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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended March 31, 1999 or
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission File Number: 0-18607
ARCTIC CAT INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1443470
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
601 Brooks Avenue South, Thief River Falls, Minnesota 56701
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (218) 681-8558
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.01 par value.
Preferred Stock Purchase Rights.
Indicate by check mark whether the registrant (1) has filed all reports
required 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.
Yes X 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 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. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of June 16, 1999 (based on the closing sale price of the Common
Stock on such date) was approximately $159,526,608.
At June 16, 1999, 18,362,775 shares of Common Stock and 7,560,000 shares of
Class B Common Stock of the Registrant were outstanding.
Documents Incorporated by Reference:
Portions of the Company's Proxy Statement for its Annual Meeting of
Shareholders currently scheduled to be held on August 5, 1999 is incorporated
by reference into Part III of this Form 10-K.
PART I
Item 1.Business
Arctic Cat Inc. (the "Company"), based in Thief River Falls, Minnesota,
operates in a single industry segment which designs, engineers , manufactures
and markets snowmobiles and all-terrain vehicles (ATVs) under the Arctic Cat
brand name, and personal watercraft (PWC) under the Tigershark brand name, as
well as related parts, garments and accessories. The Company markets its
products through a network of independent dealers located throughout the
contiguous United States and Canada, and through distributors representing
dealers in Alaska, Europe, the Middle East, Asia and other international
markets. The Arctic Cat brand name has existed for more than 30 years and is
among the most widely recognized and respected names in the snowmobile
industry. The Company trades on the Nasdaq National Market under the symbol
ACAT.
Industry Background
Snowmobiles. The snowmobile, developed in the 1950's, was originally
intended to be used as a utility vehicle, but today the overwhelming majority
of the industry's sales are for recreational use. Between the late 1950's and
early 1970's, the industry expanded dramatically reaching a peak of over 100
manufacturers and a high of almost 495,000 units sold to retail customers in
North America in 1971. Gasoline shortages, significant gasoline price
increases, high interest rates and recessions in the middle to late 1970's
through the early 1980's contributed to a significant industry downsizing.
Today the number of major industry participants has decreased to four.
Snowmobile sales to retail customers in North America were approximately
207,000 units for the 1999 model year. The Company believes these sales were
due, in part, to a number of factors such as an expanded system of public and
private snowmobile trails, a rapidly growing market among the "baby boomer"
generation, product innovations that have improved ride, performance and
handling, organized snowmobile clubs which promote the sport and ongoing
snowmobile replacement. Since 1971, approximately 5,707,000 snowmobiles have
been sold in North America, and the Company estimates that over 85 percent of
current industry sales are to retail customers who own, or previously owned,
a snowmobile.
The industry consolidation that occurred in the mid-1970's through the
early 1980's has left four major participants in the North American market:
Arctic Cat, Bombardier (Ski-Doo), Polaris and Yamaha. The Company believes the
industry consolidation has contributed to improved industry profit margins and
closer monitoring of industry inventory levels. The Company believes there are
currently more significant barriers to entry into the snowmobile market than
existed in the 1970's. These barriers include increased brand loyalty,
long-standing dealer and distributor networks and relationships, limited engine
sources, manufacturing and engineering expertise and higher initial start-up
costs.
Information in this document regarding the worldwide and North American
snowmobile market is derived from independent sources. Non-North American
sales for the industry are estimated to account for less than 10% of worldwide
sales; specific yearly information, with respect to worldwide sales, is not
considered by the Company as sufficiently consistent or reliable for
presentation in this report. All industry information is based on a model year
ending March 31, which is the same as the Company's fiscal year-end, unless
otherwise stated.
Personal Watercraft (PWC). The PWC and the related industry evolved from
the one person stand-up craft that was developed in the mid 1960's to the two
and three person sit-down models that are most popular today. PWC are up to
twelve and one half feet in length and are propelled by jet pumps. They are
ridden for leisure on lakes, rivers, oceans and major waterways. In 1998,
U. S. retail sales were approximately 129,000 units. The most rapidly growing
segment of personal watercraft models are the 3-person models, comprising 51%
of the market. They are designed to accommodate a driver and up to two
passengers and can pull skiers or water toys. The two-person watercraft and
one-person watercraft comprise approximately 47.5 percent and 1.5 percent of
the market, respectively. Major competitors in the industry include Yamaha,
Bombardier (Sea-Doo), Polaris and Kawasaki.
All-Terrain Vehicles (ATVs). The ATV industry evolved from the
three-wheel model that was developed in the early 1970s to the four-wheel
models that are sold today. ATVs are generally one person vehicles used for a
variety of off-road uses. The most popular ATV use is general recreation,
followed by hunting/fishing, farm/ranch use, hauling/towing, transportation,
and commercial uses. From 1970 to 1986, the number of three and four-wheel
ATVs sold in the United States continued to grow until peaking in 1986 with
approximately 535,000 units sold during that calendar year. From 1987 to 1991,
the number of ATVs sold declined to a low of approximately 151,000 units.
Since 1992, sales have gradually climbed until reaching approximately 432,000
units in 1998. Major competitors in the industry include Honda, Yamaha,
Kawasaki, Polaris and Suzuki.
Products
Snowmobiles. The Company produces a full line of snowmobiles, currently
consisting of 32 models, marketed under the Arctic Cat brand name, and designed
to satisfy various market niches. The 1999 Arctic Cat models carry suggested
U.S. retail prices ranging from $3,599 to $9,999, excluding a children's model
which is sold at a suggested U.S. retail price of $1,349. Arctic Cat
snowmobiles are sold in the United States, Canada, Scandinavia and other
international markets.
The Company's 2000 year snowmobile models are categorized as High
Performance, Trail Performance, Powder, Luxury Touring, Family Trail, Family
Touring and Sport Utility. The Company markets: High Performance Arctic Cat
snowmobiles under the names Thundercat, ZRT, and ZR; Trail Performance Arctic
Cat snowmobiles under the name ZL; Powder snowmobiles under the names Powder
Special and Thundercat Mountain Cat; Luxury Touring models under the names
Triple Touring and Pantera; Family Trail snowmobiles under the name Z; Family
Touring snowmobiles under the name Panther; and Sport Utility models under the
name Bearcat. In addition, to encourage family involvement in snowmobiling,
the Company offers two snowmobiles designed especially for small children,
marketed under the Z120 and Kitty Cat name.
The Company believes the Arctic Cat brand name enjoys a premier image
among snowmobile enthusiasts and that its snowmobiles have a long-standing
reputation for quality, performance, style, comfort, ride and handling.
Arctic Cat snowmobiles offer a wide range of standard and optional features
which enhance the operation, riding comfort and performance. Such features
include hydraulic disc brakes and a technologically advanced front suspension.
Arctic Cat is the only company in the industry that offers an electronic fuel
injection (EFI) system on its snowmobiles. In 1999, the Company developed a
new corporate brand "ACT"(TM) (Arctic Cat Technology) in order to recognize
and leverage its industry-leading technology and engineering. The above named
features as well as other future exclusive Arctic Cat innovations will carry
this new ACT brand. Additional features on certain models include electronic
engine gauges and indicator lights, electric starters, handlebar and thumb
warmers, reverse gears, 2-up seats, mirrors, custom windshields, hitches and
luggage racks as well as other features. These features may also be purchased
separately from independent Arctic Cat dealers as accessories.
Arctic Cat's on-going commitment to both high performance and its retail
customers has led the Company in a series of "firsts". In 1988, the Company
and Suzuki introduced a new line of compact, lightweight, liquid-cooled
twin cylinder engines. In 1990, the Prowler was the first snowmobile to offer
a new double-wishbone suspension. With its high performance 1991 Wildcat model,
the Company became the first in the industry to offer a 700cc electronic fuel
injection engine. In 1992, the Arctic FasTrack, extra-long travel rear
suspension was introduced on several high performance models. In 1993, the
Company became the first to offer a 900cc, 3 cylinder snowmobile, called the
Thundercat. In 1997, Arctic Cat offered the first batteryless EFI system.
Arctic Cat believes that its leadership in innovation, technology, style and
performance has been demonstrated by its models being voted "Snowmobile of the
Year" by various snowmobile media with respect to the EL Tigre 6000 in 1984,
the Wildcat 650 in 1988, the Prowler in 1990, the EXT Special in 1991, the
ZR 440 in 1994, the Powder Special EFI and the ZR 600 EFI in 1998. In 1999,
the ZR 500 EFI received the "Best in Class" award and the Powder Special 500
EFI received "Sport Mountain Sled of the Year".
Arctic Cat believes that it has been able to grow in the worldwide
snowmobile retail sales due to its emphasis on new product development.
A new model has been introduced by the Company nearly each year since its
formation, and in recent years new models have been among the Company's best
sellers. In the 1999 model year, approximately 85 percent of the Company's
snowmobile sales were from models or model variations not available three
years earlier.
Personal Watercraft (PWC). Similar to Arctic Cat snowmobiles, Tigershark
PWC are a blend of performance, durability and style, with attention to comfort
and economy. In fiscal 1999, the Company offered seven models to cover major
market segments in the current PWC market ranging in U.S. retail price from
$4,899 to $8,299. For the High Performance market, the Company offers the TS
770 R and TS 1100 R, two-passenger models designed for superior performance and
optimum power. Three Family Touring models are available, including the TS 770
L, TS 900 L and TS 1100 Li, three-passenger models designed for ample power and
handling with the capacity to tow skiers or water toys. For the Economy market
the Company offers the TS 640 and TS 770 both two-passenger models built for
exceptional quality and stability.
The Company believes Tigersharks have been well received in the market and
continues to maintain its reputation for a dry, stable ride. Watercraft World
has, on numerous occasions, recognized the Tigershark by selecting the 1993
Tigershark and the 1994 and 1995 Montego Deluxe as the "Best Buy" in the
Recreational Runabout category and by naming the Daytona 770 as the "Editors
Choice Award" in 1996. During fiscal 1998, the Tigershark was named "Official
Personal Rescue Craft" of the American Power Boat Association Rescue Teams.
During 1999, the TS 1100 Li was named "Innovation of the Year" by WaterWorld.
All-Terrain Vehicles (ATVs). In December 1995, the Company introduced its
first ATV, the Bearcat 454 4X4, which provided many industry-leading features
such as exclusive rocker-shifter, full floor boards, and a 50-inch wheelbase.
Since that time, the Arctic Cat ATV line has grown to include six models: the
Arctic Cat 500 4x4, Arctic Cat 400 4x4, Arctic Cat 400 2x4, Arctic Cat 300 4x4,
Arctic Cat 300 2x4, and Arctic Cat 250 2x4. These heavy duty models feature
aspects ensuring ease of handling and agility over rough terrain. Features like
independent front suspensions, hydraulic disc brakes, hi-low range and a
plentiful 4.25 gallon fuel tank, all make Arctic Cat ATVs consumer friendly.
The 1999 Arctic Cat ATV models carry suggested U.S. retail prices ranging from
$4,399 to $6,449.
Arctic Cat believes its ATVs are renown for their power and durability
and are well received within the market. For model year 1998, the Arctic Cat
300 was named "Editors Choice" by Sports Afield and "Best In Class" by ATV
Magazine. For model year 1999, ATV Magazine named the 300 4x4 as "Best in
Class" and the 500 4x4 as the Editors Pick for "Best-for-Work" machine.
Parts, Garments and Accessories. The Company is the exclusive provider of
genuine Arctic Cat snowmobile, ATV and Tigershark, parts, garments and
accessories. Included are replacement parts for Arctic Cat snowmobiles,
items to upgrade a snowmobile such as an electric start kit, a reverse gear kit
and a two-speed transmission kit, as well as accessories such as mirrors,
windshields, luggage racks, backrests, two-person seats, saddlebags, bumpers,
gauges, tail light protectors and snowmobile covers. Other items include
maintenance supplies such as oil and fuel additives, clutch and carburetor
parts, track studs and carbide runners, shocks and springs, accessory fuel
tanks, vinyl protectant, touch-up paint, hood and windshield cleaners,
windshield defogger and engine storage preservers. Tigershark parts and
accessories include impellers, grates, bilge pumps, batteries, covers, mirrors,
oil and beach dollies. Arctic Cat ATV parts and accessories include winch
kits, plow kits, portable lights, utility bags as well as maintenance supplies
such as brake fluid, fuel de-icer, anti-freeze, and fuel stabilizers. The
Company also sells generators under the "Arctic Cat" label.
The Company offers snowmobile garments for adults and children under the
"Arcticwear" label. Suits, jackets, pants and accessory garments are offered
in a wide variety of styles and sizes combining fashion with functional utility
designed for the demands of snowmobiling and other winter activities. The
Arcticwear line of clothing also includes crew neck sweaters, pull-overs,
riding gloves, hats, fog-resistant face shields, helmets, boots, duffel bags,
jerseys and T-shirts. The colors and designs of many of these items are
coordinated with specific Arctic Cat snowmobile models.
The Company offers Tigershark garments under the "Sharkwear" label.
Included in the stylish line are neoprene and lycra wet suits, goggles,
sunglasses, coolers, duffle bags, water shoes and gloves, T-shirts,
sweatshirts, jackets, golf shirts, shorts and towels.
The Company offers ATV garments under the "Arcticwear ATV Gear" label.
This line of clothing is geared toward function and comfort and includes suits,
jackets, gloves, boots, helmets, sweatshirts, T-shirts, and caps.
The Company has in the past, and may in the future, consider adding other
products consistent with its manufacturing and marketing expertise.
Manufacturing and Engineering
Arctic Cat snowmobiles and ATVs and Tigershark PWC are manufactured at
the Company's facilities in Thief River Falls, Minnesota. The Company produces
and/or paints hoods and other parts for its Arctic Cat snowmobiles and PWC in
Madison, South Dakota. The Company also has a facility in Bucyrus, Ohio which
houses its service parts, garments and accessories distributor operations. The
Company has strategically identified specific core manufacturing competencies
for vertical integration and has chosen outside vendors to provide other parts.
The Company has developed relationships with selected high quality vendors in
order to obtain access to particular capabilities and technologies outside the
scope of the Company's expertise. The Company designs component parts often in
cooperation with its vendors, contracts with them for the development of
tooling, and then enters into agreements with these vendors to purchase
component parts manufactured utilizing the tooling. In its vertically
integrated operations, the Company manufactures hoods, hulls, decks, foam seats
and seat covers and the Company machines, welds and paints other components.
The Company then completes the total assembly of its products at its facilities
in Thief River Falls. Manufacturing operations include digital and computer-
automated equipment to speed production, reduce costs and improve the quality,
fit and finish of every product. The Company believes that all raw materials
used in its manufacturing process and all component parts, with the exception
of engines and carburetors, are available from multiple alternative vendors on
short notice at competitive prices.
Since the Company's inception, its snowmobile engines have been
manufactured by Suzuki Motor Corporation ("Suzuki") pursuant to a supply
agreement which is automatically renewed annually unless terminated. While
notice of termination of the supply agreement may be given annually, effective
cessation of supply would take at least one model year due to the contractual
notice requirement. The Company's PWC and ATV models also incorporate engines
manufactured by Suzuki.
The Company and Suzuki have enjoyed an excellent relationship since the
Company's inception. Suzuki purchased approximately 31% of the Company's then
outstanding capital stock in July 1988, prior to the Company's initial public
offering, and is currently the Company's largest shareholder with approximately
29% of the Company's outstanding capital stock. If Suzuki were ever to cease
supplying engines to the Company, such an interruption could materially and
adversely affect production. The Company believes it could take up to two
model years for a new engine supplier to be in a position to manufacture the
Company's specially designed engines.
Since the Company began production, it has followed a build-to-order
policy to control snowmobile, PWC, and ATV inventory levels. Under this
policy, the Company only manufactures a number of machines equivalent to the
orders received from its dealers and distributors, plus a small number of
uncommitted machines used for new dealer development, in-house testing and
miscellaneous promotional purposes. Speculative production and excessive
inventories in certain periods during the 1970's and early 1980's contributed
to significant price discounting in the snowmobile industry. Since the
consolidation of the snowmobile industry in the mid-1970's through the early
1980's, speculative production in the industry has been reduced and dealer
inventories have remained consistently below historic peak levels. The Company
believes dealer inventory levels of non-current Arctic Cat model snowmobiles,
PWC and ATVs have regularly been and are currently among the lowest in the
industry.
Most sales of snowmobiles to retail customers begin in the early fall and
continue during the winter. Orders by dealers and distributors for each year's
production are placed in the spring following a series of dealer and
distributor meetings. Snowmobiles are build-to-order commencing in the spring
and continuing through late autumn or early winter. Since its inception, the
Company has experienced a low level of snowmobile order cancellations.
Approximately 30% to 40% of the Company's snowmobiles have historically been
sold to retail customers prior to the end of October, long before the season's
snow conditions are known.
Sales of PWC to retail customers generally begin in the spring and
continue during the summer. Orders by dealers and distributors for the
Company's model line are placed in the fall, following dealer and
distributor meetings. The PWC are then built to order commencing in
the fall and continuing through the early spring.
Retail sales of ATVs occur throughout the year with seasonal highs
occurring in the spring and fall. As with the snowmobiles and PWC, the Company
produces ATV units on a build-to-order basis. The Company builds ATVs
throughout the year to coincide with dealer and consumer demands.
The Company is committed to an ongoing engineering program dedicated to
innovation and to continued improvements in the quality and performance of its
products as well as product diversification. The Company currently employs 138
individuals in the design and development of new and existing products, with an
additional 41 individuals directly involved in the testing of snowmobiles, PWC,
and ATVs in normal and extraordinary conditions at the Company's test track.
In addition, snowmobiles, PWC, and ATVs are tested in conditions and locations
similar to those in which they are used. The Company uses computer-aided
design and manufacturing systems to shorten the time between initial concept
and final production. For 1997, 1998 and 1999, the Company spent approximately
$9,911,000, $10,273,000 and $9,545,000, or 2.1%, 2.0% and 2.0%, of net sales
for the year, on engineering, research and development, all of which was
Company sponsored. In addition, utilizing their particular expertise, the
Company's vendors regularly test and apply new technologies to the design and
production of component parts.
Sales and Marketing
The Company's products are currently sold through an extensive network of
independent dealers located throughout the contiguous United States and Canada,
and through distributors representing dealers in Alaska, Europe, the Middle
East, Asia and other international markets. See Note K of Notes to
Consolidated Financial Statements for discussion of international operations.
To promote new dealerships and to service its existing dealer network, the
Company also employs sales representatives throughout the United States and
Canada to represent its products.
The Company's dealers enter into an annual renewable contract and are
required to maintain status as an authorized dealer in order to continue
selling the Company's products. To obtain and maintain such status, dealers
are required to order a sufficient number of snowmobiles, PWC, and/or ATVs to
service their market area adequately. In addition, the dealers must perform
service on these units and maintain satisfactory service performance levels,
and their mechanics must complete special training provided by the Company.
Dealers are also required to carry an inventory of genuine Arctic Cat and/or
Tigershark parts and accessories. As is typical in the industry, most of the
Company's dealers also sell some combination of motorcycles, marine products,
lawn and garden products and other related products. Approximately 50% of the
Company's dealers sell only Arctic Cat snowmobiles, versus multiple brands of
snowmobiles. Relations with dealers are generally considered excellent.
The Company utilizes exclusive distributors outside the contiguous 48
United States and Canada to take advantage of their knowledge and experience
in their respective markets and to increase market penetration of its
products. Each distributor is subject to a distribution agreement which
stipulates an exclusive territory for a term ranging from one to three years
with specified minimum sales and service requirements for their territory. In
fiscal 1997, the Company began marketing its complete product lines to Canadian
dealers. The Company believes that marketing directly through dealers brings
the Company closer to its Canadian customers, which enables improved service
and more competitive prices on snowmobiles, PWC, ATVs and parts, garments and
accessories. Canadian sales are made in Canadian dollars, a major portion of
which is financed through certain Canadian financial institutions. Sales
outside North America are made in U.S. dollars and most are supported by
irrevocable letters of credit.
The Company's marketing efforts are comprised of dealer, distributor and
customer promotions, advertising and cooperative programs with its dealers and
distributors. Each year, the Company and its distributors conduct dealer shows
in order to introduce the upcoming year's models and to promote dealer orders.
Marketing activities are also designed to promote directly to consumers.
Products are advertised by the Company in consumer magazines and through other
media. In addition, the Company engages in extensive dealer cooperative
advertising, on a local and national level, whereby the Company and its dealers
share advertising costs. Each season the Company produces promotional films,
product brochures, point of purchase displays, leaflets, posters and banners,
and other promotional items for use by dealers. The Company also participates
in consumer shows and rallies with dealers and sponsors independent drivers who
participate in races throughout the world. In order for its dealers and
distributors to remain price competitive and to reduce retail inventories, the
Company will from time to time make available to them rebate programs,
discounts, or other incentives. The Company publishes and mails, four times a
year, the Pride magazine to all registered owners of its products.
The Company places strong emphasis on identifying and addressing the
specific needs of its customers by periodically conducting dealer and consumer
focus group meetings and surveys.
The Company warrants its snowmobiles, PWC, and ATVs under a limited
warranty against defects in materials and workmanship for a period ranging from
six months to one year from the date of retail sale or for a period of 90 days
from the date of commercial or rental use. Repairs or replacements under
warranty are administered through the Company's dealers and distributors.
Since 1985, the Company has entered into an annual arrangement with
certain financial institutions to provide floor plan financing for the
Company's North American dealers. These agreements improve the Company's
liquidity by financing dealer purchases of products without requiring
substantial use of the Company's working capital. The Company is paid by the
floorplan companies shortly after shipment and as part of its marketing
programs the Company pays the floorplan financing of its dealers for certain
set time periods depending on the size of a dealer's order. The financing
agreements require repurchase of repossessed new and unused units and sets
limits upon the Company's potential liability for annual repurchases. The
aggregate potential liability was approximately $11,355,000 at March 31, 1999.
No material losses have been incurred by the Company under these agreements,
which are terminable by either party upon 30 days notice. The Company has also
guaranteed approximately 50% of the amounts financed by its dealers with one of
the finance companies. At March 31, 1999, the Company's maximum level of
exposure under this guarantee is approximately $72,214,000. No material
losses have been incurred by the Company under this agreement.
Competition
The snowmobile, PWC, and ATV markets are highly competitive, based on a
number of factors, including performance, styling, fit and finish, brand
loyalty, reliability, durability and price. The Company believes Arctic Cat
snowmobiles and ATVs and Tigershark PWC are highly regarded by consumers in
all of these competitive categories. Certain of the Company's competitors are
more diversified and have financial and marketing resources which are
substantially greater than those of the Company.
Regulation
Both federal and state authorities have vigorous environmental control
requirements relating to air, water and noise pollution that affect the
manufacturing operations of the Company. The Company endeavors to insure that
its facilities comply with applicable environmental regulations and standards.
Various states and other governmental agencies have also promulgated safety
regulations regarding the use of snowmobiles, PWC and ATVs. The Company has
supported laws and regulations pertaining to safety and noise abatement. The
Company believes that the adoption of any pending laws or regulations would not
negatively affect its products to any greater degree than those of its
competitors.
California has recently enacted legislation setting emission standards for
ATVs and the federal government has finalized legislation setting emission
standards for a number of vehicles including PWC. Currently, the Company's
ATVs meet the emission standard requirements in California. The federal
government has also enacted legislation mandating emission standards for PWC
beginning in 1999 with annual reductions in the emission standards through the
year 2006. The Company's 1999 and future models are being engineered and
tested to meet these emission standards. The Company has signed an agreement
with Outboard Marine Corporation (OMC) to supply it's FICHT(TM) Fuel Injection
system in order to ensure compliance with these emission standards for the 1999
model year and beyond. The Company is unable to predict the impact this
enacted or any future legislation will have on the Company. Additionally, some
states may pass legislation and local ordinances which restrict the use of PWC
to specified hours and locations. The Company is unable to predict the outcome
of such actions or the possible effect on its PWC business. The Company
supports balanced and appropriate programs that educate the customer on safe
use of its products and that protects the environment. Although currently the
snowmobile industry is not regulated by any federal or state legislation (see
discussion below), the Environmental Protection Agency (EPA) has initiated the
regulations process to regulate snowmobile engines. A final ruling is expected
no earlier than September of 2001 affecting the 2003 or 2004 model years.
The EPA has promulgated rules involving more stringent emissions standards
for two-cycle engines. Such engines are used on the Company's snowmobiles and
PWC. The Company currently is unable to predict whether such legislation will
be enacted and, if so, the ultimate impact on the Company and its operations.
However, the Company is currently evaluating several alternatives to comply
with the proposed legislation.
Certain materials used in snowmobile, PWC, and ATV manufacturing that are
toxic, flammable, corrosive or reactive are classified by the federal and state
governments as "hazardous materials." Control of these substances is regulated
by the EPA and various state pollution control agencies, which require reports
and inspection of facilities to monitor compliance. The Company's cost of
compliance with environmental regulations has not been, and is not expected to
be, material. The Company's manufacturing facilities are subject to the
regulations promulgated by, and may be inspected by, the Occupational Safety
and Health Administration.
The Company is a member of the International Snowmobile Manufacturers
Association (ISMA), a trade association formed to promote safety in the
manufacture and use of snowmobiles, among other things. The ISMA is currently
made up of Arctic Cat, Bombardier (Ski-Doo), Yamaha, and Polaris. The ISMA
members are also members of the Snowmobile Safety and Certification Committee
(SSCC), which promulgated voluntary safety standards for snowmobiles. The SSCC
standards, which require testing and evaluation by an independent testing
laboratory of each model produced by participating snowmobile manufacturers,
have been adopted by the Canadian Department of Transport. Following the
development of the SSCC standards, the U.S. Consumer Products Safety Commission
denied a petition to develop a mandatory federal safety standard for
snowmobiles in light of the high degree of adherence to the SSCC standards in
the United States. Since the Company's inception, all of its models have
complied with the SSCC standards.
The Company is a member of National Marine Manufacturers Association
(NMMA), the Personal Watercraft Industry Association (PWIA), the International
Jet Sports Boating Association (IJSBA), and the Canadian Marine Manufacturers
Association (CMMA). Tigershark personal watercraft conform to applicable
United States Coast Guard (USCG) standards and Society of Automotive Engineers,
Inc. (SAE) recommended practices.
The Company is a member of the Specialty Vehicle Institute of America
(SVIA), a trade association organized to foster and promote the safe and
responsible use of specialty vehicles manufactured and/or distributed
throughout the United States of America. The Company is also a member of the
Canadian All-Terrain Vehicle Distributors Council (CATV), a council of similar
function. In addition, the Arctic Cat ATV conforms to certain U.S. Consumer
Product Safety Commission standards.
Effects of Weather
While from time to time lack of snowfall in a particular region of the
United States or Canada may adversely affect snowmobile retail sales within
that region, the Company works to mitigate this effect by taking snowmobile
orders in the spring for the following winter season and by working with its
dealers to move snowmobiles out of a region with light snowfall to another
region with heavier snowfall. Nonetheless, there is no assurance that weather
conditions will not materially effect the Company's future sales of
snowmobiles, ATVs or PWC.
Employees
During fiscal 1999, the Company had peak employment of approximately 1,685
employees including 250 salaried and 1,435 hourly and production personnel.
Due to the seasonal nature of sales and the Company's production schedules,
prior to the introduction of the PWC and ATV, approximately 60% of hourly
personnel worked only during the spring through the late fall production
period. However, during the past five fiscal years, most employees remained
employed throughout the year to produce the Tigershark PWC and Arctic Cat ATV.
The Company's employees are not represented by a union or subject to a
collective bargaining agreement. The Company has never experienced a strike
or work stoppage and considers its relations with its employees to be
excellent.
Intellectual Property
The Company makes an effort to patent all significant innovations that it
considers patentable and owns numerous patents and know-how which relate to
production of its snowmobiles, PWC, ATVs and other products. Trademarks are
important to the Company's snowmobile, PWC, ATVs and related parts, garments
and accessories business activities. While from time to time the Company
becomes aware of the unauthorized use of its trademarks, particularly in the
sale of promotional items, the Company has a vigorous program of trademark
enforcement to eliminate the unauthorized use of its trademarks, thereby
strengthening the value of its trademarks and improving its image and customer
goodwill. The Company believes that its "Arctic Cat " registered United States
trademark is its most significant trademark. Additionally, the Company has
numerous registered trademarks, trade names and logos, both in the United
States and internationally.
Item 2. Properties
The Company owns its manufacturing facilities and executive offices in
Thief River Falls, Minnesota. The facilities consist of approximately 498,000
square feet of manufacturing, office and warehouse space on 49.5 acres,
including approximately 417,000 square feet devoted to manufacturing, and
approximately 81,000 square feet devoted to office and administrative uses.
The Company also owns a separate building on land contiguous to the
manufacturing facilities and executive offices. The building consists of
approximately 60,000 square feet on two floors of which the Company utilizes
approximately two-thirds for its sewing production of Arcticwear garments and
snowmobile seats.
The Company owns three separate parcels of undeveloped land adjacent to
its Thief River Falls property totaling approximately 94.8 acres. This
property is used by the Company in some of its testing activities and remains
available for future expansion.
The Company owns a 37,000 square foot building located in Madison, South
Dakota, which is used to produce and/or paint hoods and other parts for the
Company's Arctic Cat snowmobiles and PWC. The Company also owns a 220,000
square foot facility in Bucyrus, Ohio, to house its service parts, garments and
accessories distribution operations. The Company believes the Bucyrus
facility's proximity to central shipping hubs and close access to Canada
provides decreased delivery times to the majority of its dealers.
Item 3. Legal Proceedings
Accidents involving personal injury and property damage occur in the use
of snowmobiles, PWC, and ATVs. Claims have been made against the Company from
time to time. It is the Company's policy to vigorously defend against these
actions. The Company believes that the cases in discovery are adequately
covered by reserves and product liability insurance. Although the Company from
time to time has been named as a defendant in lawsuits involving product
liability claims against Arctic Enterprises, Inc. on the theory that the
Company is a successor of Arctic Enterprises, Inc., the Company is not a
successor of Arctic Enterprises, Inc. and has never been found liable in any
such lawsuits. The Company is not involved in any other legal proceedings which
are considered to have the potential for a materially adverse impact on the
Company's business or financial condition.
Product liability insurance is presently maintained by the Company on a
"per occurrence" basis (with coverage being provided in respect of accidents
which occurred during the policy year, regardless of when the related claim is
made) in the amount of $10,000,000 in the aggregate, with a $1,000,000
self-insured retention. The Company believes such insurance is adequate.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 4(A). Executive Officers of Registrant
Name Age Position
______ _____ __________
William G. Ness 61 Chairman of the Board of Directors
Christopher A. Twomey 51 President and Chief Executive Officer
Mark E. Blackwell 46 Vice President--Marketing
Terry J. Blount 56 Vice President--Human Resources
Timothy C. Delmore 45 Chief Financial Officer and Secretary
Ronald G. Ray 50 Vice President--Manufacturing
Roger H. Skime 56 Vice President--Research & Development
Ole E. Tweet 52 Vice President--New Product Development
Mr. Ness has been Chairman of the Board of Directors of the Company since
its inception in 1983. He is also a director of Northern Woodwork (specialty
furniture manufacturer), a director of Northern State Bank, and a board member
of IBI (Itasca Bemidji Incorporated).
Mr. Twomey has been President and Chief Executive Officer of the Company
since January 1986 and a director since 1987. He has held various executive
officer positions with the Company since 1983. Mr. Twomey is currently serving
as a director of The Toro Company.
Mr. Blackwell has been Vice President--Marketing since May of 1992 and has
over 17 years of marketing experience in the recreational vehicle field.
Previously he served for five years as Marketing Director for American Suzuki
Motor Corporation, including responsibilities in the motorcycle and marine
divisions.
Mr. Blount has been Vice President--Human Resources since August of 1996.
Mr. Blount has over 30 years of Human Resource experience in the manufacturing
field. Prior to joining the Company, Mr. Blount worked as Vice President-Human
Resources at Washington Scientific Industries since 1981.
Mr. Delmore has been Chief Financial Officer of the Company since 1986 and
has been Corporate Secretary of the Company since 1989. Mr. Delmore, a CPA
with seven years of prior public accounting experience, joined the Company in
1985 as Controller.
Mr. Ray has been Vice President-Manufacturing since April of 1992 and has
over 29 years of manufacturing experience. Before joining Arctic Cat he served
eight years as Vice President of Manufacturing for a Minnesota based company.
Mr. Skime has been Vice President--Research and Development of the Company
since its inception in 1983 and has been employed in the snowmobile industry
for 38 years.
Mr. Tweet has been Vice President of New Product Development and General
Manager of the Marine Division since May 1992. Prior to that, he had been the
Company's Vice President-Marketing since its inception in 1983 and has been
employed in the snowmobile industry for 34 years.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock is traded on the Nasdaq National Market under
the Nasdaq symbol "ACAT". Quotations below represent the high and low closing
sale prices as reported by Nasdaq. The Company's stock began trading on the
Nasdaq National Market on June 26, 1990.
Years Ended
--------------------------------------------
March 31, 1999 March 31, 1998
-------------- --------------
Quarterly Prices High Low High Low
---- ---- ---- ----
First Quarter $10.25 $ 8.69 $11.44 $ 9.50
Second Quarter $ 9.88 $ 8.50 $12.50 $ 9.88
Third Quarter $10.88 $ 8.38 $12.50 $ 9.50
Fourth Quarter $10.50 $ 7.69 $10.00 $ 8.25
As of June 4, 1999, the Company had approximately 679 stockholders of
record, including the nominee of Depository Trust Company which held 15,777,407
shares of common stock.
On March 2, 1992, the Company initiated a $0.0267 per share regular
quarterly dividend. The quarterly dividend was increased to $0.0355 per share
on March 2, 1993 and subsequently increased to $0.0467 per share on March 2,
1994. On February 2, 1995, the Company increased the quarterly dividend to
$0.06 per share. All dividend information has been adjusted for stock-splits.
(This space intentionally left blank.)
Item 6. Selected Financial Data
Years Ended March 31,
(in thousands, except per share amounts)
1999 1998 1997 1996 1995
____ ____ ____ ____ ____
Income Statement Data:
Net sales $480,348 $504,206 $468,595 $404,996 $367,144
Cost of goods sold 357,137 368,688 351,249 308,946 267,210
________ ________ ________ ________ _________
Gross profit 123,211 135,518 117,346 96,050 99,934
Selling, general and
administrative expenses 90,280 97,840 83,282 72,473 50,939
________ ________ ________ ________ ________
Operating profit 32,931 37,678 34,064 23,577 48,995
Interest income 2,933 1,837 1,798 2,228 2,383
Interest expense (27) (59) (109) - (17)
________ ________ ________ ________ _________
Earnings before income taxes 35,837 39,456 35,753 25,805 51,361
Income taxes 12,722 14,007 12,692 9,159 17,976
________ ________ ________ ________ _________
Net earnings $23,115 $25,449 $ 23,061 $ 16,646 $ 33,385
-------- -------- -------- -------- ---------
-------- -------- -------- -------- ---------
Net earnings per share
Basic $ 0.84 $ 0.88 $ 0.78 $ 0.56 $ 1.13
Diluted $ 0.84 $ 0.88 $ 0.78 $ 0.56 $ 1.11
Dividends per share $ 0.24 $ 0.24 $ 0.24 $ 0.24 $ 0.21
-------- ------- ------- -------- ---------
-------- ------- ------- -------- ---------
Weighted average shares
outstanding
Basic 27,632 28,974 29,476 29,661 29,495
Diluted 27,668 29,059 29,653 29,928 30,030
___________________________________________________________________________
As of March 31, 1999 1998 1997 1996 1995
Balance Sheet Data (in thousands)
Cash & short-term investments $ 95,208 $ 58,545 $ 50,740 $ 44,002 $ 65,241
Working capital 142,039 142,243 131,604 130,142 128,845
Total assets 240,146 229,718 217,967 207,996 183,996
Long-term debt -- -- -- -- --
Shareholders' equity 175,479 177,505 166,738 156,193 147,067
___________________________________________________________________________
QUARTERLY FINANCIAL DATA (unaudited)
(in thousands, except per share amounts)
Total First Second Third Fourth
Year Quarter Quarter Quarter Quarter
Net Sales ______ ______ ______ ______ ______
1999 $480,348 $88,651 $193,382 $109,750 $88,565
1998 504,206 85,467 196,846 139,808 82,085
1997 468,595 89,126 177,925 133,877 67,667
Gross Profit
1999 $123,211 $21,951 $ 53,264 $ 31,523 $16,473
1998 135,518 21,392 55,315 41,056 17,755
1997 117,346 18,539 49,389 35,715 13,703
Net Earnings (Loss)
1999 $ 23,115 $ 1,529 $ 19,039 $ 4,278 $(1,731)
1998 25,449 872 19,904 6,193 (1,520)
1997 23,061 1,002 18,587 6,020 (2,548)
Net Earnings (Loss) Per Share
1999 - Basic $ 0.84 $ 0.05 $ 0.68 $ 0.16 $ (0.06)
1999 - Diluted 0.84 0.05 0.68 0.16 (0.06)
1998 - Basic 0.88 0.03 0.68 0.21 (0.05)
1998 - Diluted 0.88 0.03 0.68 0.21 (0.05)
1997 - Basic 0.78 0.03 0.63 0.20 (0.09)
1997 - Diluted 0.78 0.03 0.62 0.20 (0.09)
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Fiscal 1999 was both an exciting and challenging year for Arctic Cat Inc.
Retail sales of Arctic Cat ATVs nearly doubled while for only the second time
since 1991, and the third time in fifteen years, the snowmobile industry
experienced a decrease in retail sales. During the year Arctic Cat made a
number of operating improvements including a 22% inventory reduction and a
20% reduction in accounts receivable days.
Financial Data
(in thousands, except per share data)
Years ended March 31,
1999 1998 1997
-------- -------- --------
Net Sales $480,348 $504,206 $468,595
Net Earnings 23,115 25,449 23,061
Basic and Diluted Net Earnings Per Share 0.84 0.88 0.78
Cash & Short-Term Investments 95,208 58,545 50,740
Sales Mix by Product Line (In%)
Snowmobiles 56% 59% 58%
ATVs 23% 18% 11%
Parts, Garments & Accessories 17% 16% 16%
PWC 4% 7% 15%
-------- -------- --------
100% 100% 100%
-------- -------- --------
-------- -------- --------
Results of Operations
1999 vs. 1998
During fiscal 1999 net sales decreased 4.7% to $480,348,000 from
$504,206,000 in fiscal 1998. ATV unit volume increased 32.3% offset by a 13.2%
decrease in snowmobile unit volume, a 52.8% decrease in PWC unit volume and
a 1.4% decrease in dollar sales of parts, garments and accessories. The
Company believes the continued increase in its ATV sales is due both to
enthusiastic dealer and consumer reception of the Arctic Cat ATV and growth
in the ATV market. As expected, snowmobile unit volume decreased because of
lower dealer orders related to warmer than usual weather during the prior
winter season. PWC unit volume continued to decrease in response to an
industry-wide softening in consumer demand, although the Company believes
dealer inventories are at very manageable levels.
Gross profit decreased 9.1% to $123,211,000 in 1999 from $135,518,000
in 1998. Gross profit percentage decreased to 25.7% from 26.9% in 1998, as ATV
sales, which yield lower margins than snowmobiles, became a larger percentage
of the sales mix, and warranty expenses increased for snowmobile and PWC.
Selling, general and administrative expenses decreased 7.7% to $90,280,000
in 1999 from $97,840,000 in 1998. This was primarily due to lower PWC
marketing expenses. These decreases were offset by increased ATV marketing
expenses related to increased sales. As a percent of net sales, selling,
general and administrative expenses were 18.8% in 1999 compared to 19.4% in
1998.
Operating profits decreased 12.6% to $32,931,000 in 1999 from $37,678,000
in 1998. As a percent of net sales, operating profits decreased to 6.9% in
1999 compared to 7.5% in 1998 (see gross profit and operating expenses
discussion).
Net earnings decreased 9.2% to $23,115,000 or $0.84 per share on a diluted
basis, as compared to net earnings of $25,449,000 or $0.88 per share on a
diluted basis for fiscal 1998. Net earnings as a percent of net sales were
4.8% and 5.0% in 1999 and 1998, respectively.
1998 vs. 1997
Net sales increased 7.6% in 1998 to $504,206,000 from $468,595,000 in 1997
due to a 86.3% ATV unit volume increase, a 7.3% snowmobile unit volume increase
and a 5.6% increase in parts, garments and accessories sales. These increases
were offset by a 49.4% PWC unit volume decrease which the Company believes is
in response to an industry-wide softening in consumer demand. The Company
believes the increase in ATV sales is due to both dealer and consumer reception
of the Arctic Cat ATV, the expansion of the Company's model line to cover every
major segment of the ATV market and growth in the ATV market.
Gross profit increased 15.5% to $135,518,000 in 1998 from $117,346,000 in
1997. As a percent of net sales, gross profit increased to 26.9% in 1998
compared to 25.0% in 1997. The increase in gross profit percentage was
primarily due to a positive fluctuation between the US dollar and the
Japanese yen increasing gross profit by approximately $6,600,000 over fiscal
1997 (see Inflation and Exchange Rates). The Company shares exchange rate
fluctuations within certain ranges with Suzuki Motor Corporation, its engine
supplier for snowmobile and PWC engines. These fluctuations, although affecting
all three product lines, affected the snowmobile product line to the greatest
extent. Also improving the gross profit percentage were cost reductions in the
snowmobile and ATV product lines.
Selling, general and administrative expenses increased 17.5% to
$97,840,000 in 1998 from $83,282,000 in 1997. The increase is primarily due to
increased marketing and research and development expenses for all product
lines. As a percent of net sales, selling, general and administrative expenses
were 19.4% in 1998 compared to 17.8% in 1997.
Operating profits increased 10.6% to $37,678,000 in 1998 from $34,064,000
in 1997. As a percent of net sales, operating profits increased to 7.5% in 1998
from 7.3% in 1997 (see gross profit and operating expenses discussion).
Net earnings increased 10.4% to $25,449,000 or $0.88 per share on a
diluted basis, as compared to net earnings of $23,061,000 or $0.78 per share on
a diluted basis for fiscal 1997. Net earnings as a percent of net sales were
5.0% and 4.9% in 1998 and 1997, respectively.
Liquidity and Capital Resources
The seasonality of the Company's snowmobile production cycle and the lead
time between the commencement of snowmobile and ATV production in the early
spring and commencement of shipments late in the first quarter have resulted in
significant fluctuations in the Company's working capital requirements during
the year. Historically, the Company has financed its working capital
requirements out of available cash balances at the beginning and end of the
production cycle and with short-term bank borrowings during the middle of the
cycle.
Cash and Short-Term Investments
Cash and short-term investments were $95,208,000 at March 31, 1999
compared to $58,545,000 at March 31, 1998. The Company's cash balances
traditionally peak early in the fourth quarter and then decrease as working
capital requirements increase when the Company's snowmobile and spring ATV
production cycles begin. The Company's investment objectives are first, safety
of principal and second, rate of return.
Working Capital
The Company has an unsecured credit agreement with a bank for the issuance
of up to $75,000,000 of documentary and stand-by letters of credit and for
working capital. Total working capital borrowings under the credit agreement
are limited to $30,000,000. The total letters of credit issued at March 31,
1999 were $16,920,000, of which $15,869,000 was issued to Suzuki Motor
Corporation for engine purchases. During fiscal 1996 and 1998, the Company's
Board of Directors authorized the repurchase of a total of 3,000,000 shares of
common stock. During March of 1999, the Company's Board of Directors
authorized the repurchase of an additional 1,500,000 shares of common stock.
During 1999, 1998 and 1997, the Company invested $18,493,000, $8,392,000 and
$5,858,000 to repurchase and cancel 2,049,114, 834,900 and 596,500 shares. In
April of 1999, the Company's Board of Directors authorized the repurchase of up
to $30,000,000 in additional shares.
In 1999, the Company invested $10,500,000 in capital expenditures. The
Company expects that fiscal 2000 capital expenditures, including tooling, will
be approximately $10,000,000. The Company believes that cash generated from
operations and available cash will be sufficient to meet its working capital,
regular quarterly dividend, recently announced $30 million share repurchase
program and capital expenditure requirements for the foreseeable future.
The Company has agreements with certain finance companies to provide floor
plan financing for the Company's North American dealers. These agreements
improve the Company's liquidity by financing dealer purchases of products
without requiring substantial use of the Company's working capital. The Company
is paid by the floor plan companies shortly after shipment and as part of its
marketing programs the Company pays the floor plan financing of its dealers for
certain set time periods depending on the size of a dealer's order. The
financing agreements require repurchase of repossessed new and unused units and
set limits upon the Company's potential liability for annual repurchases. The
aggregate potential liability was approximately $11,355,000 at March 31, 1999.
No material losses have been incurred by the Company under these agreements,
which are terminable by either party upon 30 days notice. The Company has also
guaranteed approximately 50% of the amounts financed by its dealers with one of
the finance companies. At March 31, 1999, the Company's maximum level of
exposure under this guarantee is approximately $72,214,000.
Inflation and Exchange Rates
Inflation is not expected to have a significant impact on the Company's
business. The Company generally has been able to offset the impact of
increasing costs through a combination of productivity gains and price
increases.
During fiscal 1999, 27.3% of the Company's cost of sales were purchased
from Japanese yen denominated suppliers. The majority of these purchases were
made from Suzuki Motor Corporation who supplies engines for the Company's
snowmobiles, PWC and ATVs. The Company has an agreement with Suzuki Motor
Corporation for snowmobile and PWC engine purchases to share the impact of
fluctuations in the exchange rate between the U.S. dollar and the Japanese
yen above and below a fixed range contained in the agreement. This agreement
renews annually. During fiscal 1999, the exchange rate fluctuation between
the U.S. dollar and the Japanese yen had a modest positive impact on its
operating results. From time to time the Company utilizes foreign exchange
hedging contracts to minimize the impact of exchange rate fluctuations. At
March 31, 1999, there were no foreign exchange contracts outstanding.
Sales to Canadian dealers are made in Canadian dollars with the U.S.
dollar serving as the functional currency. During fiscal 1999, sales to
Canadian dealers comprised 15.6% of total net sales. During fiscal 1999, the
exchange rate fluctuation between the U.S. dollar and the Canadian dollar had
a negative impact on operating profits. The Company did not hedge for this
exchange rate fluctuation.
Year 2000
The Company continues to assess and address the impact of the Year 2000
issue on its business. This issue affects computer systems that have date-
sensitive programs that may not properly recognize the year 2000. The Company
uses software and related technologies throughout its business. The Company
has completed its assessment of the information systems (IS) used in its
internal business operations, and its procurement and production processes. In
addition, the Company is beginning its assessments of the Year 2000 readiness
of its non-IS systems, as well as supplier and customer readiness.
The Company's Year 2000 initiative is being managed by a team of
internal staff with the assistance of outside consultants. The team's
activities are designed to ensure that there is no adverse effect on the
Company's business operations and that transactions with suppliers, financial
institutions and customers are fully supported. The Company is under way with
these efforts, which are scheduled to be completed during the summer of 1999.
While the Company believes its planning efforts are adequate to address its
Year 2000 concerns, there can be no guarantee that the systems of other
companies on which the Company's systems and operations rely will be converted
on a timely basis and will not have a material adverse effect on the Company's
results of operations and financial condition. The most reasonably likely
effects of non-Year 2000 compliance by third parties includes the disruption or
inaccuracy of data and business disruption caused by failure of suppliers to
provide key component parts.
The cost of the Year 2000 initiatives is estimated at less than
$500,000 with $227,000 expensed in fiscal 1999 and the balance to be expensed
in fiscal 2000. At the present time there are no contingency plans being
developed in the event of a worst case scenario. If it becomes apparent during
the summer of 1999 that essential internal and third party systems relied on by
the Company will not be Year 2000 compliant prior to the end of 1999, the
Company will develop contingency plans. Factors that could influence the
amount and timing of costs include the success of the Company in identifying
systems and programs that are not Year 2000 compliant, the nature and amount of
programming required to upgrade or replace each of the affected programs or
systems, and the availability, cost and magnitude of related labor and
consulting costs.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for certain forward-looking statements. This Report on Form 10-K, as
well as the Company's Annual Report and future filings with the Securities and
Exchange Commission, the Company's press releases and oral statements made with
the approval of an authorized executive officer, contain forward-looking
statements that reflect the Company's current views with respect to future
events and financial performance. These forward-looking statements are subject
to certain risks and uncertainties that could cause actual results to differ
materially from historical results or those anticipated. The words "aim,"
"believe," "expect," "anticipate," "intend," "estimate" and other expressions
that indicate future events and trends identify forward-looking statements.
Actual future results and trends may differ materially from historical results
or those anticipated depending on a variety of factors, including, but not
limited to: product mix and volume; competitive pressure on sales and pricing;
increase in material or production cost which cannot be recouped in product
pricing; changes in the sourcing of engines from Suzuki; warranty expenses;
foreign currency exchange rate fluctuations; product liability claims and other
legal proceedings in excess of insured amounts; environmental and product
safety regulatory activity; effects of the weather; overall economic
conditions; and consumer demand and confidence.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company is subject to certain market risk relating to changes
in interest rates and foreign currency exchange rates. Information
regarding foreign currency exchange rates is discussed within
"Management's Discussion and Analysis -- Inflation and Exchange
Rate". Interest rate market risk is managed for cash and short-
term investments by investing in a diversified frequently maturing
portfolio consisting of municipal bonds and money market funds that
experience minimal volatility. The carrying amount of available-
for-sale debt securities approximate related fair value and the
associated market risk is not deemed to be significant.
Item 8. Financial Statements and Supplementary Data
Financial Statements, Notes, and Report of Independent Certified
Public Accountants appear on pages F-1 through F-13.
Quarterly financial data appears in Item 6.
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 included under the heading "Election of Directors" in the
Company's definitive Proxy Statement for the Annual Meeting of Shareholders to
be held August 5, 1999, is incorporated herein by reference.
Pursuant to instruction 3 to Item 401(b) of Regulation S-K, information as
to executive officers of the Company is set forth in Item 4(A) of this
Form 10-K.
Item 11. Executive Compensation
The information included under the heading "Executive Compensation and
Other Information" in the Company's definitive Proxy Statement for the Annual
Meeting of Shareholders to be held August 5, 1999, is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information included under the heading "Beneficial Ownership of
Capital stock" in the Company's definitive Proxy Statement for the Annual
Meeting of Shareholders to be held August 5, 1999, is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
Information with respect to certain relationships and related
transactions, appearing under the heading "Executive Compensation and Other
Information-Certain Transactions" in the Company's definitive Proxy Statement
for the Annual Meeting of Shareholders to be held on August 5, 1999, is
incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents filed as part of report
1. Financial Statements.
The following consolidated financial statements of the
Company and its subsidiaries are filed as part of this Form 10-K:
Form 10-K
Page Reference
(I) Consolidated Balance Sheets F-1
as of March 31, 1999 and 1998
(ii) Consolidated Statements of Earnings F-2
for the three years ended March 31, 1999,
1998 and 1997
(iii) Consolidated Statements of Shareholders' F-3
Equity for the three years ended March 31,
1999, 1998 and 1997
(iv) Consolidated Statements of Cash Flows F-4
for the three years ended March 31, 1999,
1998 and 1997
(v) Notes to Consolidated Financial F-5 to
Statements F-13
(vi) Report of Independent Certified Public F-13
Accountants
2. Schedules filed as part of this Form 10-K:
None
3. Exhibits
Method of Filing
3(a) Amended and Restated Articles of Incorporation (3)
of Company
3(b) Restated By-Laws of the Company (1)
4(a) Form of specimen Common Stock Certificate (1)
10(a) 1989 Stock Option Plan, as amended (3)
10(b) 1995 Stock Option Plan, as amended (3)
10(c) Purchase/Supply Agreement dated as of (1)
March 1, 1985 between Suzuki Motor Co.,
Ltd. and the Company, and related Agreement
on Implementation of Warranty Provision.
10(d) Form of Employment Agreement between the (1)
Company and each of its executive officers
10(e) Floorplan Repurchase Agreement dated (1)
July 13, 1984, between the Company
and ITT Commercial Finance Corp.
10(f) Floorplan Repurchase Agreement dated as (1)
of June 15, 1988, between the Company
And ITT Commercial Finance, a division
Of ITT Industries of Canada, Ltd.
10(g) Discretionary Revolving Credit Facility, (3)
dated as of June 6, 1997, between the Company
and Norwest Bank Minnesota, National Association.
21 Subsidiaries of the Registrant (2)
23 Consent of Independent Certified Public Accountants(2)
27 Financial Data Schedule-March 31, 1999 (2)
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three
months ended March 31, 1999.
(c) Exhibits
Reference is made to Item 14(a) 3.
--------------------------------------
(1) Incorporated herein by reference to the Company's Form
S-1 Registration Statement (File Number 33-34984).
(2) Filed with this Form 10-K.
(3) Incorporated herein by reference to the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on the 28th day of
June, 1999.
ARCTIC CAT INC.
/s/Christopher A. Twomey
_______________________________
Christopher A. Twomey
President, Chief Executive Officer
and Director
(Principle Executive Officer
and Director)
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 date indicated.
/s/William G. Ness June 28, 1999
___________________________ ___________________
William G. Ness
Chairman of the Board and Director
/s/Christopher A. Twomey June 28, 1999
___________________________ ___________________
Christopher A. Twomey
President, Chief Executive Officer
and Director
(Principle Executive Officer)
/s/Timothy C. Delmore June 28, 1999
___________________________ ___________________
Timothy C. Delmore
Chief Financial Officer
(Principle Financial and Accounting Officer)
/s/Robert J. Dondelinger June 28, 1999
___________________________ ___________________
Robert J. Dondelinger, Director
/s/William I. Hagen June 28, 1999
___________________________ ___________________
William I. Hagen, Director
/s/John C. Heinmiller June 28, 1999
___________________________ ___________________
John C. Heinmiller, Director
/s/Gregg A. Ostrander June 28, 1999
___________________________ ___________________
Gregg A. Ostrander, Director
June 28, 1999
___________________________ ___________________
Kenneth J. Roering, Director
June 28, 1999
___________________________ ___________________
Takekazu Kaito, Director
Arctic Cat Inc.
CONSOLIDATED BALANCE SHEETS
March 31,
ASSETS 1999 1998
CURRENT ASSETS
Cash and equivalents $ 51,413,000 $24,764,000
Short-term investments 43,795,000 33,781,000
Accounts receivable, less allowances 23,263,000 30,217,000
Inventories 68,644,000 88,149,000
Prepaid expenses 2,925,000 1,771,000
Income taxes receivable - 2,111,000
Deferred income taxes 12,220,000 9,088,000
__________ __________
Total current assets 202,260,000 189,881,000
PROPERTY, PLANT AND EQUIPMENT - At Cost
Machinery, equipment and tooling 75,500,000 70,611,000
Land, buildings and improvements 15,548,000 14,568,000
__________ __________
91,048,000 85,179,000
Less accumulated depreciation 53,162,000 45,342,000
__________ __________
37,886,000 39,837,000
__________ __________
$240,146,000 $229,718,000
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 23,665,000 $ 20,671,000
Accrued expenses 33,244,000 26,967,000
Income tax payable 3,312,000 -
---------- ----------
Total current liabilities 60,221,000 47,638,000
DEFERRED INCOME TAXES 4,446,000 4,575,000
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY
Preferred stock, par value $1.00;
2,050,000 shares authorized; none issued - -
Preferred stock - Series A Junior
Participating, par value $1.00;
450,000 shares authorized; none issued - -
Common stock, par value $.01; 37,440,000
shares authorized; shares issued and
outstanding, 18,828,775 in 1999;
20,857,909 in 1998 188,000 209,000
Class B common stock, par value $0.01;
7,560,000 shares authorized, issued,
and outstanding 76,000 76,000
Additional paid-in capital - 9,356,000
Retained earnings 175,215,000 167,864,000
__________ __________
175,479,000 177,505,000
__________ __________
$240,146,000 $229,718,000
---------- ----------
---------- ----------
F-1
Arctic Cat Inc.
Consolidated Statements of Earnings
Years Ended March 31,
1999 1998 1997
----------- ----------- -----------
Net sales $480,348,000 $504,206,000 $468,595,000
Cost of goods sold 357,137,000 368,688,000 351,249,000
___________ ___________ ___________
Gross profit 123,211,000 135,518,000 117,346,000
Selling, general and
administrative expenses 90,280,000 97,840,000 83,282,000
___________ ___________ ___________
Operating profit 32,931,000 37,678,000 34,064,000
Other income (expense)
Interest income 2,933,000 1,837,000 1,798,000
Interest expense (27,000) (59,000) (109,000)
___________ ___________ ___________
2,906,000 1,778,000 1,689,000
___________ ___________ ___________
Earnings before income taxes 35,837,000 39,456,000 35,753,000
Income tax expense 12,722,000 14,007,000 12,692,000
___________ ___________ ___________
Net earnings $23,115,000 $25,449,000 $23,061,000
----------- ----------- -----------
----------- ----------- -----------
Basic and diluted net
earnings per share $ 0.84 $ 0.88 $ 0.78
----------- ----------- -----------
----------- ----------- -----------
Weighted average shares outstanding
basic
diluted 27,632,000 28,974,000 29,476,000
27,668,000 29,059,000 29,653,000
---------- ----------- -----------
---------- ----------- -----------
F-2
Arctic Cat Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended March 31,
Class B Additional
Common Stock Common Stock Paid-in Retained
Shares Amount Shares Amount Capital Earnings Total
________________ ______ ______ ______ _______ ________ _____ ______
Balances at April 1, 1996
22,055,971 $221,000 7,560,000 $76,000 $22,502,000 $133,394,000
$156,193,000
Exercise of stock options and related tax benefits
83,238 - - - 526,000 -
526,000
Repurchase of common stock
(606,073) (6,000) - - (5,959,000) -
(5,965,000)
Dividends ($0.24 per share)
- - - - - (7,077,000)
(7,077,000)
Net earnings - - - - - 23,061,000
23,061,000
________________________________________________________________________
Balances at March 31, 1997
21,533,136 215,000 7,560,000 76,000 17,069,000 149,378,000
166,738,000
Exercise of stock options
230,949 3,000 - - 1,382,000 -
1,385,000
Repurchase of common stock
(906,176) (9,000) - - (9,095,000) -
(9,104,000)
Dividends ($0.24 per share)
- - - - - (6,963,000)
(6,963,000)
Net earnings - - - - - 25,449,000
25,449,000
_______________________________________________________________________
Balances at March 31, 1998
20,857,909 209,000 7,560,000 76,000 9,356,000 167,864,000
177,505,000
Exercise of stock options
49,950 - - - 299,000 -
299,000
Repurchase of common stock
(2,079,084) (21,000) - - (9,655,000) (9,116,000)
(18,792,000)
Dividends ($0.24 per share)
- - - - - (6,648,000)
(6,648,000)
Net earnings - - - - - 23,115,000
23,115,000
________________________________________________________________________
Balances at March 31, 1999
18,828,775 $188,000 7,560,000 $76,000 - $175,215,000
$175,479,000
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
F-3
Arctic Cat Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31,
1999 1998 1997
---------- ---------- ----------
Cash flows from operating activities $23,115,000 $25,449,000 $23,061,000
Net earnings
Adjustments to reconcile net earnings to
net cash provided by operating activities
Depreciation 12,486,000 13,369,000 11,350,000
Deferred income taxes (3,261,000) (517,000) 1,388,000
Changes in operating assets and
liabilities:
Trading securities (10,566,000) 11,670,000 (12,476,000)
Accounts receivable 6,954,000 (2,824,000) 9,072,000
Inventories 19,505,000 (1,647,000) 116,000
Prepaid expenses (1,154,000) (153,000) 786,000
Accounts payable 2,994,000 (915,000) (2,229,000)
Accrued expenses 6,277,000 1,697,000 950,000
Income taxes 5,423,000 1,727,000 (3,908,000)
--------- --------- ---------
Net cash provided by operating activities 61,773,000 47,856,000 28,110,000
Cash flows from investing activities
Additions of property and equipment (10,535,000)(13,699,000)(21,270,000)
Sale and maturity of available-for-sale
securities 552,000 1,070,000 4,500,000
Purchase of available-for-sale securities - (1,321,000) (2,254,000)
--------- --------- ---------
Net cash used in investing activities (9,983,000)(13,950,000)(19,024,000)
Cash flows from financing activities
Proceeds from issuance of common stock - 827,000 357,000
Repurchase of common stock (18,493,000) (8,546,000) (5,858,000)
Dividends paid (6,648,000) (6,963,000) (7,077,000)
--------- --------- ---------
Net cash used in financing activities (25,141,000)(14,682,000)(12,578,000)
--------- --------- ---------
Net increase (decrease) in cash and
equivalents 26,649,000 19,224,000 (3,492,000)
Cash and equivalents at beginning of year 24,764,000 5,540,000 9,032,000
--------- --------- ---------
Cash and equivalents at end of year $51,413,000 $24,764,000 $ 5,540,000
--------- --------- ---------
--------- --------- ---------
Supplemental disclosure of cash payments for
income taxes $12,191,000 $15,797,000 $15,212,000
--------- --------- ---------
--------- --------- ---------
F-4
Arctic Cat Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999, 1998 and 1997
Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Arctic Cat Inc.(the "Company") operates in a single industry segment
which designs, engineers, manufactures and markets snowmobiles and all-terrain
vehicles (ATVs) under the Arctic Cat brand name, personal watercraft (PWC)
under the Tigershark brand name, and related parts, garments and accessories
principally through its facilities in Thief River Falls, Minnesota. The
Company's products are sold through a network of independent dealers and
distributors located throughout the United States, Canada, Scandinavia and
other international markets.
Use of Estimates:
Preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect reported amounts of assets and
liabilities, related revenues and expenses and disclosure about contingent
assets and liabilities at the date of the financial statements. Actual results
could differ from the estimates used by management.
Principles of Consolidation:
The consolidated financial statements include the accounts of Arctic Cat
Inc. and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
Cash Equivalents:
The Company considers highly liquid temporary investments with an original
maturity of three months or less to be cash equivalents. Cash equivalents
consist primarily of commercial paper and put bonds and are stated at cost,
which approximates market value based upon quoted market prices. Cash
equivalents totaled $57,432,000 and $23,932,000 at March 31, 1999 and 1998.
Short-Term Investments:
Short-term investments include trading securities, with unrealized gains
and losses included in net earnings, and available-for-sale securities, with
unrealized gains and losses reported within shareholders' equity. Short-term
investments are reported at cost, which approximates market value based upon
quoted market prices. The Company utilizes the specific identification method
in accounting for its short-term investments.
Inventories:
Inventories are stated at the lower of cost or market, with cost
determined using the first-in, first-out method.
Property and Equipment:
Depreciation is provided in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives, using the
units of production method for tooling and the straight-line method for all
other property and equipment. Tooling is amortized over the life of the
product, generally three years. Estimated services lives range from 15-20
years for buildings and improvements and 5-7 years for machinery and equipment
. Accelerated and straight-line methods are used for income tax reporting.
F-5
Product Warranties:
The Company provides for estimated warranty costs at the time of sale and
accrues for specific items after the sale at the time their existence is known
and the amounts are determinable.
Insurance:
The Company is self-insured for employee medical, workers' compensation,
and product liability claims. Specific stop loss coverages are provided for
catastrophic claims. Losses and claims are charged to operations when it is
probable a loss has been incurred and the amount can be reasonably estimated.
Revenue Recognition:
The Company recognizes revenue when products are shipped to dealers.
Research and Development:
Research and development costs are expensed as incurred and are reported
as a component of selling, general and administrative expenses. Research and
development expense was $9,545,000, $10,273,000 and $9,911,000 during 1999,
1998 and 1997.
Advertising:
The Company expenses advertising costs as incurred. Advertising expense
was $16,238,000, $19,605,000 and $17,049,000 during 1999, 1998 and 1997.
Stock-Based Compensation:
The Company utilizes the intrinsic value method of accounting for its
employee stock-based compensation plans. Pro forma information related to the
fair value based method of accounting is contained in Note J.
Net Earnings Per Share:
The Company's diluted weighted average shares outstanding include common
shares and common share equivalents relating to stock options, when dilutive.
Options to purchase 1,363,236, 892,380 and 930,817 shares of common stock with
weighted average exercise prices of $11.65, $12.44 and $12.42 were outstanding
during 1999, 1998 and 1997, but were excluded from the computation of common
share equivalents because they were anti-dilutive.
Foreign Currency:
The Company's sales and marketing activities with Canadian dealers are
denominated in Canadian currency with the U.S. dollar serving as the functional
currency. Assets and liabilities denominated in Canadian currency are
translated using the exchange rate in effect at the balance sheet date.
Revenues and expenses are translated at the average foreign exchange rate in
effect for the period. Exchange gains and losses are reflected in the
results of operations.
The Company enters into forward exchange contracts to hedge purchase
commitments denominated in Japanese yen for ATV engines. Gains and losses on
the forward exchange contracts are deferred and included in the valuation of
the acquired inventory as the forward exchange contracts hedge the underlying
foreign exchange exposure. At March 31, 1999, there were no open forward
exchange contracts. The Company does not enter into forward exchange contracts
for trading purposes.
F-6
New Accounting Pronouncements:
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS")No. 133, Accounting for Derivative Instruments
and Hedging Activities, which is effective for fiscal years beginning after
June 15, 1999. SFAS 133 requires entities to recognize derivatives in their
financial statements as either assets or liabilities measured at fair value.
SFAS 133 also specifies new methods of accounting for derivatives used in
risk management strategies (hedging activities), prescribes the items and
transactions that may be hedged, and specifies detailed criteria required
to qualify for hedge accounting. Management believes the adoption of SFAS 133
will not have a material effect on the consolidated financial statements.
Reclassifications:
Certain 1998 and 1997 amounts have been reclassified to conform to the
1999 presentation.
NOTE B - SHORT-TERM INVESTMENTS
Short-term investments consist primarily of a diversified portfolio of
municipal bonds and money market funds and are classified as follows at March
31:
1999 1998
---------- ----------
Trading Securities $31,386,000 $20,820,000
Available-for-sale debt securities 12,409,000 12,961,000
---------- ----------
$43,795,000 $33,781,000
---------- ----------
---------- ----------
The contractual maturities of available-for-sale debt securities at March
31, 1999, are as follows: $500,000 within one year, $5,353,000 from one year
through five years, and $6,556,000 from five years through ten years. Gross
realized and unrealized gains and losses related to available-for-sale
securities were not material.
At March 31, 1999, $19,059,000 of the trading securities were invested in
two money market funds. At March 31, 1998, $9,933,000 of the trading
securities were invested in one money market fund.
NOTE C - INVENTORIES
Inventories consist of the following at March 31:
1999 1998
---------- ----------
Raw materials and sub-assemblies $22,067,000 $30,154,000
Finished goods 24,291,000 31,756,000
Parts, garments and accessories 22,286,000 26,239,000
---------- ----------
$68,644,000 $88,149,000
---------- ----------
---------- ----------
F-7
NOTE D - ACCRUED EXPENSES
Accrued expenses consist of the following at March 31:
1999 1998
--------- ---------
Marketing $10,888,000 $ 5,773,000
Compensation 8,622,000 8,876,000
Warranties 5,560,000 5,548,000
Insurance 4,952,000 3,833,000
Other 3,222,000 2,937,000
--------- ---------
$33,244,000 $26,967,000
--------- ---------
--------- ---------
NOTE E - FINANCING
The Company has a $75,000,000 unsecured bank credit agreement for
documentary and stand-by letters of credit and for working capital purposes.
Total working capital borrowings under the credit agreement are limited to
$30,000,000. The credit agreement is due on demand and expires July 31, 1999;
however, management believes they will be able to renew the existing line of
credit under materially similar terms. Interest on the working capital
borrowings is payable monthly at alternative interest rates, at the Company's
election. The credit agreement contains certain covenants. At March 31, 1999,
there was $16,920,000 of issued letters of credit outstanding and no working
capital borrowings outstanding. Of the issued letters of credit outstanding,
$15,869,000 were issued to Suzuki for engine purchases (see note G).
Outstanding letters of credit expire through October 1999.
NOTE F - RETIREMENT SAVINGS PLAN
The Company's 401(k) retirement savings plan covers substantially all
eligible employees. Employees may contribute up to 20% of their compensation
with the Company matching 100% of the employee contributions, up to a maximum
of 3% of the employee's compensation. The Company can elect to make additional
contributions at its discretion. Total Company contributions were $964,000,
$851,000 and $773,000 in 1999, 1998 and 1997.
NOTE G - RELATED PARTY TRANSACTIONS
The Company purchases engines and related parts from Suzuki Motor
Corporation (Suzuki-see note J) in Japan. Such purchases totaled $91,724,000,
$94,955,000 and $103,285,000 in 1999, 1998 and 1997. The purchase price of the
engines and related parts is determined annually. The Company has an agreement
with Suzuki for snowmobile and watercraft engine purchases to share the impact
of fluctuations in the exchange rate between the U.S. dollar and the Japanese
yen above and below a fixed range contained in the agreement. This agreement
renews annually.
The Company is dependent on Suzuki for the near term supply of its engines
and related parts. An interruption of this supply could have a material adverse
effect on the Company's operations.
Freight services and certain raw materials are purchased from companies
where certain of the Company's directors are officers or significant
shareholders. In 1999, 1998 and 1997, these transactions aggregated $4,791,000,
$5,053,000 and $7,699,000.
F-8
NOTE H - INCOME TAXES
Income tax expense consists of the following for the years ended March 31:
1999 1998 1997
Current ---------- --------- ----------
- Federal $14,023,000 $12,767,000 $ 9,767,000
- State 1,960,000 1,757,000 1,537,000
---------- --------- ----------
Deferred (3,261,000) (517,000) 1,388,000
---------- --------- ----------
$12,722,000 $14,007,000 $12,692,000
---------- --------- ----------
---------- --------- ----------
The following is a reconciliation of the Federal statutory income tax rate
to the effective tax rate for the years ended March 31:
1999 1998 1997
---- ---- ----
Statutory income tax rate 35.0% 35.0% 35.0%
State taxes 2.5 2.4 2.3
Tax exempt interest (1.0) (0.7) (1.3)
Foreign sales corporation (1.4) (1.3) (1.5)
Other 0.4 0.1 1.0
----- ----- -----
35.5% 35.5% 35.5%
----- ----- -----
----- ----- -----
The cumulative temporary differences between the tax bases of assets and
liabilities and their carrying amounts for financial reporting purposes are as
follows at March 31:
1999 1998
Short-term deferred income taxes --------- ---------
Accrued expenses $ 8,762,000 $6,599,000
Inventory capitalization and writedowns 2,720,000 1,973,000
Other 738,000 516,000
--------- ---------
Net deferred tax asset $12,220,000 $9,088,000
--------- ---------
--------- ---------
Long-term deferred income taxes
Property and equipment $ 2,219,000 $2,802,000
Other 2,227,000 1,773,000
--------- ---------
Net deferred tax liability $ 4,446,000 $4,575,000
--------- ---------
--------- ---------
NOTE I - COMMITMENTS AND CONTINGENCIES
Dealer Financing:
Finance companies provide certain of the Company's dealers and
distributors with floor plan financing. The Company has agreements with these
finance companies to repurchase certain repossessed products sold to its
dealers. At March 31, 1999, the Company was contingently liable under these
agreements for a maximum repurchase amount of approximately $11,355,000. No
material losses have been incurred under these agreements during the periods
presented.
The Company pays a portion of its dealers' floor plan interest obligations
to the finance companies under various Company marketing programs. These costs
are included in selling, general and administrative expenses.
The Company has guaranteed approximately 50% of the amounts financed by
its dealers and distributors with one of the finance companies. At March 31,
1999, the Company's maximum exposure under this guarantee was $72,214,000.
F-9
Litigation:
The Company is subject to legal proceedings and claims which arise in
the ordinary course of business. In the opinion of management, the ultimate
outcome of these matters will not be material to the Company's consolidated
financial position, results of operations or cashflows.
NOTE J - SHAREHOLDERS' EQUITY
Stock Option Plans:
The Company has stock option plans that provide for incentive and
non-qualified stock options to be granted to directors, officers and other
key employees or consultants. The stock options granted generally have a five
to ten year life, vest over a period of one to three years, and have an
exercise price equal to the fair market value of the stock on the date of
grant. At March 31, 1999, the Company had 789,873 shares of common stock
available for grant under the plans.
Transactions under the plans during each of the three years in the period
ended March 31, 1999 are summarized as follows:
Number of Weighted
shares under average
option exercise price
-------- -------
Outstanding at April 1, 1996 1,224,998 $10.02
Granted 602,752 10.25
Exercised (83,238) 5.59
-------- -------
Outstanding at March 31, 1997 1,744,512 10.31
Granted 45,000 10.83
Exercised (230,949) 6.00
Canceled (15,000) 10.45
-------- -------
Outstanding at March 31, 1998 1,543,563 10.96
Granted 391,000 9.70
Exercised (49,950) 6.00
Canceled (120,573) 11.05
-------- -------
Outstanding at March 31, 1999 1,764,040 $10.80
-------- -------
-------- -------
Options exercisable at March 31 are as follows:
1997 751,180 $ 8.94
1998 965,380 $11.08
1999 1,210,318 $11.24
F-10
The following tables summarize information concerning currently outstanding
and exercisable stock options at March 31, 1999:
Options Outstanding
Weighted Average
Range of Number Remaining Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price
- ------------ --------- ----------- -----------
$ 6.00 - $8.03 150,921 3.2 years $ 6.00
9.50 - 13.33 1,377,648 7.4 years 10.35
16.33 - 19.75 235,471 5.0 years 16.59
- --------------------------------------------------------------------
1,764,040
- --------------------------------------------------------------------
Options Exercisable
Range of Number Weighted Average
Exercise Prices Exercisable Exercise Price
- --------------- -------- -----------
$ 6.00 - $8.03 150,921 $ 6.00
9.50 - 13.33 823,926 10.68
16.33 - 19.75 235,471 16.59
- --------------------------------------------------------------------
1,210,318
- --------------------------------------------------------------------
The Company's pro forma net earnings and basic and diluted net earnings per
share would have been as follows had the fair value method been used for
valuing stock options granted to employees:
1999 1998 1997
---- ---- ----
Pro forma net earnings $22,190,000 $24,351,000 $22,290,000
Pro forma basic and diluted
net earnings per share $ 0.80 $ 0.84 $ 0.76
The impact on net earnings may not be representative of future disclosures
because they do not take into effect pro forma compensation expense related to
grants made before 1996.
The weighted average fair value of options granted and the weighted
average assumptions used in the binomial options pricing model are as follows:
1999 1998 1997
---- ---- ----
Fair value of options granted $3.93 $4.44 $3.40
Assumptions:
Dividend yield 2% 2% 2%
Average term 7.7 years 8 years 4.7 years
Volatility 35% 35% 35%
Risk-free rate of return 6.2% 6.2% 6.6%
F-11
Class B Common Stock:
Suzuki owns all outstanding shares of the Company's Class B common stock.
At the option of Suzuki, the Class B common stock is convertible into an equal
number of shares of the Company's common stock. The Class B shareholder is
entitled to elect one member of the Company's Board of Directors but cannot
vote for the election of other directors of the Company. The Class B
shareholder can vote on all other matters submitted to the common shareholders.
The Class B common stock participates equally with the common stock in all
dividends and other distributions duly declared by the Company's Board of
Directors. The Class B common shares are converted into an equal number of
shares of common stock if: Suzuki owns less than 15% of the aggregate number
of outstanding common and Class B common shares; the Company becomes a non-
surviving party due to a merger or recapitalization; the Company sells
substantially all of its assets; or Suzuki transfers its Class B common stock
to any person.
In addition, the Company has a Stock Purchase Agreement with Suzuki that
prohibits the purchase of additional shares of the Company's common stock
unless, following such purchase, Suzuki's ownership is less than or equal to
32% of the aggregate outstanding shares of common and Class B common stock. The
Company has the first right of refusal to purchase any shares Suzuki intends to
sell. Suzuki has agreed not to compete in the manufacture of snowmobiles or
related parts so long as it supplies engines to the Company or owns at least
10% of the aggregate common and Class B common shares outstanding.
Preferred Stock:
The Company's Board of Directors is authorized to issue 2,050,000 shares
of $1.00 par value preferred stock in one or more series. The board can
determine voting, conversion, dividend and redemption rights and other
preferences of each series. No shares have been issued.
Shareholders' Rights Plan:
In connection with the adoption of a Shareholders' Rights Plan, the
Company created a Series A Junior Participating preferred stock. Under terms of
the Company's Shareholder Rights Plan, upon the occurrence of certain events,
registered holders of common stock and Class B common stock are entitled to
purchase one-hundredth of a share of Series A Junior Participating preferred
stock at a stated price, or to purchase either the Company's common shares or
common shares of an acquiring entity at half their market value. The Rights
related to this plan expire September 5, 2001.
Share Repurchase Authorization:
The Company invested $18,493,000, $8,392,000 and $5,858,000 during 1999,
1998 and 1997 to repurchase and cancel 2,049,114, 834,900 and 596,500 shares,
pursuant to a previous Board of Directors' authorizations for the repurchase of
4,500,000 shares. Cumulative shares repurchased through March 31, 1999 under
these authorizations totaled 3,546,514.
In April 1999, the Board of Directors authorized the Company to repurchase
an additional $30,000,000 of its common stock.
NOTE K - EXPORT SALES
Sales to foreign customers, located primarily in Canada, amounted to
$101,471,000, $113,442,000 and $94,468,000 in 1999, 1998 and 1997.
F-12
NOTE L - RISK AND UNCERTAINTIES
The Year 2000 issue relates to limitations in computer systems and
applications that may prevent proper recognition of the Year 2000. The
potential effect of the Year 2000 issue on the Company and its business
partners will not be fully determinable until the year 2000 and thereafter.
If Year 2000 modifications are not properly completed either by the Company
or entities with whom the Company conducts business, the Company's revenues
and financial condition could be adversely impacted.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Arctic Cat Inc.
We have audited the accompanying consolidated balance sheets of Arctic Cat
Inc. and subsidiaries as of March 31, 1999 and 1998, and the related
consolidated statements of earnings, shareholders' equity, and cash flows for
each of the three years in the period ended March 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Arctic Cat
Inc. and subsidiaries as of March 31, 1999 and 1998, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended March 31, 1999, in conformity with generally
accepted accounting principles.
/s/Grant Thornton LLP
- -------------------------------
Minneapolis, Minnesota
May 13, 1999
F-13
ARCTIC CAT INC.
EXHIBIT INDEX
Exhibit Number
21 Subsidiaries of Registrant
23 Consent of Independent Certified Public
Accountants
27 Financial Data Schedule - March 31, 1999