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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

ý

Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

 

 

for the fiscal year ended March 31, 2004 or

 

 

o

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
of incorporation or organization)

 

(I.R.S. Employer
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     ý      No       o

 

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. ý

 

Indicate by check mark whether Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

 

Yes     ý      No       o

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrant’s most recently completed second fiscal quarter: $245,000,000.

 

At June 2, 2004, 14,126,206 shares of Common Stock and 6,717,000 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 4, 2004 are incorporated by reference into Part III of this Form 10-K

 

 



 

ARCTIC CAT INC.

FORM 10-K

TABLE OF CONTENTS

 

 

Description

 

PART I

 

 

 

 

 

ITEM 1.

Business

 

ITEM 2.

Properties

 

ITEM 3.

Legal Proceedings

 

ITEM 4.

Submission of Matters to a Vote of Security Holders

 

ITEM 4A.

Executive Officers of Registrant

 

 

 

 

PART II

 

 

 

 

 

ITEM 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities

 

ITEM 6.

Selected Financial Data
Quarterly Financial Data

 

ITEM 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

ITEM 7A.

Quantitative and Qualitative Disclosures About Market Risk

 

ITEM 8.

Financial Statements and Supplementary Data

 

ITEM 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

ITEM 9A.

Controls and Procedures

 

 

 

 

PART III

 

 

 

 

 

ITEM 10.

Directors and Executive Officers of the Registrant

 

ITEM 11.

Executive Compensation

 

ITEM 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

ITEM 13.

Certain Relationships and Related Transactions

 

ITEM 14.

Principal Accountant Fees and Services

 

 

 

 

PART IV

 

 

 

 

 

ITEM 15.

Exhibits, Financial Statement Schedules, and Reports on Form 8-K

 

 

Signatures

 

 

Consolidated Balance Sheets

 

 

Consolidated Statements of Earnings

 

 

Consolidated Statements of Shareholders’ Equity

 

 

Consolidated Statements of Cash Flows

 

 

Notes to Consolidated Financial Statements

 

 

Report of Independent Certified Public Accountants

 

 

Exhibit Index

 

 

Exhibit 21

 

 

Exhibit 23

 

 

Exhibit 31.1

 

 

Exhibit 31.2

 

 

Exhibit 32.1

 

 

Exhibit 32.2

 

 

2



 

PART I

 

ITEM 1. BUSINESS

 

Arctic Cat Inc. (the “Company”), based in Thief River Falls, Minnesota, operates in a single industry segment and designs, engineers, manufactures and markets snowmobiles and all-terrain vehicles (ATVs) under the Arctic Catâ 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 over 40 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. Today the number of major industry participants has decreased to four, Arctic Cat, Bombardier Recreational Products (Bombardier), Polaris and Yamaha. 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 set-up costs. Industry-wide snowmobile sales to retail customers in North America were approximately 158,000 units for the 2004 model year.

 

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. 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 ATVs retailed 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 increased each year reaching approximately 799,000 units in calendar 2003. Major competitors in the industry include Honda, Yamaha, Kawasaki, Bombardier, Polaris and Suzuki and in early 2004 John Deere entered the market.

 

Products

 

Snowmobiles – The Company produces a full line of snowmobiles, consisting of 56 models, marketed under the Arctic Cat brand name, and designed to satisfy various market niches. The 2004 Arctic Cat models carry suggested U.S. retail prices ranging from $3,899 to $9,799, excluding a youth model which is sold at a suggested U.S. retail price of $2,049. Arctic Cat snowmobiles are sold in the United States, Canada, Scandinavia and other international markets.

 

The Company’s 2004 year snowmobile models are categorized as Performance, Trail Performance, Mountain, Touring and Utility. The Company markets: Performance Arctic Cat snowmobiles under the names Firecat and ZR; Trail Performance Arctic Cat snowmobiles under the name Z, Sabercat and T660 Turbo; Mountain snowmobiles under the names Mountain Cat and King Cat; Touring models under the names Panther, Pantera, and T660 Touring; and Utility models under the name Bearcat. In addition, to encourage family involvement in snowmobiling, the Company offers a youth snowmobile marketed under the ZR120 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, fuel management, 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, remote starters and a technologically advanced front and rear suspension. Arctic Cat is the industry leader in fuel management technology offering electronic fuel injection (EFI) system on its snowmobiles. The Company recently introduced a snowmobile with a turbo four stroke inter-cooled engine. 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.

 

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 every year since its formation, and in recent years new models have been among the Company’s best sellers. In the 2004 model year, over 75 percent of the Company’s snowmobile sales were from models or model variations not available three years earlier.

 

All-Terrain Vehicles (ATVs) – In December 1995, the Company introduced its first ATV. Since that time the Arctic Cat line has grown to 26 models. Features like fully independent front and rear suspensions, hydraulic disc brakes, hi-low range, high ground clearance, MRP Speedracks and a large fuel tank, all make Arctic Cat ATVs consumer friendly. The 2004 Arctic Cat ATV models carry suggested U.S. retail

 

3



 

prices ranging from $3,299 to $7,899, excluding youth models which are sold at suggested U.S. retail prices ranging from $1,799 to $2,299.

 

Arctic Cat has continued to expand into international markets by adding new distributors, entering new territories, and developing new markets. The Company produces ATVs for AGCO Corporation under the Arctic Cat and Massey Ferguson/Delta Allis brands for distribution through their dealer network outside of North America.

 

Arctic Cat believes its ATVs are renowned 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. Farm Industry News gave Arctic Cat 2000 models the FinOvation Award for having the greatest reader interest. ATV Magazine awarded the Arctic Cat 250 4x4 model “Best in Class” in fiscal 2001 and “Best Utility” in 2002. In 2003 Arctic Cat MRP models received the 2003 Product Innovation Award from ATV Magazine. In 2004 the Arctic Cat 650 V-twin received “ATV of the Year” award from both “ATV Illustrated” and “ATV Guide”.

 

Parts, Garments and Accessories – The Company is the exclusive provider of genuine Arctic Cat snowmobile and ATV parts, garments and accessories. Included are replacement parts and accessory items to upgrade Arctic Cat snowmobiles such as electric start and reverse kits, luggage racks and bags, backrests, machine covers, windshields, and colored accessories. Other items include maintenance supplies such as oil and fuel additives, track studs and carbide runners.  Arctic Cat ATV parts and accessories include winch kits, snow plow kits, MRP Speedrack accessories, portable lights, utility bags as well as maintenance supplies.

 

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 pull-overs, riding gloves, hats, helmets, boots, gear bags, sweatshirts, T-shirts, and caps. The colors and designs of many of these items are coordinated with specific Arctic Cat snowmobile models.

 

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, helmets, gear bags, sweatshirts, T-shirts, and caps.

 

Manufacturing and Engineering

 

Arctic Cat snowmobiles and ATVs are manufactured at the Company’s facilities in Thief River Falls, Minnesota. The Company paints snowmobile hoods and produces other parts for Arctic Cat snowmobiles and ATVs in Madison, South Dakota. The Company also has a facility in Bucyrus, Ohio which houses its service parts, garments and accessories distribution 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, foam seats, seat covers and machines, welds and paints other components. The Company 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 are available from multiple alternative vendors on relatively short notice at competitive prices.

 

Suzuki Motor Corporation (“Suzuki”) has manufactured snowmobile and ATV engines for the Company pursuant to supply agreements which are automatically renewed annually unless terminated. While notice of termination of the supply agreements may be given annually, effective termination of supply would take at least one model year for snowmobile and two model years for ATVs due to contractual notice requirements.

 

The Company is in the second year of a three year agreement with Kawasaki to supply Arctic Cat certain ATV engines. In fiscal 2004 this amounted to approximately 15% of the Company’s engine requirements.

 

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 in July of 1990, and is currently the Company’s largest shareholder with approximately 32% of the Company’s outstanding capital stock. If Suzuki or Kawasaki 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.

 

In May 2004 the Company announced it would begin building 650cc ATV engines late in fiscal 2005 as part of a strategic first step in a new engine program. The Company believes that having the capability to design and build its own ATV engines will enable Arctic Cat to offer customers more choices, provide excellent value and enhance its long-term competitive position.

 

4



 

Since the Company began snowmobile production, it has followed a build-to-order policy to control inventory levels. Under this policy, the Company only manufactures a number of snowmobiles equivalent to the orders received from its dealers and distributors, plus a number of uncommitted machines used for dealer and market 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 the Company believes dealer inventories have remained consistently below historic peak levels. The Company believes dealer inventory levels of non-current Arctic Cat model snowmobiles 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 built 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.

 

Retail sales of ATVs occur throughout the year with seasonal highs occurring in the spring and fall. The Company builds ATVs throughout the year to coincide with dealer and consumer demand.

 

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 156 individuals in the design and development of new and existing products, with an additional 28 individuals directly involved in the testing of snowmobiles and ATVs in normal and extraordinary conditions at the Company’s test track. In addition, snowmobiles 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 2004, 2003, and 2002, the Company spent approximately $14,736,000, $14,254,000, and $15,244,000 on engineering, research and development. 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. 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 expected to order a sufficient number of snowmobiles 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 expected to carry adequate levels of inventory of genuine Arctic Cat 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 are single line dealers and sell only Arctic Cat branded snowmobiles and ATVs. Relations with dealers are generally considered excellent.

 

The Company utilizes 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. Canadian sales are made in Canadian dollars, nearly all of which is financed through certain Canadian financial institutions. Sales outside North America are normally made in U.S. dollars and most are supported by letters of credit.

 

The Company’s marketing efforts are comprised of dealer, distributor and consumer 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 racers who participate in snowmobile 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, during the year, magazines called Pride (snowmobile) and Ride (ATV) to 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.

 

5



 

The Company warrants its snowmobiles and ATVs under a limited warranty against defects in materials and workmanship for a period generally 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.

 

Competition

 

The snowmobile 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 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 and ATVs. The Company has supported laws and regulations pertaining to safety and exhaust emissions. 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 regulations set emission standards for ATVs, with which the Company currently complies. Although the snowmobile industry is not currently required to comply with any federal or state exhaust emissions standards, the Environmental Protection Agency (EPA) recently adopted regulations affecting snowmobiles and ATVs for model years 2006 and beyond. The Company believes that it will be in compliance with these regulations. The Company supports balanced and appropriate programs that educate the customer on safe use of its products and protect the environment.

 

Certain materials used in snowmobile 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, 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 category produced by participating snowmobile manufacturers, have been adopted by the Canadian Ministry 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 the Specialty Vehicle Institute of America (SVIA), a trade association organized to foster and promote the safe and responsible use of ATVs 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), as well as the All-Terrain Vehicle Association of Europe.

 

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 facilitate the movement of 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 affect the Company’s future sales of snowmobiles.

 

Employees

 

At March 31, 2004, the Company had 1,469 employees including 285 salaried and 1,184 hourly and production personnel. 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 for its snowmobiles, ATVs and other products. Trademarks are important to the Company’s snowmobile, 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 program of

 

6



 

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 trademark is its most significant trademark. Additionally, the Company has numerous registered trademarks, trade names and logos, both in the United States and internationally.

 

Available Information

 

The Company has a website at www.arcticcat.com. Contents of such website are not part of or incorporated by reference into this annual report.

 

Since November 15, 2002, the Company has made its annual reports, quarterly reports and current reports available on its website as soon as reasonably practicable after such report has been filed with the SEC.

 

ITEM 2. PROPERTIES

 

The following sets forth the Company’s material property holdings as of March 31, 2004.

 

Location

 

FacilityType / Use

 

Owned or
Leased

 

Sq Ft.

 

Thief River Falls, Minnesota

 

Manufacturing / Corporate Office

 

Owned

 

558,000

 

Thief River Falls, Minnesota

 

Warehouse

 

Leased

 

60,500

 

Thief River Falls, Minnesota

 

Warehouse

 

Leased

 

14,350

 

Madison, South Dakota

 

Manufacturing

 

Owned

 

40,000

 

Bucyrus, Ohio

 

Distribution Center

 

Owned

 

220,000

 

Winnipeg, Manitoba

 

Service Center

 

Leased

 

10,602

 

Island Park, Idaho

 

Test & Development Facility

 

Owned

 

3,000

 

 

ITEM 3. LEGAL PROCEEDINGS

 

Accidents involving personal injury and property damage occur in the use of snowmobiles 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. The Company is not involved in any legal proceedings which it believes will 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 $5,000,000 self-insured retention. The Company believes such insurance is adequate.

 

7



 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

No matters were submitted to the shareholders during the fourth quarter of fiscal 2004.

 

ITEM 4A. EXECUTIVE OFFICERS OF REGISTRANT

 

Name

 

Age

 

Position

Christopher A. Twomey

 

56

 

Chairman of the Board of Directors, President and Chief Executive Officer

Timothy C. Delmore

 

50

 

Chief Financial Officer and Corporate Secretary

Terry J. Blount

 

61

 

Vice President – Human Resources

Robert Bonev

 

46

 

Vice President – Sales and Marketing

Ronald G. Ray

 

55

 

Vice President – Operations

Roger H. Skime

 

61

 

Vice President – Research & Development

Ole E. Tweet

 

57

 

Vice President – New Product Development

 

Mr. Twomey has been Chairman since 2003, President and Chief Executive Officer of the Company since January 1986 and director since 1987. Mr. Twomey is currently serving as a director of The Toro Company and Universal Trailer Corporation.

 

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. 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. Bonev has been Vice President – Sales and Marketing since June of 2001 and has over 20 years of marketing experience. From February 1999 to January 2000, Mr. Bonev served as Vice President of Marketing for Outdoor Marine Corporation. From December 1998 to February 1999, Mr. Bonev was employed by Teledyne Continental Motors, a business segment of Teledyne Technologies Incorporated, as Vice President of Sales/Marketing. From June 1993 to December 1998, Mr. Bonev was Director of Marketing for Mercury Marine, a division of The Brunswick Corporation.

 

Mr. Ray has been Vice President – Operations since April of 2004; prior to that he served as the Company’s Vice President – Manufacturing since 1992 and has over 30 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 over 40 years.

 

Mr. Tweet has been Vice President – New Product Development since May 1992. Prior to that, he had been the Company’s Vice President – Marketing since its inception in 1983 and has been employed either in the snowmobile or ATV industry for over 30 years.

 

8



 

Part II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER OF EQUITY SECURITIES

 

The Company’s common stock is traded on the Nasdaq National Market under the Nasdaq symbol “ACAT”. Quotations below represent the high and low 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,

 

2004

 

2003

 

Quarterly Prices

 

High

 

Low

 

High

 

Low

 

First Quarter

 

$

19.71

 

$

15.03

 

$

20.75

 

$

16.00

 

Second Quarter

 

$

22.25

 

$

18.25

 

$

17.41

 

$

13.54

 

Third Quarter

 

$

25.45

 

$

18.52

 

$

18.20

 

$

12.95

 

Fourth Quarter

 

$

28.55

 

$

22.68

 

$

17.93

 

$

12.35

 

 

As of June 2, 2004, the Company had approximately 468 stockholders of record, including the nominee of Depository Trust Company which held 12,854,029 shares of common stock.

 

Cash Dividends Paid

 

Cash Dividends are declared quarterly and have been paid since 1995. As of October 23, 2003, the quarterly dividend was increased to $0.07 per share.

 

Quarter

 

2004

 

2003

 

First Quarter

 

$

0.06

 

$

0.06

 

Second Quarter

 

$

0.06

 

$

0.06

 

Third Quarter

 

$

0.07

 

$

0.06

 

Fourth Quarter

 

$

0.07

 

$

0.06

 

Total

 

$

0.26

 

$

0.24

 

 

Purchases of Company Equity Securities

 

Period

 

Total Number of
Shares Purchased

 

Average Price
Paid per Share

 

Total number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs

 

Maximum Number
of Shares that May
Yet be Purchased
Under the Plans
or Programs

 

January 1, 2004 – January 31, 2004

 

0

 

$

 

0

 

567,800

 

February 1, 2004 – February 28, 2004

 

131,400

 

$

26.21

 

131,400

 

436,400

 

March 1, 2004 – March 31, 2004

 

18,600

 

$

25.69

 

18,600

 

417,800

 

 

The Company purchases Company common stock primarily to offset the dilution created by employee stock option programs and as an alternative in returning excess cash to shareholders.

 

The Company has a publicly announced stock repurchase stock purchase program which has been approved by the Board of Directors. The Board approved a $20 million repurchase program in August 2002. Pricing under this program has been delegated to management. There is no expiration date for this program.

 

The Company has executed the Company stock purchases in accordance with Rule 10b-18 of the Securities Exchange Act of 1934. There have been no other purchases of the Company’s common stock.

 

9



 

ITEM 6. SELECTED FINANCIAL DATA

 

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

Years ended March 31,

 

2004

 

2003

 

2002

 

2001

 

2000

 

INCOME STATEMENT DATA:

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

649,617

 

$

577,070

 

$

556,079

 

$

502,449

 

$

461,460

 

Cost of goods sold

 

510,445

 

448,266

 

433,297

 

398,019

 

376,202

 

Gross profit

 

139,172

 

128,804

 

122,782

 

104,430

 

85,258

 

Selling, general and administrative expenses

 

95,511

 

81,757

 

83,228

 

68,712

 

79,550

 

Operating profit

 

43,661

 

47,047

 

39,554

 

35,718

 

5,708

 

Interest income

 

993

 

1,442

 

2,543

 

4,563

 

4,591

 

Interest expense

 

 

 

 

 

 

Earnings before income taxes

 

44,654

 

48,489

 

42,097

 

40,281

 

10,299

 

Income taxes

 

14,289

 

15,786

 

13,471

 

13,293

 

2,678

 

Net earnings

 

$

30,365

 

$

32,703

(1)

$

28,626

 

$

26,988

 

$

7,621

(2)

Net earnings per share

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.42

 

$

1.46

(1)

$

1.21

 

$

1.11

 

$

0.30

(2)

Diluted

 

$

1.40

 

$

1.45

(1)

$

1.20

 

$

1.10

 

$

0.30

(2)

Cash dividends per share

 

$

0.26

 

$

0.24

 

$

0.24

 

$

0.24

 

$

0.24

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

Basic

 

21,424

 

22,396

 

23,587

 

24,231

 

25,535

 

Diluted

 

21,730

 

22,615

 

23,925

 

24,457

 

25,586

 

 

As of March 31,

 

2004

 

2003

 

2002

 

2001

 

2000

 

BALANCE SHEET DATA (In thousands):

 

 

 

 

 

 

 

 

 

 

 

Cash and short-term investments

 

$

106,440

 

$

91,295

 

$

102,040

 

$

99,828

 

$

108,277

 

Working capital

 

133,012

 

136,964

 

133,785

 

127,216

 

132,072

 

Total assets

 

285,562

 

278,291

 

268,595

 

255,658

 

246,535

 

Long-term debt

 

0

 

0

 

0

 

0

 

0

 

Shareholders’ equity

 

185,953

 

187,286

 

181,638

 

170,442

 

162,558

 

 


(1)               In fiscal 2003, the Company’s results included a net reduction of restructuring accruals and other costs related to the fiscal 2000 exit from the personal watercraft (PWC) business. This reduction increased: pretax earnings $5.4 million, net earnings $3.4 million and diluted earnings per share $0.15.

 

(2)               During fiscal 2000 the Company announced that it was exiting the PWC business effective September 30, 1999. Fiscal 2000 results include a pretax charge of $26.2 million ($16.9 million after tax) or $0.66 per share for certain costs related to the discontinued PWC business.

 

10



 

QUARTERLY FINANCIAL DATA (unaudited)

 

(In thousands, except per share amounts)

 

Total
Year

 

First
Quarter

 

Second
Quarter

 

Third
Quarter

 

Fourth
Quarter

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

2004

 

$

649,617

 

$

77,189

 

$

237,650

 

$

194,618

 

$

140,160

 

2003

 

577,070

 

78,283

 

211,242

 

176,175

 

111,370

 

2002

 

556,079

 

77,821

 

211,081

 

167,917

 

99,260

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

 

 

 

 

 

 

 

 

 

 

2004

 

$

139,172

 

$

18,526

 

$

56,172

 

$

43,981

 

$

20,493

 

2003

 

128,804

 

18,843

 

52,970

 

39,653

 

17,338

 

2002

 

122,782

 

18,876

 

51,925

 

35,642

 

16,339

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Earnings (Loss)

 

 

 

 

 

 

 

 

 

 

 

2004

 

$

30,365

 

$

102

 

$

21,569

 

$

9,733

 

$

(1,039

)

2003

 

32,703

 

1,969

 

20,520

 

11,912

 

(1,698

)

2002

 

28,626

 

1,957

 

20,332

 

8,151

 

(1,814

)

 

 

 

 

 

 

 

 

 

 

 

 

Net Earnings (Loss) Per Share

 

 

 

 

 

 

 

 

 

 

 

2004

Basic

 

$

1.42

 

$

0.00

 

$

0.99

 

$

0.46

 

$

(0.05

)

 

Diluted

 

1.40

 

0.00

 

0.98

 

0.46

 

(0.05

)

2003

Basic

 

1.46

 

0.09

 

0.92

 

0.54

 

(0.08

)

 

Diluted

 

1.45

 

0.08

 

0.91

 

0.53

 

(0.08

)

2002

Basic

 

1.21

 

0.08

 

0.85

 

0.35

 

(0.08

)

 

Diluted

 

1.20

 

0.08

 

0.84

 

0.34

 

(0.08

)

 

11



 

Part III

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Executive Level Overview

 

Fiscal 2004 was the fourth consecutive year of record sales for Arctic Cat. Fiscal 2004 net sales increased nearly 13% to $649.6 million from $577.1 million in fiscal 2003. In fiscal 2004 net earnings were $30.4 million or $1.40 per diluted share. During the year the Company raised its dividend by 17 percent due to the Company’s strong financial position and ended the year with $106.4 million in cash and short-term investments.

 

The Company’s product lines consist of all-terrain vehicles (ATVs), snowmobiles and parts, garments and accessories.

 

ATV sales increased 25% in fiscal 2004 to $294.4 million from $235.9 million in fiscal 2003. For the first time ATV net sales have surpassed snowmobile net sales and are now the Company’s largest product line, comprising over 45% of net sales. The Company’s rapid ATV growth is due to Arctic Cat’s expanded product line-up that now fills nearly every market segment as well as overall growth in the ATV market.

 

Snowmobile sales increased 5% in fiscal 2004 to $258.4 million from $245.2 million in fiscal 2003 despite less than normal snowfall during the prior winter season. The Company expects that with normal snowfall Arctic Cat customers will renew their enthusiasm for the sport. Snowmobiles comprised 40% of the Company’s net sales in fiscal 2004.

 

Parts, garments and accessory sales increased 5% in fiscal 2004 to $96.8 million from $92.0 million in fiscal 2003. A return to more normal snowfall in key regions led to greater demand for snow-related items. Additionally, parts, garments and accessory sales benefited from the many new ATV products that were introduced last year. Parts, garments and accessory sales were 15% of the Company’s net sales in fiscal 2004.

 

Results of Operations

 

2004 vs. 2003 During fiscal 2004 net sales increased 12.6% to $649,617,000 from $577,070,000 in fiscal 2003. ATV unit volume increased 13.0%, snowmobile unit volume decreased 6.0% and dollar sales of parts, garments and accessories increased $4,727,000. The Company believes the continued increase in ATV sales is due both to enthusiastic dealer and consumer reception of the Arctic Cat ATV and growth in the ATV market. Snowmobile unit volume decreased because of lower dealer orders related to less than normal snowfalls during the prior winter season in certain key regions in North America.

 

Gross profit increased 8.0% to $139,172,000 in 2004 from $128,804,000 in 2003. The gross profit percentage decreased to 21.4% versus 22.3% in 2003. The decrease in the 2004 gross profit percentage was mainly due to the fact that the fiscal 2003 gross profit benefited from a one-time $4,000,000 increase from the net reduction in PWC related restructuring accruals.

 

Selling, general and administrative expenses increased 16.8% to $95,511,000 in 2004 from $81,757,000 in 2003. Selling, general and administrative costs increased at a greater rate than the overall sales increase due to approximately $5 million of Canadian currency hedge costs. As a percent of net sales, operating expenses were 14.7% in 2004 compared with 14.2% in 2003.

 

Operating profits decreased 7.2% to $43,661,000 in 2004 from $47,047,000 in 2003. As a percent of net sales, operating profits were 6.7% in 2004 compared to 8.2% in 2003. The principal reason for this decrease was the PWC matter described in the gross margin discussion.

 

Interest income decreased 31.1% to $993,000 in fiscal 2004 from $1,442,000 in fiscal 2003 due to lower yields on invested cash related to lower rates of return.

 

Net earnings decreased 7.1% to $30,365,000 or $1.40 per diluted share from $32,703,000 or $1.45 per diluted share for fiscal 2003. Net earnings as a percent of net sales were 4.7% and 5.7% in 2004 and 2003, respectively. Net earnings in fiscal 2003 would have been $29,298,000 or $1.30 per diluted share without the net reduction in PWC related restructuring accruals.

 

2003 vs. 2002 During fiscal 2003 net sales increased 3.8% to $577,070,000 from $556,079,000 in fiscal 2002. ATV unit volume increased 9.2%, snowmobile unit volume decreased 11.5% and dollar sales of parts, garments and accessories increased $2,260,000. Net sales also increased $4,000,000 due to a reduction of a restructuring accrual for estimated sales incentives related to Arctic Cat’s exit from the PWC business in fiscal 2000. The Company believes the continued increase in ATV sales is due both to enthusiastic dealer and consumer reception of the Arctic Cat ATV and growth in the ATV market. Snowmobile unit volume decreased because of lower dealer orders related to less than normal snowfalls during the prior winter season.

 

Gross profit increased 4.9% to $128,804,000 in 2003 from $122,782,000 in 2002. The gross profit percentage improved to 22.3% versus 22.1% in 2002. The improvement of gross profit and gross profit percentages was due to the aforementioned reduction of estimated PWC accruals. Selling, general and administrative expenses decreased 1.8% to $81,757,000 in 2003 from $83,228,000 in 2002. Decreases in snowmobile marketing expenses and a $2.4

 

12



 

million reduction of PWC restructuring accruals were offset by a $1 million increase in other non-exit PWC related accruals and increased ATV marketing expenses. As a percent of net sales, operating expenses were 14.2% in 2003 compared with 15.0% in 2002.

 

Operating profits increased 18.9% to $47,047,000 in 2003 from $39,554,000 in 2002. As a percent of net sales, operating profits were 8.2% in 2003 compared to 7.1% in 2002.

 

Interest income decreased 43.3% to $1,442,000 in fiscal 2003 from $2,543,000 in fiscal 2002 due to lower yields on invested cash related to lower interest rates.

 

Net earnings increased 14.2% to $32,703,000 or $1.45 per diluted share from $28,626,000 or $1.20 per diluted share for fiscal 2002. Net earnings as a percent of net sales were 5.7% and 5.1% in 2003 and 2002, respectively. Net earnings would have been $29,298,000 or $1.30 per diluted share without the net reduction in PWC related items.

 

Critical Accounting Policies

 

The preparation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the amount of reported assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. Actual results may differ from those estimates. The Company reviewed the development and selection of the critical accounting policies and believes the following are the most critical accounting policies that could have an effect on the Company’s reported results. These critical accounting policies and estimates have been reviewed with the audit committee of the Board of Directors.

 

Revenue Recognition The Company recognizes revenue and provides for estimated marketing and sales incentive costs if applicable when products are shipped to dealers and distributors pursuant to their order the price is fixed and collection is reasonably assured. Arctic Cat has agreements with finance companies to repurchase products repossessed up to certain limits. Arctic Cat’s financial exposure to repurchase products is limited to the difference between the amount paid to the finance company and the resale value of the repossessed products. Historically, Arctic Cat has not incurred material losses as a result of repurchases nor has it provided a financial reserve for repurchases. Adverse changes in retail sales could cause this situation to change.

 

Marketing and Sales Incentive Costs The Company provides for various marketing and sales incentive costs which are offered to its dealers and consumers at the latter of when the revenue is recognized or when the marketing and sales incentive program is approved and communicated. Examples of these costs include: dealer and consumer rebates, dealer floor plan financing assistance, sales associate incentives and other incentive and promotion programs. Adverse market conditions resulting in lower than expected retail sales or the matching of competitor programs could cause accrued marketing and incentive costs to materially increase if the Company authorizes and communicates new programs to its dealers. The Company estimates marketing and sales incentive costs based on expected usage and historical experience. The related marketing and sales incentive costs accrual is included in accrued marketing in the Company’s balance sheet. To the extent current experience differs with previous estimates the accrued liability for marketing and sales incentives is adjusted accordingly.

 

Product Warranties The Company generally provides a limited warranty to the original owner of snowmobiles for twelve months from the date of consumer registration and for six months on ATVs. The Company provides for estimated warranty costs at the time of sale based on historical rates and trends and makes subsequent adjustments to their estimate as actual claims become known or the amounts are determinable. Adverse changes in actual warranty costs compared to the Company’s initial estimates could cause accrued warranty to materially change.

 

Product Liability and Litigation The Company is subject to product liability claims and other litigation in the normal course of business. Arctic Cat insures for product liability claims although it retains a modest self insured retention accrual within the balance sheet caption Insurance. The estimated costs resulting from any losses over insured amounts are charged to operating expenses when it is probable a loss has been incurred and the amount of the loss is reasonably determinable.

 

The Company utilizes historical trends and other analysis to assist in determining the appropriate loss. Adverse changes in the final determination of product liability or other claims made against the Company could have a material impact on the Company’s financial condition.

 

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

 

13



 

cycle and with short-term bank borrowings during the middle of the cycle. In fiscal 2004 the Company incurred no short-term bank borrowings. The Company believes current available cash and cash generated from operations together with its available line of credit will provide sufficient funds to finance the Company on a short and long-term basis.

 

Cash and Short-Term Investments

 

Cash and short-term investments were $106,440,000 at March 31, 2004 compared to $91,295,000 at March 31, 2003. 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.

 

Financing Arrangements and Cash Flows

 

The Company has a $60,000,000 unsecured bank credit agreement for the documentary and stand-by letters of credit and for working capital purposes. Total working capital borrowings under the credit agreement are limited to $45,000,000 during the last six months of the fiscal year. The total letters of credit issued at March 31, 2004 were $35,253,000, of which $30,215,000 was issued to Suzuki Motor Corporation for engine and service parts purchases.

 

The Company has agreements with certain finance companies to provide snowmobile and ATV 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 $23,549,000 at March 31, 2004. No material losses have been incurred by the Company under these agreements. The Company believes current available cash and cash generated from operations provide sufficient funding in the event there is a requirement to perform under this guarantee and repurchase agreement.

 

In 2004, the Company invested $25,053,000 in capital expenditures. The Company expects that fiscal 2005 capital expenditures, including tooling, will be approximately $28,500,000. Since 1996, the Company has repurchased over 9 million shares of common stock. In August 2002, the Company’s Board of Directors authorized an additional $20,000,000 share repurchase of which $10,604,000 remains available for repurchase. The Company believes that cash generated from operations and available cash will be sufficient to meet its working capital, regular quarterly dividend, share repurchase program and capital expenditure requirements on a short and long-term basis.

 

Contractual Obligations

 

The following table summarizes the Company’s significant future contractual obligations at March 31, 2004 (in millions):

 

 

 

Payment Due by Period

 

 

 

Total

 

Less than
1 Year

 

1-3 Years

 

More than
3 Years

 

Contractual Obligations

 

 

 

 

 

 

 

 

 

Operating Lease Obligations

 

$

0.2

 

$

0.2

 

0

 

0

 

Purchase Obligations(1)

 

91.7

 

91.7

 

0

 

0

 

Total Contractual Obligations

 

$

91.9

 

$

91.9

 

0

 

0

 

 


(1)               The Company has outstanding purchase obligations with suppliers and vendors at March 31, 2004 for raw materials and other supplies as part of the normal course of business.

 

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.

 

14



 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Inflation, Foreign Exchange Rates and Interest 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 2004, approximately 29% of the Company’s cost of sales was 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 and ATVs. The Company has an agreement with Suzuki Motor Corporation for snowmobile 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 2004, the exchange rate fluctuation between the U.S. dollar and the Japanese yen had a modest negative impact on the Company’s operating results. From time to time the Company utilizes foreign exchange cash flow hedging contracts to minimize the impact of exchange rate fluctuations relating to ATV engine purchases. During 2004, the average contracted forward exchange rate on these cash flow hedges was approximately 120 (Japanese Yen to the U.S. Dollar).  At March 31, 2004, there were no foreign exchange contracts outstanding for Japanese yen.

 

Sales to Canadian dealers are made in Canadian dollars with the U.S. dollar serving as the functional currency. During fiscal 2004, sales to Canadian dealers comprised 18.0% of total net sales. During fiscal 2004, the exchange rate fluctuation between the U.S. dollar and the Canadian dollar had a modest positive impact on operating profits. During 2004, the Company utilized cash flow hedges to mitigate the variability in Canadian exchange rate changes relating to Canadian dollar fund transfers to the United States. During 2004, the average contracted forward exchange rate on these cash flows hedges was approximately $1.50 (Canadian Dollar to U.S. Dollar). At March 31, 2004 there were Canadian dollar forward exchange contracts outstanding with notional amounts of $73,101,000.

 

The fair values of the Canadian dollar hedge contracts at March 31, 2004 represent an unrealized loss of $655,000.  A ten percent fluctuation in the currency rates as of March 31, 2004 would have resulted in a change in the fair value of the Canadian dollar hedge contracts of approximately $7,000,000. However, since these contracts hedge foreign currency denominated transactions, any change in the fair value of the contracts would be offset by changes in the underlying value of the transaction being hedged.

 

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.

 

The Company is a party to an unsecured bank line of credit arrangement under which it may borrow an aggregate of up to $60 million. Interest is charged at variable rates based on LIBOR or “prime”. In fiscal 2004 the Company incurred no short-term bank borrowings.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Financial Statements, Notes, and Report of Independent Certified Public Accountants appear on pages 20 through 32. Quarterly financial data appears in Item 6.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A. CONTROLS AND PROCEDURES

 

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 (the “1934 Act”) as of March 31, 2004. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in the reports it files or submits under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

 

There have been no significant changes in internal controls over financial reporting during the fiscal quarter ended March 31, 2004 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

15



 

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

 

The information included under the heading “Election of Directors”  and “Beneficial Ownership of Capital Stock-Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s definitive Proxy Statement for the Annual Meeting of Shareholders to be held August 4, 2004, 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 4A 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 4, 2004, is incorporated herein by reference.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

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 4, 2004, 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 4, 2004, is incorporated herein by reference.

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

The information required by this item is incorporated by reference to the information set forth under the heading “Auditors” in the Company’s definitive Proxy Statement for the Annual Meeting of Shareholders to be held August 4, 2004.

 

16



 

Part IV

 

ITEM 15. 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:

 

 

(i)

Consolidated Balance Sheets as of March 31, 2004 and 2003

 

 

 

 

 

 

(ii)

Consolidated Statements of Earnings for the three years ended March 31, 2004, 2003 and 2002

 

 

 

 

 

 

(iii)

Consolidated Statements of Shareholders’ Equity for the three years ended March 31, 2004, 2003 and 2002

 

 

 

 

 

 

(iv)

Consolidated Statements of Cash Flows for the three years ended March 31, 2004, 2003 and 2002

 

 

 

 

 

 

(v)

Notes to Consolidated Financial Statements

 

 

 

 

 

 

(vi)

Report of Independent Certified Public Accountants

 

 

2. Schedules filed as part of this Form 10-K.

 

The information required to be disclosed within Schedule II – Valuation and Qualifying Accounts is provided within the Consolidated Financial Statements of the Company, filed as part of this Form 10-K.

 

3. Exhibits

 

 

 

 

 

Method of Filing

3(a)

 

Amended and Restated Articles of Incorporation of Company

 

(3)

 

 

 

 

 

3(b)

 

Restated By-Laws of the Company

 

(1)

 

 

 

 

 

4(a)

 

Form of specimen Common Stock Certificate

 

(1)

 

 

 

 

 

4(b)

 

Rights Agreement by and between the Company and Wells Fargo Bank Minnesota, N.A., dated September 17, 2001

 

(4)

 

 

 

 

 

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 March 1, 1985 between Suzuki Motor Co., Ltd. and the Company, and related Agreement on Implementation of Warranty Provision.

 

(1)

 

 

 

 

 

10(d)

 

Form of Employment Agreement between the Company and each of its executive officers

 

(1)

 

 

 

 

 

10(e)

 

Floorplan Repurchase Agreement dated July 13, 1984, between the Company and ITT Commercial Finance Corp.

 

(1)

 

 

 

 

 

10(f)

 

Floorplan Repurchase Agreement dated as of June 15, 1988, between the Company and ITT Commercial Finance, a division of ITT Industries of Canada, Ltd.

 

(1)

 

 

 

 

 

10(g)

 

Discretionary Revolving Credit Facility, dated as of June 6, 1997, between the Company and Wells Fargo Bank Minnesota, National Association.

 

(3)

 

 

 

 

 

10(h)

 

2002 Stock Plan

 

(5)

 

 

 

 

 

10(i)

 

Program agreement, dated as of January 20, 2003, by and between Arctic Cat Sales Inc. and Textron Financial Corporation (Confidential treatment pursuant to 17 CFR Sections 200.80(b) and 240.246-2 has been requested for certain portions of this exhibit.  Such portions have been omitted herein and have been filed separately with the SEC.)

 

(6)

 

 

 

 

 

10(j)

 

Repurchase Agreement, dated as of January 20, 2003, by and between Arctic Cat Sales Inc. and Textron Financial Corporation

 

(6)

 

 

 

 

 

21

 

Subsidiaries of the Registrant

 

(2)

 

 

 

 

 

23

 

Consent of Independent Certified Public Accountants

 

(2)

 

 

 

 

 

31.1

 

Section 302 Certificate of Chief Executive Officer

 

(2)

 

 

 

 

 

31.2

 

Section 302 Certificate of Chief Financial Officer

 

(2)

 

 

 

 

 

32.1

 

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

 

 

32.2

 

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

(2)

 

(b) Reports on Form 8-K

 

 

 

On January 22, 2004, the Company filed a Form 8-K to furnish the SEC under Item 12 a press release regarding the registrant’s results of operations for the third quarter of 2004.

 

17



 

(c) Exhibits

 

Reference is made to Item 15(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.

 

(4) Incorporated by reference to Exhibit 1 to the Company’s Registration on Form 8-A filed with the SEC on September 20, 2001.

 

(5) Incorporated by reference to Exhibit 99.1 to the Company’s Registration on Form S-8 filed with the SEC on September 6, 2002.

 

(6) Incorporated herein by reference to the Company's Quarterly Report, on Form 10-Q for the quarter ended December 31, 2003.

 

 

18



 

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 14th day of June, 2004.

 

 

 

ARCTIC CAT INC.

 

 

 

 

 

 

 

 

/s/Christopher A. Twomey

 

 

Christopher A. Twomey

 

Chairman of the Board of Directors, President and Chief Executive Officer

 

 

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.

 

Signature

 

Date

 

 

 

/s/

Christopher A. Twomey

 

 

June 14, 2004

 

Christopher A. Twomey

 

 

 

Chairman of the Board of Directors, President, Chief Executive Officer

 

 

 

(Principle Executive Officer)

 

 

 

 

 

 

/s/

Timothy C. Delmore

 

 

June 14, 2004

 

Timothy C. Delmore

 

 

 

Chief Financial Officer

 

 

 

(Principle Financial and Accounting Officer)

 

 

 

 

 

 

/s/

Robert J. Dondelinger

 

 

June 14, 2004

 

Robert J. Dondelinger, Director

 

 

 

 

 

 

/s/

William I. Hagen

 

 

June 14, 2004

 

William I. Hagen, Director

 

 

 

 

 

 

/s/

William G. Ness

 

 

June 14, 2004

 

William G Ness, Vice Chairman of the
Board of Directors

 

 

 

 

 

 

/s/

Gregg A. Ostrander

 

 

June 14, 2004

 

Gregg A. Ostrander, Director

 

 

 

 

 

 

/s/

Kenneth J. Roering

 

 

June 14, 2004

 

Kenneth J. Roering, Lead Director

 

 

 

 

 

 

/s/

Motoo Murakami

 

 

June 14, 2004

 

Motoo Murakami, Director

 

 

 

19



 

Consolidated Balance Sheets

 

Arctic Cat Inc. March 31,

 

2004

 

2003

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and equivalents

 

$

44,045,000

 

$

33,081,000

 

Short-term investments

 

62,395,000

 

58,214,000

 

Accounts receivable, less allowances

 

28,274,000

 

29,018,000

 

Inventories

 

61,127,000

 

71,723,000

 

Prepaid expenses

 

3,592,000

 

3,829,000

 

Income taxes receivable

 

4,607,000

 

5,009,000

 

Deferred income taxes

 

12,020,000

 

14,417,000

 

Total current assets

 

216,060,000

 

215,291,000

 

 

 

 

 

 

 

Property and Equipment – At Cost

 

 

 

 

 

Machinery, equipment and tooling

 

125,584,000

 

110,924,000

 

Land, buildings and improvements

 

22,213,000

 

20,428,000

 

 

 

147,797,000

 

131,352,000

 

Less accumulated depreciation

 

78,295,000

 

68,352,000

 

 

 

69,502,000

 

63,000,000

 

 

 

$

285,562,000

 

$

278,291,000

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Accounts payable

 

$

48,148,000

 

$

35,865,000

 

Accrued expenses

 

34,900,000

 

42,462,000

 

Total current liabilities

 

83,048,000

 

78,327,000

 

 

 

 

 

 

 

Deferred Income Taxes

 

16,561,000

 

12,678,000

 

 

 

 

 

 

 

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, 14,285,882 in 2004; 14,487,849 in 2003

 

143,000

 

144,000

 

Class B common stock, par value $.01; 7,560,000 shares authorized, Shares issued, and outstanding 6,717,000 in 2004; 7,560,000 in 2003

 

67,000

 

76,000

 

Accumulated other comprehensive loss

 

(221,000

)

(336,000

)

Retained earnings

 

185,964,000

 

187,402,000

 

 

 

185,953,000

 

187,286,000

 

 

 

$

285,562,000

 

$

278,291,000

 

 

The accompanying notes are an integral part of these statements.

 

20



 

Consolidated Statements of Earnings

 

Arctic Cat Inc. Years ended March 31,

 

2004

 

2003

 

2002

 

Net sales

 

$

649,617,000

 

$

577,070,000

 

$

556,079,000

 

Cost of goods sold

 

510,445,000

 

448,266,000

 

433,297,000

 

Gross profit

 

139,172,000

 

128,804,000

 

122,782,000

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

95,511,000

 

84,161,000

 

83,228,000

 

Watercraft exit costs

 

 

(2,404,000

)

 

Operating profit

 

43,661,000

 

47,047,000

 

39,554,000

 

 

 

 

 

 

 

 

 

Other income

 

 

 

 

 

 

 

Interest income

 

993,000

 

1,442,000

 

2,543,000

 

Earnings Before Income Taxes

 

44,654,000

 

48,489,000

 

42,097,000

 

Income tax expense

 

14,289,000

 

15,786,000

 

13,471,000

 

Net Earnings

 

$

30,365,000

 

$

32,703,000

 

$

28,626,000

 

Net Earnings Per Share

 

 

 

 

 

 

 

Basic

 

$

1.42

 

$

1.46

 

$

1.21

 

Diluted

 

$

1.40

 

$

1.45

 

$

1.20

 

Weighted average shares outstanding

 

 

 

 

 

 

 

Basic

 

21,424,000

 

22,396,000

 

23,587,000

 

Diluted

 

21,730,000

 

22,615,000

 

23,925,000

 

 

The accompanying notes are an integral part of these statements.

 

21



 

Consolidated Statements of Shareholders’ Equity

 

Arctic Cat Inc.
Years ended March 31,

 

 

 

 

 

Additional
Paid-in
Capital

 

Accumulated
Other
Comprehensive
Income

 

Retained
Earnings

 

Total

 

Common Stock

Class B
Common Stock

Shares

 

Amount

Shares

 

Amount

Balances at March 31, 2001

 

16,228,412

 

$

162,000

 

7,560,000

 

$

76,000

 

$

 

$

320,000

 

$

169,884,000

 

$

170,442,000

 

Exercise of stock options

 

801,869

 

8,000

 

 

 

7,922,000

 

 

 

7,930,000

 

Tax benefits from stock option exercises

 

 

 

 

 

1,256,000

 

 

 

1,256,000

 

Repurchase of common stock

 

(1,335,965

)

(13,000

)

 

 

(9,178,000

)

 

(11,316,000

)

(20,507,000

)

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

 

 

 

28,626,000

 

28,626,000

 

Unrealized loss on securities available-for-sale, net of tax

 

 

 

 

 

 

(49,000

)

 

(49,000

)

Effect of adoption of SFAS No. 133

 

 

 

 

 

 

(741,000

)

 

(741,000

)

Unrealized gain on derivative instruments, net of tax

 

 

 

 

 

 

348,000

 

 

348,000

 

Total other comprehensive income

 

 

 

 

 

 

 

 

28,184,000

 

Dividends ($.24 per share)

 

 

 

 

 

 

 

(5,667,000

)

(5,667,000

)

Balances at March 31, 2002

 

15,694,316

 

157,000

 

7,560,000

 

76,000

 

 

(122,000

)

181,527,000

 

181,638,000

 

Exercise of stock options

 

256,160

 

2,000

 

 

 

2,777,000

 

 

 

2,779,000

 

Tax benefits from stock option exercises

 

 

 

 

 

1,207,000

 

 

 

1,207,000

 

Repurchase of common stock

 

(1,462,627

)

(15,000

)

 

 

(3,984,000

)

 

(21,445,000

)

(25,444,000

)

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

 

 

 

32,703,000

 

32,703,000

 

Unrealized gain on securities available-for-sale, net of tax

 

 

 

 

 

 

75,000

 

 

75,000

 

Unrealized loss on derivative instruments, net of tax

 

 

 

 

 

 

(289,000

)

 

(289,000

)

Total other comprehensive income

 

 

 

 

 

 

 

 

32,489,000

 

Dividends ($.24 per share)

 

 

 

 

 

 

 

(5,383,000

)

(5,383,000

)

Balances at March 31, 2003

 

14,487,849

 

144,000

 

7,560,000

 

76,000

 

 

(336,000

)

187,402,000

 

187,286,000

 

Exercise of stock options

 

644,305

 

6,000

 

 

 

7,649,000

 

 

 

7,655,000

 

Tax benefits from stock option exercises

 

 

 

 

 

1,868,000

 

 

 

1,868,000

 

Repurchase of common stock

 

(846,272

)

(7,000

)

(843,000

)

(9,000

)

(9,517,000

)

 

(26,230,000

)

(35,763,000

)

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

 

 

 

30,365,000

 

30,365,000

 

Unrealized loss on securities available-for-sale, net of tax

 

 

 

 

 

 

(154,000

)

 

(154,000

)

Unrealized gain on derivative instruments, net of tax

 

 

 

 

 

 

269,000

 

 

269,000

 

Total other comprehensive income

 

 

 

 

 

 

 

 

30,480,000

 

Dividends ($.26 per share)

 

 

 

 

 

 

 

(5,573,000

)

(5,573,000

)

Balances at March 31, 2004

 

14,285,882

 

$

143,000

 

6,717,000

 

$

67,000

 

$

 

$

(221,000

)

$

185,964,000

 

$

185,953,000

 

 

The accompanying notes are an integral part of these statements.

 

22



 

Consolidated Statements of Cash Flows

 

Arctic Cat Inc. Years ended March 31,

 

2004

 

2003

 

2002

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net earnings

 

$

30,365,000

 

$

32,703,000

 

$

28,626,000

 

Adjustments to reconcile net earnings to net cash provided by operating activities

 

 

 

 

 

 

 

Depreciation

 

18,551,000

 

15,684,000

 

14,571,000

 

Deferred income taxes

 

6,213,000

 

5,674,000

 

4,694,000

 

Tax benefit from stock option exercises

 

1,868,000

 

1,207,000

 

1,256,000

 

Watercraft exit costs

 

 

(6,404,000

)

 

Changes in operating assets and liabilities, net of effect of watercraft costs

 

 

 

 

 

 

 

Trading securities

 

(6,155,000

)

(1,031,000

)

(2,845,000

)

Accounts receivable

 

744,000

 

(5,199,000

)

1,078,000

 

Inventories

 

10,596,000

 

(9,547,000

)

(1,237,000

)

Prepaid expenses

 

237,000

 

(436,000

)

(1,536,000

)

Accounts payable

 

12,710,000

 

6,996,000

 

(1,521,000

)

Accrued expenses

 

(7,562,000

)

(948,000

)

229,000

 

Income taxes

 

402,000

 

(1,072,000

)

(3,395,000

)

Net cash provided by operating activities

 

67,969,000

 

37,627,000

 

39,920,000

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchase of property and equipment

 

(25,053,000

)

(21,475,000

)

(22,231,000

)

Sale and maturity of available-for-sale securities

 

1,729,000

 

1,861,000

 

1,140,000

 

Purchase of available-for-sale securities

 

 

(350,000

)

 

Net cash used in investing activities

 

(23,324,000

)

(19,964,000

)

(21,091,000

)

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from issuance of common stock

 

6,425,000

 

2,767,000

 

6,514,000

 

Repurchase of common stock

 

(34,533,000

)

(25,432,000

)

(19,091,000

)

Dividends paid

 

(5,573,000

)

(5,383,000

)

(5,667,000

)

Net cash used in financing activities

 

(33,681,000

)

(28,048,000

)

(18,244,000

)

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and equivalents

 

10,964,000

 

(10,385,000

)

585,000

 

Cash and equivalents at beginning of year

 

33,081,000

 

43,466,000

 

42,881,000

 

Cash and equivalents at end of year

 

$

44,045,000

 

$

33,081,000

 

$

43,466,000

 

Supplemental disclosure of cash payments for income taxes

 

$

9,423,000

 

$

12,978,000

 

$

10,787,000

 

 

Supplemental disclosure of non-cash investing and financing activities:

 

As of March 31, 2004 and 2003, the unrealized gain on securities available-for-sale, net of tax was $192,000 and $346,000.

 

As of March 31, 2004 and 2003, the unrealized loss on derivative instruments, net of tax was $413,000 and $682,000.

 

During 2004 and 2003, mature common shares with a fair market value of $1,230,000 and $12,000 were exchanged in settlement for the exercise of certain stock options.

 

The accompanying notes are an integral part of these statements.

 

23



 

Notes to Consolidated Financial Statements

 

Arctic Cat Inc.   March 31, 2004, 2003 and 2002

 

A               SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Arctic Cat Inc. (the “Company”) operates in a single industry segment and designs, engineers, manufactures and markets snowmobiles and all-terrain vehicles (ATVs) under the Arctic Cat® 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 accounting principles generally accepted in the United States of America 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 and Equivalents

 

The Company considers highly liquid temporary investments with an original maturity of three months or less or with put options exercisable in three months or less to be cash equivalents. Cash and equivalents consist primarily of commercial paper and put bonds. The Company’s cash management policy provides for bank disbursement accounts to be reimbursed on a daily basis. Checks issued but not presented to the banks for payment are included in cash and equivalents as a reduction of other cash balances.

 

Fair Values of Financial Instruments

 

Except where noted, the carrying value of current financial assets and liabilities approximates their fair value, due to their short-term nature.

 

Short-Term Investments

 

Short-term investments are reported at fair value and include trading securities, with unrealized gains and losses included in net earnings, and available-for-sale securities, with unrealized gains and losses are reported as a separate component of shareholders’ equity. The Company utilizes the specific identification method in accounting for its short-term investments.

 

Accounts Receivable

 

The Company’s accounts receivable balance consists of amounts due from its dealers and certain finance companies. The Company extends credit to its dealers based on an evaluation of the dealers’ financial condition. The Company’s collection exposure relating to accounts receivable amounts due from certain dealer finance companies is limited due to the financial strength of the finance companies and provisions of its existing agreements. Accounts receivable is presented net of an allowance for estimated uncollectible amounts due from its dealers. The Company estimates the uncollectible amounts considering numerous factors, mainly historical trends as well as current available information. The Company’s allowance for uncollectible accounts was $1,083,000 at March 31, 2004, 2003 and 2002. The activity within the allowance for uncollectible accounts for the three years ending March 31, 2004 was not significant.  Accounts receivable amounts written off have been within management’s expectations.

 

Inventories

 

Inventories are stated at the lower of cost or market, with cost determined using the first-in, first-out method.

 

Derivative Instruments and Hedging Activities

 

The Company enters into forward exchange contracts to hedge the variability in foreign exchange rates related to purchase commitments denominated in Japanese yen for ATV engines and transfers of Canadian dollar funds to the United States of America. The contracts are designated as, and meet the criteria for, cash flow hedges. The Company does not enter into forward contracts for the purpose of trading. Gains and loss on forward contracts are recorded in accumu-lated other comprehensive income (loss), net of tax, and subsequently reclassified within 12 months into cost of goods sold upon the sale of ATV units or into operating expense upon completing transfers of Canadian dollar funds.

 

As of March 31, 2004 and 2003, the Company had open Canadian dollar forward exchange contracts, maturing through December 2004 and 2003, with notional amounts totaling $73,101,000 and $46,770,000 and fair value liabilities, included in accounts payable, of $655,000 and $1,082,000. The related amounts reported within other comprehensive loss, net of tax, were $413,000 and $682,000. There

 

24



 

were no open Japanese yen forward exchange contracts at March 31, 2004 and 2003.

 

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. Repairs and maintenance cost that are considered not to extend the useful life of the property and equipment are expensed as incurred. Tooling is amortized over the life of the product, generally three years. Estimated service 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.

 

Product Warranties

 

The Company generally provides a limited warranty to the original owner of snowmobiles for twelve months from the date of consumer registration and for six months on ATVs. The Company provides for estimated warranty costs at the time of sale based on historical rates and trends and makes subsequent adjustments to its estimate as actual claims become known or the amounts are determinable. The following represents changes in the Company’s accrued warranty liability for the fiscal years ended March 31,

 

 

 

2004

 

2003

 

2002

 

Balance at April 1,

 

$

12,205,000

 

$

12,937,000

 

$

11,922,000

 

Warranty Provision

 

14,141,000

 

15,318,000

 

11,512,000

 

Warranty Claim Payments

 

16,015,000

 

16,050,000

 

10,497,000

 

Balance at March 31,

 

$

10,331,000

 

$

12,205,000

 

$

12,937,000

 

 

Insurance

 

The Company is self-insured for employee medical, workers’ compen-sation, 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 and provides for estimated marketing and sales incentive costs when products are shipped
to dealers and distributors pursuant to their order, the price is fixed and collection is reasonably assured.

 

Marketing and Sales Incentive Costs

 

At the time product revenue is recognized the Company provides for various marketing and sales incentive costs which are offered to its dealers and consumers. Examples of these costs, which are recognized as a reduction of revenue when the products are sold, include: dealer and consumer rebates, dealer floor plan financing assistance, sales associate incentives and other incentive and promotion programs. Generally, the Company records costs related to these marketing programs at the later of when the revenue is recognized or when the sales incentive or marketing program is approved and communicated for products previously shipped. Sales incentives that involve a free product or service delivered to the consumer are recorded as a component of cost of goods sold. The Company estimates the costs of these various incentive and marketing programs at the time of sale or subsequently when programs are approved and communicated based on historical experience. To the extent current experience differs with previous estimates the accrued liability for marketing and sales incentives is adjusted accordingly.

 

To help facilitate retail sales of snowmobiles, the Company, at its discretion, works with dealers to transfer units from lower snow fall or lower retail activity regions to higher snow fall or higher retail activity  regions. At the time of a transfer the Company credits the transferring dealer and re-bills the receiving dealer. The net effect of this marketing program was to reduce revenue by less than 1% in 2004, 2003 and 2002.

 

Dealer Holdback

 

The Company records a dealer holdback program liability at the time certain products are shipped to its dealers. If the products subject to the holdback program are sold within the program time period, the Company refunds a portion of the original sale price, referred to as dealer holdback, to the dealer. The Company’s dealer holdback program liability, included within the accounts payable, as of March 31, 2004 and 2003 was $9,673,000 and $1,566,000. The increase from March 31, 2003 to 2004 was principally related to qualifying additional products and the period of coverage under the program and the timing of payments.

 

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 $14,736,000, $14,254,000 and $15,244,000 during 2004, 2003 and 2002.

 

Advertising

 

The Company expenses advertising costs as incurred, except for cooperative advertising obligations arising related to the sale of the

 

25



 

Company’s products to its dealers. The estimated cost of cooperative advertising, which the dealer is required to support, is recorded as marketing expense at the time the product is sold. Total advertising expense, including cooperative advertising, was $18,900,000, $20,784,000 and $14,983,000 in 2004, 2003 and 2002.

 

Stock-Based Compensation

 

The Company utilizes the intrinsic value method of accounting for its employee stock-based compensation plans. The Company’s reported 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:

 

 

 

2004

 

2003

 

2002

 

Net earnings:

 

 

 

 

 

 

 

As reported

 

$

30,365,000

 

$

32,703,000

 

$

28,626,000

 

Additional compensation expense, net of tax

 

1,337,000

 

1,366,000

 

1,067,000

 

Pro forma

 

$

29,028,000

 

$

31,337,000

 

$

27,559,000

 

Net earnings per share:

 

 

 

 

 

 

 

As reported

 

 

 

 

 

 

 

Basic

 

$

1.42

 

$

1.46

 

$

1.21

 

Diluted

 

$

1.40

 

$

1.45

 

$

1.20

 

Pro forma

 

 

 

 

 

 

 

Basic

 

$

1.35

 

$

1.40

 

$

1.17

 

Diluted

 

$

1.34

 

$

1.39

 

$

1.15

 

 

The fair value of each stock option award was estimated on the date of grant using the binomial options pricing model. The following assumptions were used to estimate the fair value of options:

 

 

 

2004

 

2003

 

2002

 

Assumptions:

 

 

 

 

 

 

 

Dividend yield

 

1.3

%

1.4

%

1.5

%

Average term

 

7 years

 

7 years

 

8 years

 

Volatility

 

39

%

31

%

37

%

Risk-free rate of return

 

3.8

%

3.9

%

5.0

%

 

The weighted average fair value of options granted during each of the following years ended March 31:

 

 

 

2004

 

2003

 

2002

 

Fair value of options granted

 

$

8.46

 

$

5.32

 

$

6.46

 

 

See Note K for additional disclosures regarding stock option plans.

 

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 85,180, 369,295, and 128,512 shares of common stock with weighted average exercise prices of $20.94, $15.80, and $16.80 were outstanding during 2004, 2003 and 2002, but were excluded from the computation of common share equivalents because they were anti-dilutive.

 

Weighted average shares outstanding consist of the following for the years ended March 31,

 

 

 

2004

 

2003

 

2002

 

Weighted average number Of common shares outstanding

 

21,424,000

 

22,396,000

 

23,587,000

 

Dilutive effect of option plan

 

306,000

 

219,000

 

338,000

 

Common and potential shares outstanding - Diluted

 

21,730,000

 

22,615,000

 

23,925,000

 

 

Foreign Currency Translation

 

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.

 

Comprehensive Income

 

Comprehensive income represents net earnings adjusted for the unrealized gain or loss on derivative instruments and debt securities classified as available-for-sale and shown in the consolidated financial statements of stockholders’ equity.

 

Accounting Policy and Disclosure Changes

 

Accounting for Derivative Instruments and Hedging Activities – The Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, on April 1, 2001. These standards require entities to recognize derivatives in their financial statements as either assets or liabilities measured at fair value. The accounting for changes in the fair value of a derivative

 

26



 

is recognized into earnings unless certain criteria are met. These Standards also require formal documentation, designation and effectiveness assessment of transactions receiving hedge accounting. At April 1, 2001, the Company had open Japanese yen forward exchange contracts with notional amounts totaling $21,495,000 maturing through June 2001. Under the new standard the Company recorded a liability of $1,176,000 for the open Japanese yen forward contracts, accumulated other comprehensive income, net of tax, of $741,000, and current deferred tax assets of $435,000.

 

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:

 

 

 

2004

 

2003

 

Trading securities

 

$

55,282,000

 

$

49,127,000

 

Available-for-sale debt securities

 

7,113,000

 

9,087,000

 

 

 

$

62,395,000

 

$

58,214,000

 

 

Trading securities consists of $41,707,000 and $38,946,000 invested in various money market funds at March 31, 2004 and 2003, respectively, while the remainder of trading securities and available-for-sale securities consists primarily of “A” rated or higher municipal bond investments. The amortized cost and fair value of debt securities classified as available-for-sale was $6,808,000 and $7,113,000, at March 31, 2004. The unrealized gain on available-for-sale debt securities is reported, net of tax, as a separate component of shareholders’ equity. The contractual maturities of available-for-sale debt securities at March 31, 2004, are $3,773,000 within one year and $3,340,000 from one year through five years.

 

C               INVENTORIES

 

Inventories consist of the following at March 31:

 

 

 

2004

 

2003

 

Raw materials and sub-assemblies

 

$

16,942,000

 

$

17,575,000

 

Finished goods

 

14,719,000

 

22,293,000

 

Parts, garments and accessories

 

29,466,000

 

31,855,000

 

 

 

$

61,127,000

 

$

71,723,000

 

 

D               ACCRUED EXPENSES

 

Accrued expenses consist of the following at March 31:

 

 

 

2004

 

2003

 

Marketing

 

$

8,566,000

 

$

13,275,000

 

Compensation

 

9,206,000

 

8,389,000

 

Warranties

 

10,331,000

 

12,205,000

 

Insurance

 

5,061,000

 

5,619,000

 

Other

 

1,736,000

 

2,974,000

 

 

 

$

34,900,000

 

$

42,462,000

 

 

E                 DISCONTINUED PERSONAL WATERCRAFT BUSINESS AND RELATED COSTS

 

On October 7, 1999, the Company announced that it was exiting the personal watercraft (PWC) business effective September 30, 1999 and recorded a charge of $21,462,000. The charge included $8,961,000 for consumer incentives, $3,480,000 for the write-down and disposal of long-lived assets with no alternative use, $5,286,000 to reduce related inventory to a net realizable value and accrued $3,735,000 relating to other matters. The Company had no significant sales of the PWC product line in the years ended March 31, 2004, 2003 and 2002. As of March 31, 2004, cumulative charges related to accrued consumer incentives and other accrued exit costs were $5,152,000 and $881,000. The majority of the Company’s PWC exit plan has concluded while other aspects of the plan will extend beyond March 31, 2004. During fiscal year 2003, the Company analyzed current and future exit plan costs, and reduced the initial recorded PWC exit plan consumer incentive and other exit costs accruals in the amount of $4,000,000 and $2,404,000, respectively. The changes in the PWC exit accrual (included in other expenses) were as follows:

 

 

 

Consumer
Incentives

 

Other
Matters

 

Total

 

Balance at April 1, 2001

 

$

4,886,000

 

$

3,072,000

 

$

7,958,000

 

Cash payments

 

(231,000

)

(218,000

)

(449,000

)

Balance on March 31, 2002

 

4,655,000

 

2,854,000

 

7,509,000

 

Change in estimates

 

(4,000,000

)

(2,854,000

)

(6,404,000

)

Cash payments

 

(228,000

)

 

(228,000

)

Balance at Marach 31, 2003

 

427,000

 

450,000

 

877,000

 

Cash payments

 

(269,000

)

 

(269,000

)

Balance on March 31, 2004

 

$

158,000

 

$

450,000

 

$

608,000

 

 

27



 

F                 FINANCING

 

The Company has a $60,000,000 unsecured bank credit agreement for documentary and stand-by letters of credit and for working capital purposes. In fiscal 2004 the Company incurred no short term bank borrowings. Total working capital borrowings under the credit agreement are limited to $45,000,000 during the last six months of the fiscal year. The credit agreement is due on demand and expires July 31, 2004, 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, 2004, there was $35,253,000 of issued letters of credit outstanding and no working capital borrowings outstanding. Of the issued letters of credit outstanding, $30,215,000 was issued to Suzuki Motor Corporation (Suzuki) for engine and service parts purchases (see Note H). Outstanding letters of credit will be repaid over the following six months in accordance with the credit agreement and any such renewal.

 

G               RETIREMENT SAVINGS PLAN

 

The Company’s 401(k) retirement savings plan covers substantially all eligible employees. Employees may contribute up to 50% 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 matching contributions were $1,286,000, $1,284,000 and $1,230,000 in 2004, 2003 and 2002. There were no discretionary contributions made during 2004, 2003 and 2002.

 

H               RELATED PARTY TRANSACTIONS

 

The Company purchases engines and service parts from Suzuki, owner of the Company’s Class B common stock. Such purchases totaled $129,700,000, $114,472,000 and $124,438,000 in 2004, 2003 and 2002. The purchase price of the engines and service parts is determined annually. The Company has an agreement with Suzuki for snowmobile 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 service parts. An interruption of this supply could have a material adverse effect on the Company’s operations. Certain raw materials and services are purchased from vendors in which certain of the Company’s directors are officers or significant shareholders. In 2004, 2003 and 2002, these transactions aggregated $7,150,000, $6,165,000 and $4,315,000.

 

I                    INCOME TAXES

 

Income tax expense consists of the following for the years ended March 31:

 

 

 

2004

 

2003

 

2002

 

Current

 

 

 

 

 

 

 

Federal

 

$

7,083,000

 

$

9,307,000

 

$

8,159,000

 

State

 

926,000

 

929,000

 

973,000

 

Deferred

 

6,280,000

 

5,550,000

 

4,339,000

 

 

 

$

14,289,000

 

$

15,786,000

 

$

13,471,000

 

 

 

The following is a reconciliation of the Federal statutory income tax rate to the effective tax rate for the years ended March 31:

 

 

 

2004

 

2003

 

2002

 

Statutory income tax rate

 

35.0

%

35.0

%

35.0

%

State taxes

 

1.4

 

1.3

 

1.1

 

Tax exempt interest

 

(0.5

)

(0.5

)

(0.8

)

Foreign sales corporation

 

(2.1

)

(1.8

)

(1.6

)

Other

 

(1.8

)

(1.4

)

(1.7

)

 

 

32.0

%

32.6

%

32.0

%

 

The cumulative temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes under the liability methods are as follows at March 31:

 

 

 

2004

 

2003

 

Short-term deferred income taxes

 

 

 

 

 

Accrued expenses

 

$

9,127,000

 

$

11,513,000

 

Inventory capitalization and writedowns

 

2,492,000

 

2,503,000

 

Other

 

401,000

 

401,000

 

Net short-term deferred tax asset

 

$

12,020,000

 

$

14,417,000

 

Long-term deferred income taxes

 

 

 

 

 

Property and equipment

 

$

11,585,000

 

$

8,279,000

 

Other

 

4,976,000

 

4,399,000

 

Net long-term deferred tax liability

 

$

16,561,000

 

$

12,678,000

 

 

 

28



 

J                 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, 2004, the Company was contingently liable under these agreements for a maximum repurchase amount of approximately $23,549,000.  The Company’s financial exposure under these agreements is limited to the difference between the amount paid to the finance companies for repurchases and the amount received upon the resale of the repossessed product. Losses incurred under these agreements during the periods presented have not been material.

 

Litigation

 

The Company is subject to legal proceedings and claims which arise in the ordinary course of business. Accidents involving personal injury and property damage occur in the use of snowmobiles 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. The Company is not involved in any legal proceedings which it believes will have the potential for a materially adverse impact on the Company’s business or financial condition, results of operations or cash flows.

 

K               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. 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, 2004, the Company had 1,031,942 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, 2004 are summarized as follows:

 

 

 

Number of
shares under
option

 

Weighted
average
exercise price

 

Outstanding at April 1, 2001

 

1,908,612

 

$

10.60

 

Granted

 

282,500

 

15.21

 

Exercised

 

(801,869

)

9.89

 

Outstanding at March 31, 2002

 

1,389,243

 

11.87

 

Granted

 

327,000

 

15.59

 

Exercised

 

(256,160

)

10.85

 

Cancelled

 

(3,000

)

15.21

 

Outstanding at March 31, 2003

 

1,457,083

 

12.88

 

Granted

 

316,000

 

21.00

 

Exercised

 

(644,305

)

11.88

 

Outstanding at March 31, 2004

 

1,128,778

 

$

15.72

 

 

Options exercisable at March 31 are as follows:

 

 

 

Number of
shares under
option

 

Weighted
average
exercise price

 

2002

 

937,906

 

$

11.26

 

2003

 

922,081

 

$

11.64

 

2004

 

578,282

 

$

13.22

 

 

The following tables summarize information concerning currently outstanding and exercisable stock options at March 31, 2004:

 

Options Outstanding

 

Range of
Exercise Prices

 

Number
Outstanding

 

Weighted
Average
Remaining
Contractual Life

 

Weighted
Average
Exercise
Price

 

$ 6.11 – $ 9.13

 

11,814

 

4.4 years

 

$

6.11

 

  9.38 –  13.33

 

298,856

 

5.1 years

 

10.82

 

14.41 –  21.03

 

818,108

 

8.0 years

 

17.65

 

 

 

1,128,778

 

 

 

$

15.72

 

 

Options Exercisable

 

Range of
Exercise Prices

 

Number
Exercisable

 

Weighted
Average
Exercise
Price

 

$ 6.11 – $ 9.13

 

11,814

 

$

6.11

 

  9.38 –  13.33

 

298,856

 

10.82

 

14.41 –  21.03

 

267,612

 

16.21

 

 

 

578,282

 

$

13.22

 

 

29



 

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 B 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 B 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 17, 2011.

 

Share Repurchase Authorization

 

The Company invested $35,763,000, $25,444,000 and $20,507,000 during 2004, 2003 and 2002 to repurchase and cancel 1,689,500, 1,463,000 and 1,336,000 shares of common stock, pursuant to Board of Directors’ authorizations. Included in the 2004 repurchases are 843,000 shares of Class B stock from Suzuki Motor Corporation, repurchased for $18,259,000 or $21.66 per share.  At March 31, 2004, authorization to repurchase $10,604,000 or approximately 417,800 shares remain outstanding.

 

L                EXPORT SALES

 

Sales to foreign customers, located primarily in Canada, amounted to $152,657,000, $118,399,000 and $100,694,000 in 2004, 2003 and 2002.

 

30



 

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, 2004 and 2003, and the related consolidated statements of earnings, shareholders’ equity, and cash flows for each of the three years in the period ended March 31, 2004. 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 the standards of the Public Company Accounting Oversight Board (United States). 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, 2004 and 2003, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended March 31, 2004, in conformity with accounting principles generally accepted in the United States of America.

 

 

/s/ GRANT THORNTON LLP

 

 

 

 

 

Minneapolis, Minnesota

May 5, 2004

 

31



 

ARCTIC CAT INC. EXHIBIT INDEX

 

EXHIBIT NUMBER

 

21

Subsidiaries of Registrant

23

Consent of Independent Certified Public Accountants

31.1

Certificate of Chief Executive Officer

31.2

Certificate of Chief Financial Officer

32.1

Certification of Chief Executive Officer

32.2

Certification of Chief Financial Officer

 

32