED COMPENSATION continued
  Three months ended
    
    
    Nine months endedSeptember 30, 2006
    
    
    September 30, 2006(In thousands, except share data)Income from continuing operations
before income taxes
    
    $
    775
    
    
    $
    2,198Income from continuing operations
    
    $
    775
    
    
    $
    2,198Net income
    
    $
    490
    
    
    $
    1,403Earnings per share:Basic and Diluted
    
    $
    .02
    
    
    $
    .05
    7




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A.S.V., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED
(UNAUDITED)
 NOTE 3. STOCK-BASED COMPENSATION continued
  Three months ended
    
    
    Nine months endedSeptember 30, 2005
    
    
    September 30, 2005(In thousands, except share data)Net earnings, as reported
    
    $
    8,001
    
    
    $
    19,728Less total stock-based employee
compensation determined under
fair value methods for all awards,
net of income taxes
    
    
    (420
    )
    
    
    (1,248
    )Pro forma net earnings
    
    $
    7,581
    
    
    $
    18,480Earnings per share:Basic  as reported
    
    $
    .30
    
    
    $
    .74Basic  pro forma
    
    $
    .28
    
    
    $
    .69Diluted  as reported
    
    $
    .29
    
    
    $
    .71Diluted  pro forma
    
    $
    .27
    
    
    $
    .67
  Nine months endedSeptember 30,2006
    
    
    2005Risk-free interest rate
    
    
    4.73
    %
    
    
    4.09
    %Expected volatility
    
    
    34.95
    %
    
    
    39.45
    %Expected life (in years)
    
    
    3.75
    
    
    
    6.05Dividend yield
    
    
    
    
    
    
    
  8




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A.S.V., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED
(UNAUDITED)
 NOTE 3. STOCK-BASED COMPENSATION continued
  WeightedWeighted-
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Price
    
    
    Life (Years)
    
    
    ValueOutstanding at December 31, 2005
    
    
    1,950,520
    
    
    $
    10.14Granted
    
    
    197,500
    
    
    
    30.61Exercised
    
    
    (168,670
    )
    
    
    8.23Canceled
    
    
    (7,000
    )
    
    
    17.25Outstanding at March 31, 2006
    
    
    1,972,350
    
    
    $
    12.33Granted
    
    
    75,000
    
    
    
    29.59Exercised
    
    
    (8,887
    )
    
    
    11.49Canceled
    
    
    (500
    )
    
    
    32.22Outstanding at June 30, 2006
    
    
    2,037,963
    
    
    $
    13.07Granted
    
    
    
    
    
    
    Exercised
    
    
    (8,325
    )
    
    
    6.03Canceled
    
    
    (4,875
    )
    
    
    21.88Outstanding at September 30, 2006
    
    
    2,024,763
    
    
    $
    13.08
    
    
    
    3.81
    
    
    $
    9,656,000Exercisable at September 30, 2006
    
    
    1,020,024
    
    
    $
    8.42
    
    
    
    3.32
    
    
    $
    7,128,000
   Options Outstanding
    
    
    Options ExercisableWeighted-Number
    
    
    average
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Range of
    
    outstanding
    
    
    remaining
    
    
    average
    
    
    Number
    
    
    averageexercise
    
    at
    
    
    contractual
    
    
    exercise
    
    
    exercisable at
    
    
    exerciseprices
    
    period end
    
    
    life (years)
    
    
    price
    
    
    period end
    
    
    price$4.04-6.06
    
    
    852,850
    
    
    
    3.12
    
    
    $
    4.57
    
    
    
    616,611
    
    
    $
    4.63$6.13-9.19
    
    
    90,300
    
    
    
    0.99
    
    
    
    6.67
    
    
    
    90,300
    
    
    
    6.67$14.45-21.67
    
    
    775,113
    
    
    
    4.68
    
    
    
    16.73
    
    
    
    304,113
    
    
    
    16.22$22.60-32.22
    
    
    306,500
    
    
    
    4.32
    
    
    
    29.40
    
    
    
    9,000
    
    
    
    22.602,024,763
    
    
    
    
    
    
    $
    13.08
    
    
    
    1,020,024
    
    
    $
    8.42
 9




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A.S.V., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED
(UNAUDITED)
 NOTE 4. BUILDING EXPANSION PROJECT
  NOTE 5. STOCK BUYBACK PROGRAM
   NOTE 6. NEW ACCOUNTING PRONOUNCEMENTS
 Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statements
 Fair Value Measurements Fair Value Measurement
 Accounting for Uncertainty in Income Taxes: Accounting for Uncertainty in Income Taxesan interpretation of
FASB Statement No. 109
 10




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ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
 Overview
   
    
    We believe there is a greater acceptance of rubber track machines in the
marketplace as users experience the benefits that a rubber track machine can
provide over a standard wheeled machine.
    
    The number of companies entering into the rubber track machine market has
increased in the last few years, thereby contributing to the increased awareness
and market acceptance of the products.
    
    We have increased our number of product offerings over the past few years
thereby making it easier to attract prospective dealers to carry our Posi-Track
product line. In addition, the number of dealers selling our Posi-Track product
line has increased over the past few years.
  Critical Accounting Policies
   Revenue Recognition and Accounts Receivable. i.e.
 11




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Inventories.
 Warranties.
 Income Taxes
 Stock-Based Compensation
 Results of Operations
   Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Gross profit
    
    
    22.0
    
    
    
    25.0
    
    
    
    23.6
    
    
    
    24.5Selling, general and administrative
    
    
    9.2
    
    
    
    6.2
    
    
    
    8.3
    
    
    
    6.7Research
and development
    
    
    0.7
    
    
    
    0.7
    
    
    
    0.6
    
    
    
    0.7Operating income
    
    
    12.1
    
    
    
    18.1
    
    
    
    14.7
    
    
    
    17.1Net earnings
    
    
    8.1
    
    
    
    11.6
    
    
    
    9.8
    
    
    
    11.0
 For the three months ended September 30, 2006 and 2005.
 Net Sales.
 12




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Gross Profit.
 Selling, General and Administrative.
 Research and Development.
 Other Income (Expense).
 Net Earnings.
 13




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For the nine months ended September 30, 2006 and 2005.
 Net Sales.
 Gross Profit.
 Selling, General and Administrative.
 Research and Development.
 14




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Other Income (Expense).
 Net Earnings.
 Liquidity and Capital Resources
  Customer Note Receivable
  Off-Balance Sheet Arrangements
  Facility Expansion
  15




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Stock Buyback Programs
    Stock-Based Compensation
  Share-Based Payment
 Accounting for Stock Issued to Employees,
    Quarter Ending December 31, 2006
    
    $
    771,000Year Ending December 31, 2007
    
    $
    2,590,000Year Ending December 31, 2008
    
    $
    1,567,000Year Ending December 31, 2009
    
    $
    769,000Year Ending December 31, 2010
    
    $
    143,000
 16




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New Accounting Pronouncements
 Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statements.
 Fair Value Measurements Fair Value Measurements
 Accounting for Uncertainty in Income Taxes: Accounting for Uncertainty in Income Taxesan interpretation of
FASB Statement No. 109
 Cash Requirements
  Forward-Looking Statements
  17




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
 Changes in Internal Controls
 
 PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  18




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ITEM 6. EXHIBITS
 ExhibitNumber
    
    Description3.1
    
    Third Restated Articles of Incorporation of the Company (a)3.2
    
    Bylaws of the Company (b)3.3
    
    Amendment to Bylaws of the Company adopted April 13, 1999 (c)4.1
    
    Specimen form of the Companys Common Stock Certificate (b)11
    
    Statement re: Computation of Per Share Earnings31.1
    
    Certification of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    Certification of the Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2
    
    Certification of the Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 
 (a)
    
    Incorporated by reference to Exhibit 3.1 to the Companys Quarterly Report
on Form 10-Q for the quarter ended June 30, 2006 (File No. 0-25620) filed
electronically August 9, 2006.(b)
    
    Incorporated by reference to Exhibit 3.2 to the Companys
Registration Statement on Form SB-2 (File No. 33-61284C) filed July 7, 1994.(c)
    
    Incorporated by reference to Exhibit 3.3 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. 19




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SIGNATURES
  A.S.V., Inc.Dated: November 6, 2006
    
    By
    
    /s/ Richard A. BensonRichard A. BensonChief Executive Officer(duly authorized officer)Dated: November 6, 2006
    
    By
    
    /s/ Thomas R. KargesThomas R. KargesChief Financial Officer(principal financial and accounting officer)
 20