-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KUdV+P3caNPWQh0ksUpQrr+wD/iGumL4I6hw6WY3xRTd0KI9cBA+1RNcAfoWaFuK xjgFzxp2CSCcNCSqIA50IQ== 0000719866-98-000005.txt : 19980701 0000719866-98-000005.hdr.sgml : 19980701 ACCESSION NUMBER: 0000719866-98-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980630 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARCTIC CAT INC CENTRAL INDEX KEY: 0000719866 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS TRANSPORTATION EQUIPMENT [3790] IRS NUMBER: 411443470 STATE OF INCORPORATION: MN FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-18607 FILM NUMBER: 98657292 BUSINESS ADDRESS: STREET 1: 600 BROOKS AVE SOUTH STREET 2: P O BOX 810 CITY: THIEF RIVER FALLS STATE: MN ZIP: 56701 BUSINESS PHONE: 2186818558 FORMER COMPANY: FORMER CONFORMED NAME: ARCTCO INC DATE OF NAME CHANGE: 19940224 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K X Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended March 31, 1998 or Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number: 0-18607 ARCTIC CAT INC. (Exact name of registrant as specified in its charter) Minnesota 41-1443470 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 601 Brooks Avenue South, Thief River Falls, Minnesota 56701 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (218) 681-8558 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value. Preferred Stock Purchase Rights. Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The aggregate market value of the voting stock held by non-affiliates of the Registrant as of June 19, 1998 (based on the closing sale price of the Common Stock on such date) was approximately $180,515,029. At June 19, 1998, 20,630,289 shares of Common Stock and 7,560,000 shares of Class B Common Stock of the Registrant were outstanding. Documents Incorporated by Reference: Portions of the Company's Proxy Statement for its Annual Meeting of Shareholders currently scheduled to be held on August 6, 1998 is incorporated by reference into Part III of this Form 10-K. PART I Item 1.Business Arctic Cat Inc. (the "Company"), based in Thief River Falls, Minnesota, designs, engineers , manufactures and markets snowmobiles and all-terrain vehicles (ATVs) under the Arctic Cat brand name, and personal watercraft (PWC) under the Tigershark brand name, as well as related parts, garments and accessories. The Company markets its products through a network of independent dealers located throughout the contiguous United States and Canada, and through distributors representing dealers in Alaska, Europe, the Middle East, Asia and other international markets. The Arctic Cat brand name has existed for more than 30 years and is among the most widely recognized and respected names in the snowmobile industry. The Company trades on the Nasdaq Stock Market under the symbol ACAT. Industry Background Snowmobiles. The snowmobile, developed in the 1950's, was originally intended to be used as a utility vehicle, but today the overwhelming majority of the industry's sales are for recreational use. Between the late 1950's and early 1970's, the industry expanded dramatically reaching a peak of over 100 manufacturers and a high of almost 495,000 units sold to retail customers in North America in 1971. Gasoline shortages, significant gasoline price increases, high interest rates and recessions in the middle to late 1970's through the early 1980's contributed to a significant industry downsizing. Today the number of major industry participants has decreased to four. Since 1983, snowmobile sales to retail customers in North America have grown until reaching approximately 231,000 units for the 1998 model year. The Company believes this growth was due, in part, to a number of factors such as an expanded system of public and private snowmobile trails, a rapidly growing market among the "baby boomer" generation, product innovations that have improved ride, performance and handling, organized snowmobile clubs which promote the sport and ongoing snowmobile replacement. Since 1971, approximately 5,500,000 snowmobiles have been sold in North America, and the Company estimates that over 85 percent of current industry sales are to retail customers who own, or previously owned, a snowmobile. The industry consolidation that occurred in the mid-1970's through the early 1980's has left four major participants in the North American market: Arctic Cat, Bombardier (Ski-Doo), Polaris and Yamaha. The Company believes the industry consolidation has contributed to improved industry profit margins and closer monitoring of industry inventory levels. The Company believes there are currently more significant barriers to entry into the snowmobile market than existed in the 1970's. These barriers include increased brand loyalty, long-standing dealer and distributor networks and relationships, limited engine sources, manufacturing and engineering expertise and higher initial start-up costs. Information in this document regarding the worldwide and North American snowmobile market is derived from independent sources. Non-North American sales for the industry are estimated to account for less than 10% of worldwide sales; specific yearly information, with respect to worldwide sales, is not considered by the Company as sufficiently consistent or reliable for presentation in this report. All industry information is based on a model year ending March 31, which is the same as the Company's fiscal year-end, unless otherwise stated. Personal Watercraft (PWC). The PWC and the related industry evolved from the one person stand-up craft that was developed in the mid 1960's to the two and three person sit-down models that are most popular today. PWC are up to ten feet in length that are propelled by jet pumps. They are ridden for leisure on lakes, rivers, oceans and major waterways. In 1997, U. S. retail sales were approximately 176,000 units. The most rapidly growing segment of personal watercraft models are the 3-person models, designed to accommodate a driver and up to two passengers. These PWC can pull skiers or water toys. Currently the two-person watercraft is still the most widely owned model type comprising of approximately 54 percent of the market. The three-person watercraft and one-person watercraft comprise approximately 44 percent and 2 percent of the market, respectively. Major competitors in the industry include Yamaha, Bombardier (Sea-Doo), Polaris and Kawasaki. All-Terrain Vehicles (ATVs). The ATV industry evolved from the three-wheel model that was developed in the early 1970s to the four-wheel models that are sold today. ATVs are generally one person vehicles used for a variety of off-road uses. The most popular ATV use is general recreation, followed by hunting/fishing, farm/ranch use, hauling/towing, transportation, and commercial uses. From 1970 to 1986, the number of three and four-wheel ATVs sold in the United States continued to grow until peaking in 1986 with approximately 535,000 units sold during that calendar year. From 1987 to 1991, the number of ATVs sold declined to a low of approximately 151,000 units. Since 1992, sales have gradually climbed until reaching approximately 359,000 units in 1997. Major competitors in the industry include Honda, Yamaha, Kawasaki, Polaris and Suzuki. Products Snowmobiles. The Company produces a full line of snowmobiles, currently consisting of 34 models, marketed under the Arctic Cat brand name, and designed to satisfy various market niches. The 1998 Arctic Cat models carry suggested U.S. retail prices ranging from $3,399 to $9,799, excluding a children's model which is sold at a suggested U.S. retail price of $1,299. Arctic Cat snowmobiles are sold in the United States, Canada, Scandinavia and other international markets. The Company's snowmobiles are categorized as High Performance, Trail Performance, Mountain Performance, Touring, Family Trail and Sport Utility. The Company markets: High Performance Arctic Cat snowmobiles under the names Thundercat, ZRT, and ZR; Trail Performance Arctic Cat snowmobiles under the names ZL, Z, EXT and Cougar; Mountain Performance Arctic Cat snowmobiles under the names Powder Extreme, Powder Special, Thundercat Mountain Cat and Cougar Mountain Cat; Touring models under the names EXT, Panther, and Pantera; Family Trail snowmobiles under the name Jag; and Sport Utility models under the name Bearcat. In addition, to encourage family involvement in snowmobiling, the Company offers the only snowmobile in the industry designed especially for small children, marketed under the Kitty Cat name. The Company believes the Arctic Cat brand name enjoys a premier image among snowmobile enthusiasts and that its snowmobiles have a long-standing reputation for quality, performance, style, comfort, ride and handling. Arctic Cat snowmobiles offer a wide range of standard and optional features which enhance the operation, riding comfort and performance. Such features include hydraulic disc brakes and a technologically advanced front suspension. Arctic Cat is the only company in the industry that offers an electronic fuel injection (EFI) system on its snowmobiles. Additional features on certain models include electronic engine gauges and indicator lights, electric starters, handlebar and thumb warmers, reverse gears, 2-up seats, mirrors, custom windshields, hitches and luggage racks as well as other features. These features may also be purchased separately from independent Arctic Cat dealers as accessories. Arctic Cat's on-going commitment to both high performance and its retail customers has led the Company in a series of "firsts." In 1988, the Company and Suzuki introduced a new line of compact, lightweight, liquid-cooled twin cylinder engines. In 1990, the Prowler was the first snowmobile to offer a new double-wishbone suspension. With its high performance 1991 Wildcat model, the Company became the first in the industry to offer a 700cc electronic fuel injection engine. In 1992, the Arctic FasTrack, extra-long travel rear suspension was introduced on several high performance models. In 1993, the Company became the first to offer a 900cc, 3 cylinder snowmobile, called the Thundercat. In 1997, Arctic Cat offered the first batteryless EFI system. Arctic Cat believes that its leadership in innovation, technology, style and performance has been demonstrated by its models being voted "Snowmobile of the Year" by various snowmobile media with respect to the El Tigre 6000 in 1984, the Wildcat 650 in 1988, the Prowler in 1990, the EXT Special in 1991, the ZR 440 in 1994, the Powder Special EFI and the ZR 600 EFI in model year 1998. Arctic Cat believes that it has been able to grow in the worldwide snowmobile retail sales due to its emphasis on new product development. A new model has been introduced by the Company nearly each year since its formation, and in recent years new models have been among the Company's best sellers. In the 1998 model year, approximately 85 percent of the Company's snowmobile sales were from models or model variations not available three years earlier. Personal Watercraft (PWC). Similar to Arctic Cat snowmobiles, Tigershark PWC are a blend of performance, durability and style, with attention to comfort and economy. In fiscal 1998, the Company offered seven models to cover major market segments in the current PWC market ranging in price from $4,799 to $7,899. For the High Performance market, the Company offers the TS 770 R and TS 1000 R, two-passenger models designed for superior performance and optimum power. Three Family Touring models are available, including the TS 640 L, TS 770 L and TS 1000 L, three-passenger models designed for ample power and handling with the capacity to tow skiers or water toys. For the Economy market the Company offers the TS 640 and TS 770 both two-passenger models built for exceptional quality and stability. The Company believes Tigersharks have been well received in the market and believes the Tigershark brand continues to maintain its reputation for a dry, stable ride. Watercraft World has, on numerous occasions, recognized the Tigershark by selecting the 1993 Tigershark and the 1994 and 1995 Montego Deluxe as the "Best Buy" in the Recreational Runabout category and by naming the Daytona 770 as the "Editors Choice Award" in 1996. During fiscal 1998, the Tigershark was named "Official Personal Rescue Craft" of the American Power Boat Association Rescue Teams. All-Terrain Vehicles (ATVs). In December 1995, the Company introduced its first ATV, the Bearcat 454 4X4, which provided many industry-leading features such as exclusive rocker-shifter, full floor boards, and a 50-inch wheelbase. Since that time, the Arctic Cat ATV line has grown to include seven models: the Arctic Cat 500 4x4, Arctic Cat 454 4X4, Arctic Cat 454 2X4, Arctic Cat 400 4x4, Arctic Cat 400 2x4, Arctic Cat 300 4x4 and Arctic Cat 300 2x4. Arctic Cat ATVs are designed for the Utility, Farming/Ranching and Hunting/Fishing markets. These heavy duty models feature aspects ensuring ease of handling and agility over rough terrain. Features like independent front suspensions, hydraulic disc brakes, hi-low range and a plentiful 4.25 gallon fuel tank, all make Arctic Cat ATVs consumer friendly. The 1998 Arctic Cat ATV models carry suggested U.S. retail prices ranging from $4,399 to $6,449. Arctic Cat believes its ATVs are renown for their power and durability and are well received within the market. For model year 1998, the Arctic Cat 300 was named "Editors Choice" by Sports Afield and "Best In Class" by ATV Magazine. Parts, Garments and Accessories. The Company is the exclusive provider of genuine Arctic Cat snowmobile, Tigershark, and Arctic Cat ATV parts, garments and accessories. Included are replacement parts for Arctic Cat snowmobiles, items to upgrade a snowmobile such as an electric start kit, a reverse gear kit and a two-speed transmission kit, as well as accessories such as mirrors, windshields, luggage racks, backrests, two-person seats, saddlebags, bumpers, gauges, tail light protectors and snowmobile covers. Other items include maintenance supplies such as oil and fuel additives, clutch and carburetor parts, track studs and carbide runners, shocks and springs, accessory fuel tanks, vinyl protectant, touch-up paint, hood and windshield cleaners, windshield defogger and engine storage preservers. Tigershark parts and accessories include impellers, grates, bilge pumps, batteries, covers, mirrors, oil and beach dollies. Arctic Cat ATV parts and accessories include winch kits, plow kits, portable lights, utility bags as well as maintenance supplies such as brake fluid, fuel de-icer, anti-freeze, and fuel stabilizers. The Company also sells generators under the "Arctic Power " label. The Company offers snowmobile garments for adults and children under the "Arcticwear " label. Suits, jackets, pants and accessory garments are offered in a wide variety of styles and sizes combining fashion with functional utility designed for the demands of snowmobiling and other winter activities. The Arcticwear line of clothing also includes crew neck sweaters, pull-overs, riding gloves, hats, fog-resistant face shields, helmets, boots, duffel bags, jerseys and T-shirts. The colors and designs of many of these items are coordinated with specific Arctic Cat snowmobile models. The Company offers Tigershark garments under the "Sharkwear" label. Included in the stylish line are neoprene and lycra wet suits, goggles, sunglasses, coolers, duffle bags, water shoes and gloves, T-shirts, sweatshirts , jackets, golf shirts, shorts and towels. The Company offers ATV garments under the "Arcticwear ATV Gear" label. This line of clothing is geared toward function and comfort and includes suits, jackets, gloves, boots, helmets, sweatshirts, T-shirts, and caps. The Company has in the past, and may in the future, consider adding other products consistent with its manufacturing and marketing expertise. Manufacturing and Engineering Arctic Cat snowmobiles and ATVs and Tigershark PWC are manufactured at the Company's facilities in Thief River Falls, Minnesota. The Company produces and/or paints hoods and other parts for its Arctic Cat snowmobiles and PWC in Madison, South Dakota. The Company also has a facility in Bucyrus, Ohio which houses its service parts, garments and accessories distributor operations. The Company has strategically identified specific core manufacturing competencies for vertical integration and has chosen outside vendors to provide other parts. The Company has developed relationships with selected high quality vendors in order to obtain access to particular capabilities and technologies outside the scope of the Company's expertise. The Company designs component parts often in cooperation with its vendors, contracts with them for the development of tooling, and then enters into agreements with these vendors to purchase component parts manufactured utilizing the tooling. In its vertically integrated operations, the Company manufactures hoods, hulls, decks, foam seats and seat covers and the Company machines, welds and paints other components. The Company then completes the total assembly of its products at its facilities in Thief River Falls. Manufacturing operations include digital and computer- automated equipment to speed production, reduce costs and improve the quality, fit and finish of every product. The Company believes that all raw materials used in its manufacturing process and all component parts, with the exception of engines and carburetors, are available from multiple alternative vendors on short notice at competitive prices. Since the Company's inception, its snowmobile engines have been manufactured by Suzuki Motor Corporation ("Suzuki") pursuant to a supply agreement which is automatically renews annually unless terminated. While notice of termination of the supply agreement may be given annually, effective cessation of supply would take at least one model year due to the contractual notice requirement. The Company's PWC and ATV models also incorporate engines manufactured by Suzuki. The Company and Suzuki have enjoyed an excellent relationship since the Company's inception. Suzuki purchased approximately 31% of the Company's then outstanding capital stock in July 1988, prior to the Company's initial public offering, and is currently the Company's largest shareholder with approximately 27% of the Company's outstanding capital stock. If Suzuki were ever to cease supplying engines to the Company, such an interruption could materially and adversely affect production. The Company believes it could take up to two model years for a new engine supplier to be in a position to manufacture the Company's specially designed engines. Since the Company began production, it has followed a build-to-order policy to control snowmobile, PWC, and ATV inventory levels. Under this policy, the Company only manufactures a number of machines equivalent to the orders received from its dealers and distributors, plus a small number of uncommitted machines used for new dealer development, in-house testing and miscellaneous promotional purposes. Speculative production and excessive inventories in certain periods during the 1970's and early 1980's contributed to significant price discounting in the snowmobile industry. Since the consolidation of the snowmobile industry in the mid-1970's through the early 1980's, speculative production in the industry has been reduced and dealer inventories have remained consistently below historic peak levels. The Company believes dealer inventory levels of non-current Arctic Cat model snowmobiles, PWC and ATVs have regularly been and are currently among the lowest in the industry. Most sales of snowmobiles to retail customers begin in the early fall and continue during the winter. Orders by dealers and distributors for each year's production are placed in the spring following a series of dealer and distributor meetings. Snowmobiles are build-to-order commencing in the spring and continuing through late autumn or early winter. Since its inception, the Company has experienced a low level of snowmobile order cancellation. Approximately 30% to 40% of the Company's snowmobiles have historically been sold to retail customers prior to the end of October, long before the season's snow conditions are known. Sales of PWC to retail customers generally begin in the spring and continue during the summer. Orders by dealers and distributors for the Company's 1999 model line will be placed in the fall, following a series of dealer and distributor meetings. The PWC are then built to order commencing in the fall and continuing through the early spring. Retail sales of ATVs occur throughout the year with seasonal highs occurring in the spring and fall. As with the snowmobiles and PWC, the Company produces ATV units on a build-to-order basis. The Company believes ATVs will be built throughout the year to coincide with dealer and consumer demands. The Company is committed to an ongoing engineering program dedicated to innovation and to continued improvements in the quality and performance of its products as well as product diversification. The Company currently employs 128 individuals in the design and development of new and existing products, with an additional 22 individuals directly involved in the testing of snowmobiles, PWC, and ATVs in normal and extraordinary conditions at the Company's test track. In addition, snowmobiles, PWC, and ATVs are tested in conditions and locations similar to those in which they are used. The Company uses computer-aided design and manufacturing systems to shorten the time between initial concept and final production. For 1996, 1997 and 1998, the Company spent approximately $9,317,000, $9,911,000 and $10,273,000, or 2.3%, 2.1% and 2.0%, of net sales for the year, on engineering, research and development, all of which was Company sponsored. In addition, utilizing their particular expertise, the Company's vendors regularly test and apply new technologies to the design and production of component parts. Sales and Marketing The Company's products are currently sold through an extensive network of independent dealers located throughout the contiguous United States and Canada, and through distributors representing dealers in Alaska, Europe, the Middle East, Asia and other international markets. To promote new dealerships and to service its existing dealer network, the Company also employs sales representatives throughout the United States and Canada to represent its products. The Company's dealers enter into an annual renewable contract and are required to maintain status as an authorized dealer in order to continue selling the Company's products. To obtain and maintain such status, dealers are required to order a sufficient number of snowmobiles, PWC, and/or ATVs to service their market area adequately. In addition, the dealers must perform service on these units and maintain satisfactory service performance levels, and their mechanics must complete special training provided by the Company. Dealers are also required to carry an inventory of genuine Arctic Cat and/or Tigershark parts and accessories. As is typical in the industry, most of the Company's dealers also sell some combination of motorcycles, marine products, lawn and garden products and other related products. Approximately 50% of the Company's dealers sell only Arctic Cat snowmobiles, versus multiple brands of snowmobiles. Relations with dealers are generally considered excellent. The Company utilizes exclusive distributors outside the contiguous 48 United States and Canada to take advantage of their knowledge and experience in their respective markets and to increase market penetration of its products. Each distributor is subject to a distribution agreement which stipulates an exclusive territory for a term ranging from one to three years with specified minimum sales and service requirements for their territory. In fiscal 1997, the Company began marketing its complete product lines to Canadian dealers. The Company believes that marketing directly through dealers brings the Company closer to its Canadian customers, which enables improved service and more competitive prices on snowmobiles, PWC, ATVs and parts, garments and accessories. Canadian sales are made in Canadian dollars, a major portion of which is financed through certain Canadian financial institutions. Sales outside North America are made in U.S. dollars and supported by irrevocable letters of credit. The Company's marketing efforts are comprised of dealer, distributor and customer promotions, advertising and cooperative programs with its dealers and distributors. Each year, the Company and its distributors conduct dealer shows in order to introduce the upcoming year's models and to promote dealer orders. Marketing activities are also designed to promote directly to consumers. Products are advertised by the Company in consumer magazines and through other media. In addition, the Company engages in extensive dealer cooperative advertising, on a local and national level, whereby the Company and its dealers share advertising costs. Each season the Company produces promotional films, product brochures, point of purchase displays, leaflets, posters and banners, and other promotional items for use by dealers. The Company also participates in consumer shows and rallies with dealers and sponsors independent drivers who participate in races throughout the world. In order for its dealers and distributors to remain price competitive and to reduce retail inventories, the Company will from time to time make available to them rebate programs, discounts, or other incentives. The Company publishes and mails, four times a year, the Pride magazine to all registered owners of its products. The Company places strong emphasis on identifying and addressing the specific needs of its customers by periodically conducting dealer and consumer focus group meetings and surveys. The Company warrants its snowmobiles, PWC, and ATVs under a limited warranty against defects in materials and workmanship for a period ranging from six months to one year from the date of retail sale or for a period of 90 days from the date of commercial or rental use. Repairs or replacements under warranty are administered through the Company's dealers and distributors and have not had a material effect on the Company's business. Since 1985, the Company has entered into an annual arrangement with certain financial institutions to provide floor plan financing for the Company's North American dealers. These agreements improve the Company's liquidity by financing dealer purchases of products without requiring substantial use of the Company's working capital. The Company is paid by the floorplan companies shortly after shipment and as part of its marketing programs the Company pays the floorplan financing of its dealers for certain set time periods depending on the size of a dealer's order. The financing agreements require repurchase of repossessed new and unused units and sets limits upon the Company's potential liability for annual repurchases. The aggregate potential liability was approximately $11,100,000 at March 31, 1998. No material losses have been incurred by the Company under these agreements, which are terminable by either party upon 30 days notice. Effective April 1, 1998, the Company agreed to guarantee approximately 50% of the amounts financed by its dealers with one of the finance companies. At April 1, 1998, the Company's maximum level of exposure under this guarantee is approximately $61,500,000. Competition The snowmobile, PWC, and ATV markets are highly competitive, based on a number of factors, including performance, styling, fit and finish, brand loyalty, reliability, durability and price. The Company believes Arctic Cat snowmobiles and ATVs and Tigershark PWC are highly regarded by consumers in all of these competitive categories. Certain of the Company's competitors are more diversified and have financial and marketing resources which are substantially greater than those of the Company. Regulation Both federal and state authorities have vigorous environmental control requirements relating to air, water and noise pollution that affect the manufacturing operations of the Company. The Company endeavors to insure that its facilities comply with applicable environmental regulations and standards. Various states and other governmental agencies have also promulgated safety regulations regarding the use of snowmobiles, PWC and ATVs. The Company has supported laws and regulations pertaining to safety and noise abatement. The Company believes that the adoption of any pending laws or regulations would not negatively affect its products to any greater degree than those of its competitors. California has recently enacted legislation setting emission standards for ATVs and the federal government has finalized legislation setting emission standards for a number of vehicles including PWC. California legislation has established three emission standard categories for ATVs based on horsepower and weight of the machine. Currently, the Company's ATVs meet the emission standard requirements stipulated within their category. The federal government has also enacted legislation mandating emission standards for PWC beginning in 1999 with annual reductions in the emission standards through the year 2006. The Company's 1999 and future models are being engineered and tested to meet these emission standards. The Company has signed an agreement with Outboard Marine Corporation (OMC) to supply it's FICHT(TM) Fuel Injection system in order to ensure compliance with these emission standards for the 1999 model year and beyond. The Company is unable to predict the impact this enacted or any future legislation will have on the Company. Additionally, some states may pass legislation and local ordinances which restrict the use of PWC to specified hours and locations. The Company is unable to predict the outcome of such actions or the possible effect on its PWC business. The Company supports balanced and appropriate programs that educate the customer on safe use of its products and that protects the environment. Currently the snowmobile industry is not regulated by any federal or state legislation (see discussion below). Certain materials used in snowmobile, PWC, and ATV manufacturing that are toxic, flammable, corrosive or reactive are classified by the federal and state governments as "hazardous materials." Control of these substances is regulated by the Environmental Protection Agency and various state pollution control agencies, which require reports and inspection of facilities to monitor compliance. The Company's cost of compliance with environmental regulations has not been, and is not expected to be, material. The Company's manufacturing facilities are subject to the regulations promulgated by, and may be inspected by, the Occupational Safety and Health Administration. The Company is a member of the International Snowmobile Manufacturers Association (ISMA), a trade association formed to promote safety in the manufacture and use of snowmobiles, among other things. The ISMA is currently made up of Arctic Cat, Bombardier (Ski-Doo), Yamaha, and Polaris. The ISMA members are also members of the Snowmobile Safety and Certification Committee (SSCC), which promulgated voluntary safety standards for snowmobiles. The SSCC standards, which require testing and evaluation by an independent testing laboratory of each model produced by participating snowmobile manufacturers, have been adopted by the Canadian Department of Transport. Following the development of the SSCC standards, the U.S. Consumer Products Safety Commission denied a petition to develop a mandatory federal safety standard for snowmobiles in light of the high degree of adherence to the SSCC standards in the United States. Since the Company's inception, all of its models have complied with the SSCC standards. The Company is a member of National Marine Manufacturers Association (NMMA), the Personal Watercraft Industry Association (PWIA), the International Jet Sports Boating Association (IJSBA), and the Canadian Marine Manufacturers Association (CMMA). Tigershark personal watercraft conform to applicable United States Coast Guard (USCG) standards and Society of Automotive Engineers, Inc. (SAE) recommended practices. The Company is a member of the Specialty Vehicle Institute of America (SVIA), a trade association organized to foster and promote the safe and responsible use of specialty vehicles manufactured and/or distributed throughout the United States of America. The Company is also a member of the Canadian All-Terrain Vehicle Distributors Council (CATV), a council of similar function. In addition, the Arctic Cat ATV conforms to certain U.S. Consumer Product Safety Commission standards. The EPA has promulgated rules involving more stringent emissions standards for two-cycle engines. Such engines are used on the Company's snowmobiles and PWC. The Company currently is unable to predict whether such legislation will be enacted and, if so, the ultimate impact on the Company and its operations. However, the Company is currently evaluating several alternatives to comply with the proposed legislation. Effects of Weather While from time to time lack of snowfall in a particular region of the United States or Canada may adversely affect snowmobile retail sales within that region, the Company works to mitigate this effect by taking snowmobile orders in the spring for the following winter season and by working with its dealers to move snowmobiles out of a region with light snowfall to another region with heavier snowfall. Nonetheless, there is no assurance that weather conditions will not materially effect the Company's future sales of snowmobiles, ATVs or PWC. Employees During fiscal 1998, the Company had peak employment of approximately 1,808 employees, including 275 salaried and 1,533 hourly and production personnel. Due to the seasonal nature of sales and the Company's production schedules, prior to the introduction of the PWC and ATV, approximately 60% of hourly personnel worked only during the spring through the late fall production period. However, during the past five fiscal years, most employees remained employed throughout the year to produce the Tigershark PWC and Arctic Cat ATV. The Company's employees are not represented by a union or subject to a collective bargaining agreement. The Company has never experienced a strike or work stoppage and considers its relations with its employees to be excellent. Intellectual Property The Company makes an effort to patent all significant innovations that it considers patentable and owns numerous patents and know-how which relate to production of its snowmobiles, PWC, ATVs and other products. Trademarks are important to the Company's snowmobile, PWC, ATVs and related parts, garments and accessories business activities. While from time to time the Company becomes aware of the unauthorized use of its trademarks, particularly in the sale of promotional items, the Company has a vigorous program of trademark enforcement to eliminate the unauthorized use of its trademarks, thereby strengthening the value of its trademarks and improving its image and customer goodwill. The Company believes that its "Arctic Cat " registered United States trademark is its most significant trademark. Additionally, the Company has numerous registered trademarks, trade names and logos, both in the United States and internationally. Year 2000 Compliance The Company has evaluated its computer systems for century compliance issues. Management believes that the Company will correct century compliance issues either through the replacement of the non-compliant systems or through the reprogramming of its systems. The Company does not believe that the costs of achieving century dating compliance will have a material effect on the Company's financial statements. Item 2. Properties The Company owns its manufacturing facilities and executive offices in Thief River Falls, Minnesota. The facilities consist of approximately 498,000 square feet of manufacturing, office and warehouse space on 49.5 acres, including approximately 417,000 square feet devoted to manufacturing, and approximately 81,000 square feet devoted to office and administrative uses. The Company also owns a separate building on land contiguous to the manufacturing facilities and executive offices. The building consists of approximately 60,000 square feet on two floors of which the Company utilizes approximately two-thirds for its sewing production of Arcticwear garments and snowmobile seats. In addition, the Company also owns three separate parcels of undeveloped land adjacent to its property totaling approximately 94.8 acres. This property is used by the Company in some of its testing activities and remains available for future expansion. The Company owns all the tooling used in the manufacture of its products and the machinery located at its plant in Thief River Falls, Minnesota. During fiscal 1997, the Company purchased a 37,000 square foot building located in Madison, South Dakota, that it had leased since 1992. This facility is used to produce and/or paint hoods and other parts for the Company's Arctic Cat snowmobiles and PWC. Also during fiscal 1997, the Company constructed a 220,000 square foot facility in Bucyrus, Ohio, to house its service parts, garments and accessories distribution operations. The Company believes the Bucyrus facility's proximity to central shipping hubs and close access to Canada provides decreased delivery times to the majority of its dealers. Item 3. Legal Proceedings Accidents involving personal injury and property damage occur in the use of snowmobiles, PWC, and ATVs. Claims have been made against the Company from time to time. It is the Company's policy to vigorously defend against these actions. The Company believes that the cases in discovery are adequately covered by reserves and product liability insurance. Although the Company from time to time has been named as a defendant in lawsuits involving product liability claims against Arctic Enterprises, Inc. on the theory that the Company is a successor of Arctic Enterprises, Inc., the Company is not a successor of Arctic Enterprises, Inc. and has never been found liable in any such lawsuits. The Company is not involved in any other legal proceedings which are considered to have the potential for a materially adverse impact on the Company's business or financial condition. Product liability insurance is presently maintained by the Company on a "per occurrence" basis (with coverage being provided in respect of accidents which occurred during the policy year, regardless of when the related claim is made) in the amount of $5,000,000 in the aggregate, in addition to a $1,000,000 self-insured retention. The Company believes such insurance is adequate. Item 4. Submission of Matters to a Vote of Security Holders None Item 4. (A) Executive Officers of Registrant Name Age Position ______ _____ __________ William G. Ness 60 Chairman of the Board of Directors Christopher A. Twomey 50 President and Chief Executive Officer Mark E. Blackwell 45 Vice President--Marketing Terry J. Blount 55 Vice President--Human Resources Timothy C. Delmore 44 Chief Financial Officer and Secretary Ronald G. Ray 49 Vice President--Manufacturing Roger H. Skime 55 Vice President--Research & Development Ole E. Tweet 51 Vice President--New Product Development Mr. Ness has been Chairman of the Board of Directors of the Company since its inception in 1983. He is also a director of Northern Woodwork (specialty furniture manufacturer), Thief River Falls, Minnesota and a director of Northern State Bank. Mr. Twomey has been President and Chief Executive Officer of the Company since January 1986 and a director since 1987. He has held various executive officer positions with the Company since 1983. Mr. Twomey is also a Community Board Member of Norwest Bank Minnesota West, N.A. Mr. Twomey is currently serving as a director of The Toro Company. Mr. Blackwell has been Vice President--Marketing since May of 1992 and has over 16 years of marketing experience in the recreational vehicle field. Previously he served for five years as Marketing Director for American Suzuki Motor Corporation. His responsibilities have included the motorcycle and marine divisions. Mr. Blount has been Vice President--Human Resources since August of 1996. Mr. Blount has over 29 years of Human Resource experience in the manufacturing field. Prior to joining the Company, Mr. Blount worked as Vice President-Human Resources at Washington Scientific Industries since 1981. Mr. Delmore has been Chief Financial Officer of the Company since 1986 and has been Corporate Secretary of the Company since 1989. Mr. Delmore, a CPA with seven years of prior public accounting experience, joined the Company in 1985 as Controller. Mr. Ray has been Vice President-Manufacturing since April of 1992 and has over 28 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 37 years. Mr. Tweet, Vice President of New Product Development and General Manager of the Marine Division, had been the Company's Vice President-Marketing since its inception in 1983 and has been employed in the snowmobile industry for 33 years. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company's common stock is traded on the Nasdaq Stock Market under the Nasdaq symbol "ACAT". Quotations below represent the high and low closing sale prices as reported by Nasdaq. The Company's stock began trading on the Nasdaq Stock Market on June 26, 1990. Years Ended -------------------------------------------- March 31, 1998 March 31, 1997 -------------- -------------- Quarterly Prices High Low High Low ---- ---- ---- ---- First Quarter $11.44 $ 9.50 $12.50 $ 9.50 Second Quarter $12.50 $ 9.88 $12.25 $ 8.88 Third Quarter $12.50 $ 9.50 $10.75 $ 9.00 Fourth Quarter $10.00 $ 8.25 $11.00 $ 9.44 As of June 10, 1998, the Company had approximately 721 stockholders of record, including the nominee of Depository Trust Company which held 17,579,226 shares of common stock. On March 2, 1992, the Company initiated a $0.0267 per share regular quarterly dividend. The quarterly dividend was increased to $0.0355 per share on March 2, 1993 and subsequently increased to $0.0467 per share on March 2, 1994. On February 2, 1995, the Company increased the quarterly dividend to $0.06 per share. All dividends have been adjusted for stock-splits. (This space intentionally left blank.) Item 6. Selected Financial Data Years Ended March 31, (in thousands, except per share amounts) 1998 1997 1996 1995 1994 ____ ____ ____ ____ ____ Income Statement Data: Net sales $504,206 $468,595 $404,996 $367,144 $268,057 Cost of goods sold 368,688 351,249 308,946 267,210 190,972 ________ ________ ________ ________ _________ Gross profit 135,518 117,346 96,050 99,934 77,085 Selling, general and administrative expenses 97,840 83,282 72,473 50,939 36,906 ________ ________ ________ ________ ________ Operating profit 37,678 34,064 23,577 48,995 40,179 Interest income 1,837 1,798 2,228 2,383 1,595 Interest expense (59) (109) - (17) (98) ________ ________ ________ ________ _________ Earnings before income taxes 39,456 35,753 25,805 51,361 41,676 Income taxes 14,007 12,692 9,159 17,976 14,170 ________ ________ ________ ________ _________ Net earnings $25,449 $23,061 $ 16,646 $ 33,385 $ 27,506 Net earnings per share Basic $ 0.88 $ 0.78 $ 0.56 $ 1.13 $ 0.94 Diluted $ 0.88 $ 0.78 $ 0.56 $ 1.11 $ 0.92 Cash dividends per share $ 0.24 $ 0.24 $ 0.24 $ 0.21 $ 0.15 Weighted average shares outstanding Basic 28,974 29,476 29,661 29,495 29,267 Diluted 29,059 29,653 29,928 30,030 29,860 ___________________________________________________________________________ As of March 31, 1998 1997 1996 1995 1994 Balance Sheet Data (in thousands) Cash & short-term investments $ 58,545 $ 50,740 $ 44,002 $ 65,241 $ 59,923 Working capital 142,243 131,604 130,142 128,845 104,885 Total assets 229,718 217,967 207,996 183,996 154,980 Long-term debt -- -- -- -- -- Shareholders' equity 177,505 166,738 156,193 147,067 118,203 ___________________________________________________________________________ QUARTERLY FINANCIAL DATA (unaudited) (in thousands, except per share amounts) Total First Second Third Fourth Year Quarter Quarter Quarter Quarter Net Sales ______ ______ ______ ______ ______ 1998 $504,206 $85,467 $196,846 $139,808 $82,085 1997 468,595 89,126 177,925 133,877 67,667 1996 404,996 61,759 166,059 123,623 53,555 Gross Profit 1998 $135,518 $21,392 $55,315 $41,056 $17,755 1997 117,346 18,539 49,389 35,715 13,703 1996 96,050 11,806 43,295 31,792 9,157 Net Earnings (Loss) 1998 $ 25,449 $ 872 $19,904 $ 6,193 $(1,520) 1997 23,061 1,002 18,587 6,020 (2,548) 1996 16,646 (4,268) 17,888 6,015 (2,989) Net Earnings (Loss) Per Share 1998 - Basic $ 0.88 $ 0.03 $ 0.68 $ 0.21 $ (0.05) 1998 - Diluted 0.88 0.03 0.68 0.21 (0.05) 1997 - Basic 0.78 0.03 0.63 0.20 (0.09) 1997 - Diluted 0.78 0.03 0.62 0.20 (0.09) 1996 - Basic 0.56 (0.14) 0.60 0.20 (0.10) 1996 - Diluted 0.56 (0.14) 0.60 0.20 (0.10) Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal 1998 was a successful, record breaking sales year for Arctic Cat Inc. as the Company reached a half billion dollars in sales. While industry snowmobile sales were down for the year, for the fifteenth consecutive year, the Company once again achieved record retail sales and increased it's North American snowmobile market share. Dealer and consumer reception of Arctic Cat ATVs continues to be encouraging as ATV revenues grew by 73% for fiscal 1998. Financial Data (in thousands, except per share data) Years ended March 31, 1998 1997 1996 -------- -------- -------- Net Sales $504,206 $468,595 $404,996 Net Earnings $ 25,449 $ 23,061 $ 16,646 Basic and Diluted Net Earnings Per Share $ 0.88 $ 0.78 $ 0.56 Cash & Short-Term Investments $ 58,545 $ 50,740 $ 44,002 Sales by Product Line (In%) Snowmobiles 59% 58% 66% ATVs 18% 11% 3% Parts, garments & accessories 16% 16% 17% PWC 7% 15% 14% Results of Operations 1998 vs. 1997 Net sales increased 7.6% in 1998 to $504,206,000 from $468,595,000 in 1997 due to a 86.3% ATV unit volume increase, a 7.3% snowmobile unit volume increase and a 5.6% increase in parts, garments and accessories sales. These increases were offset by a 49.4% PWC unit volume decrease which the Company believes is in response to an industry-wide softening in consumer demand. The Company believes the increase in ATV sales is due to both dealer and consumer reception of the Arctic Cat ATV, the expansion of the Company's model line to cover every major segment of the ATV market and growth in the ATV market. Gross profit increased 15.5% to $135,518,000 in 1998 from $117,346,000 in 1997. As a percent of net sales, gross profit increased to 26.9% in 1998 compared to 25.0% in 1997. The increase in gross profit percentage was primarily due to a positive fluctuation between the US dollar and the Japanese yen increasing gross profit by approximately $6,600,000 over fiscal 1997 (see Inflation and Exchange Rates). The Company shares exchange rate fluctuations within certain ranges with Suzuki Motor Corporation, its engine supplier for snowmobile and PWC engines. These fluctuations, although affecting all three product lines, affected the snowmobile product line to the greatest extent. Also improving the gross profit percentage were cost reductions in the snowmobile and ATV product lines. Selling, general and administrative expenses increased 17.5% to $97,840,000 in 1998 from $83,282,000 in 1997. The increase is primarily due to increased marketing and research and development expenses for all product lines. As a percent of net sales, selling, general and administrative expenses were 19.4% in 1998 compared to 17.8% in 1997. Operating profits increased 10.6% to $37,678,000 in 1998 from $34,064,000 in 1997. As a percent of net sales, operating profits increased to 7.5% in 1998 from 7.3% in 1997 (see gross profit and operating expenses discussion). Net earnings increased 10.4% to $25,449,000 or $0.88 per share on a diluted basis, as compared to net earnings of $23,061,000 or $0.78 per share on a diluted basis for fiscal 1997. Net earnings as a percent of net sales were 5.0% and 4.9% in 1998 and 1997, respectively. 1997 vs. 1996 Net sales increased 15.7% in 1997 to $468,595,000 from $404,996,000 in 1996 due to a 2.0% increase in snowmobile sales, on flat unit volume, an 8.9% increase in parts, garments and accessories sales, and $50.7 million of ATV sales as the Company completed its first full year in the ATV market. PWC unit volume increased 17.8%. The Company believes the increases in snowmobile parts and accessory sales were driven by increased demand for the Company's products as well as by excellent winter conditions in the midwest and western United States and Canada. PWC sales increases resulted from late shipments of models for the 1996 summer season that were shipped in the first quarter ended June 30, 1996 and the earlier shipment of models for the 1997 summer season occurring in the fourth quarter. Gross profit increased 22.2% to $117,346,000 in 1997 from $96,050,000 in 1996. Gross profit as a percent of net sales was 25.0% in 1997 compared to 23.7% in 1996. The increase in the gross profit percentage was primarily due to the positive fluctuation in the exchange rates between the U.S. dollar and the Japanese yen. The Company shares exchange rate fluctuations with Suzuki Motor Corporation, its engine supplier. These fluctuations affected all three product lines and increased gross profit by approximately $5,500,000 over fiscal 1996 (see Inflation and Exchange Rates). Also improving the gross profit percentage were Canadian dealer direct snowmobile and accessory shipments which yielded higher margins than the prior years shipments to Canadian distributors. These factors were mitigated by a larger percentage of ATVs and PWC in the sales mix which yield lower margins than snowmobiles. Selling, general and administrative expenses increased 14.9% to $83,282,000 in 1997 from $72,473,000 in 1996. The increase is principally attributable to increased selling and administrative expenses associated with increased ATV sales and increased expenses due to selling directly to dealers in Canada. As a percent of net sales, selling, general and administrative expenses were 17.8% in 1997 compared to 17.9% in 1996. Operating profits increased 44.5% to $34,064,000 in 1997 from $23,577,000 in 1996. As a percent of net sales, operating profits increased to 7.3% in 1997 from 5.8% in 1996 (see gross profit and operating expense discussion). Net earnings increased 38.5% to $23,061,000 in 1997 from $16,646,000 in 1996. Net earnings as a percent of net sales were 4.9% and 4.1% in 1997 and 1996, respectively. Net earnings per share were $0.78 in 1997 compared to $0.56 in 1996. Liquidity and Capital Resources The seasonality of the Company's snowmobile production cycle and the lead time between the commencement of snowmobile and ATV production in the early spring and commencement of shipments late in the first quarter have resulted in significant fluctuations in the Company's working capital requirements during the year. Historically, the Company has financed its working capital requirements out of available cash balances at the beginning and end of the production cycle and with short-term bank borrowings during the middle of the cycle. The Company has evaluated its computer systems for century compliance issues. Management believes that the Company will correct century compliance issues either through the replacement of the non-compliant systems or through the reprogramming of its systems. The Company does not believe that the costs of achieving century dating compliance will have a material effect on the Company's financial statements. Cash and Short-Term Investments Cash and short-term investments were $58,545,000 at March 31, 1998 compared to $50,740,000 at March 31, 1997. The Company's cash balances traditionally peak early in the fourth quarter and then decrease as working capital requirements increase when the Company's snowmobile and spring ATV production cycles begin. The Company's investment objectives are first, safety of principal and second, rate of return. Working Capital The Company has an unsecured credit agreement with a bank for the issuance of up to $75,000,000 of documentary and stand-by letters of credit and for working capital. Total working capital borrowings under the credit agreement are limited to $30,000,000. The total letters of credit issued at March 31, 1998 were $15,133,000, of which $8,232,000 was issued to Suzuki Motor Corporation for engine purchases. During fiscal 1996, the Company's Board of Directors authorized the repurchase of 1,500,000 shares of common stock. During March of 1998, the Company's Board of Directors authorized the repurchase of an additional 1,500,000 shares of common stock. During 1998, 1997 and 1996, the Company invested $8,392,000, $5,858,000 and $672,000 to repurchase and cancel 834,900, 596,500 and 66,000 shares. In 1998, the Company invested $13,699,000 in capital expenditures. The Company expects that fiscal 1999 capital expenditures, including tooling, will be approximately $15,000,000. The Company believes that cash generated from operations will be sufficient to meet its working capital, regular quarterly dividend, share repurchase program and capital expenditure requirements for the foreseeable future. The Company has agreements with certain finance companies to provide floor plan financing for the Company's North American dealers. These agreements improve the Company's liquidity by financing dealer purchases of products without requiring substantial use of the Company's working capital. The Company is paid by the floor plan companies shortly after shipment and as part of its marketing programs the Company pays the floor plan financing of its dealers for certain set time periods depending on the size of a dealer's order. The financing agreements require repurchase of repossessed new and unused units and sets limits upon the Company's potential liability for annual repurchases. The aggregate potential liability was approximately $11,100,000 at March 31, 1998. No material losses have been incurred by the Company under these agreements, which are terminable by either party upon 30 days notice. Effective April 1, 1998, the Company agreed to guarantee approximately 50% of the amounts financed by its dealers with one of the finance companies. At April 1, 1998, the Company's maximum level of exposure under this guarantee is approximately $61,500,000. Inflation and Exchange Rates Inflation is not expected to have a significant impact on the Company's business. The Company generally has been able to offset the impact of increasing costs through a combination of productivity gains and price increases. The relationship of the U.S. dollar to the Canadian dollar and Japanese yen may have a significant impact on the Company's business. Two of the Company's principal competitors are based in Japan and Canada. Also, the Company purchases its snowmobile, ATV and PWC engines and related parts from Suzuki Motor Corporation and sells a full line of products to Canadian dealers. All purchase and sales prices are determined annually. The Company has an agreement with Suzuki Motor Corporation for snowmobile and PWC engine purchases to share the impact of fluctuations in the exchange rate between the U.S. dollar and the Japanese yen above and below a fixed range contained in the agreement. This agreement renews annually. The Company has in the past, in the case of the Japanese yen, and may in the future enter into foreign exchange contracts for both the Japanese yen and the Canadian dollar to minimize the impact of exchange rate fluctuations (see gross profit discussion). Forward-Looking Statements The Private Securities Litigation Reform Act of 1995 provides a safe harbor for certain forward-looking statements. This Report on Form 10-K, as well as the Company's Annual Report and future filings with the Securities and Exchange Commission, the Company's press releases and oral statements made with the approval of an authorized executive officer, contain forward-looking statements that reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated. The words "aim," "believe," "expect," "anticipate," "intend," "estimate" and other expressions that indicate future events and trends identify forward-looking statements. Actual future results and trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to: product mix and volume; competitive pressure on sales and pricing; increase in material or production cost which cannot be recouped in product pricing; changes in the sourcing of engines from Suzuki; warranty expenses; foreign currency exchange rate fluctuations; product liability claims and other legal proceedings in excess of insured amounts; environmental and product safety regulatory activity; effects of the weather; overall economic conditions; and consumer demand and confidence. Item 7A. Quantitative and Qualitative Disclosures about Market Risk Not Applicable. Item 8. Financial Statements and Supplementary Data Financial Statements, Notes, and Report of Independent Certified Public Accountants appear on pages F-1 through F-13. Quarterly financial data appears in Item 6. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None Part III Item 10. Directors and Executive Officers of the Registrant The information included under the heading "Election of Directors" in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held August 6, 1998, is incorporated herein by reference. Pursuant to instruction 3 to Item 401(b) of Regulation S-K, information as to executive officers of the Company is set forth in Item 4(A) of this Form 10-K. Item 11. Executive Compensation The information included under the heading "Executive Compensation and Other Information" in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held August 6, 1998, is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information included under the heading "Beneficial Ownership of Capital stock" in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held August 6, 1998, 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 6, 1998, is incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) Documents filed as part of report 1. Financial Statements. The following consolidated financial statements of the Company and its subsidiaries are filed as part of this Form 10-K: Form 10-K Page Reference (I) Consolidated Balance Sheets F-1 as of March 31, 1998 and 1997 (ii) Consolidated Statements of Earnings F-2 for the three years ended March 31, 1998, 1997 and 1996 (iii) Consolidated Statements of Shareholders' F-3 Equity for the three years ended March 31, 1998, 1997 and 1996 (iv) Consolidated Statements of Cash Flows F-4 for the three years ended March 31, 1998, 1997 and 1996 (v) Notes to Consolidated Financial F-5 to Statements F-12 (vi) Report of Independent Certified Public F-13 Accountants 2. Schedules filed as part of this Form 10-K: (I) Schedule II - Valuation and Qualifying Accounts F-14 3. Exhibits Method of Filing 3(a) Amended and Restated Articles of Incorporation (3) of Company 3(b) Restated By-Laws of the Company (1) 4(a) Form of specimen Common Stock Certificate (1) 10(a) 1989 Stock Option Plan, as amended (3) 10(b) 1995 Stock Option Plan, as amended (3) 10(c) Purchase/Supply Agreement dated as of (1) March 1, 1985 between Suzuki Motor Co., Ltd. and the Company, and related Agreement on Implementation of Warranty Provision. 10(d) Form of Employment Agreement between the (1) Company and each of its executive officers 10(e) Floorplan Repurchase Agreement dated (1) July 13, 1984, between the Company and ITT Commercial Finance Corp. 10(f) Floorplan Repurchase Agreement dated as (1) of June 15, 1988, between the Company And ITT Commercial Finance, a division Of ITT Industries of Canada, Ltd. 10(g) Discretionary Revolving Credit Facility, (3) dated as of June 6, 1997, between the Company and Norwest Bank Minnesota, National Association. 21 Subsidiaries of the Registrant (2) 23 Consent of Independent Certified Public Accountants(2) 27 Financial Data Schedule-March 31, 1998 (2) 27.1 Restated Financial Data Schedule- (2) September 30, 1996 (b) Reports on Form 8-K No reports on Form 8-K were filed during the three months ended March 31, 1998. (c) Exhibits Reference is made to Item 14(a) 3. (d) Schedules Reference is made to Item 14(a) 2. -------------------------------------- (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 and Form 10-K for the fiscal year ended March 31, 1997. SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 26th day of June, 1998. ARCTIC CAT INC. /s/Christopher A. Twomey _______________________________ Christopher A. Twomey President, Chief Executive Officer and Director (Principle Executive Officer and Director) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. /s/William G. Ness June 26, 1998 ___________________________ ___________________ William G. Ness Chairman of the Board and Director /s/Christopher A. Twomey June 26, 1998 ___________________________ ___________________ Christopher A. Twomey President, Chief Executive Officer and Director (Principle Executive Officer) /s/Timothy C. Delmore June 26, 1998 ___________________________ ___________________ Timothy C. Delmore Chief Financial Officer (Principle Financial and Accounting Officer) /s/Robert J. Dondelinger June 26, 1998 ___________________________ ___________________ Robert J. Dondelinger, Director /s/William I. Hagen June 26, 1998 ___________________________ ___________________ William I. Hagen, Director /s/Lowell T. Swenson June 26, 1998 ___________________________ ___________________ Lowell Swenson, Director /s/Gregg A. Ostrander June 26, 1998 __________________________ ___________________ Gregg A. Ostrander, Director ___________________________ ___________________ Kenneth J. Roering, Director ___________________________ ___________________ Takeshi Natori, Director Arctic Cat Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS March 31, ASSETS 1998 1997 CURRENT ASSETS Cash and equivalents $ 24,764,000 $ 5,540,000 Short-term investments 33,781,000 45,200,000 Accounts receivable, less allowances 30,217,000 27,393,000 Inventories 88,149,000 86,502,000 Prepaid expenses 1,771,000 1,618,000 Income taxes receivable 2,111,000 3,838,000 Deferred income taxes 9,088,000 8,369,000 __________ __________ Total current assets 189,881,000 178,460,000 PROPERTY, PLANT AND EQUIPMENT - At Cost Machinery, equipment and tooling 70,611,000 60,534,000 Land, buildings and improvements 14,568,000 11,771,000 __________ __________ 85,179,000 72,305,000 Less accumulated depreciation 45,342,000 32,798,000 __________ __________ 39,837,000 39,507,000 __________ __________ $229,718,000 $217,967,000 ---------- ---------- ---------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 20,671,000 $ 21,586,000 Accrued expenses 26,967,000 25,270,000 ---------- ---------- Total current liabilities 47,638,000 46,856,000 DEFERRED INCOME TAXES 4,575,000 4,373,000 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; 20,857,909 in 1998; 21,533,136 in 1997 209,000 215,000 Class B common stock, par value $0.1; 7,560,000 shares authorized, issued, and outstanding 76,000 76,000 Additional paid-in capital 9,356,000 17,069,000 Retained earnings 167,864,000 149,378,000 __________ __________ 177,505,000 166,738,000 __________ __________ $229,718,000 $217,967,000 ---------- ---------- ---------- ---------- F-1 Arctic Cat Inc. and Subsidiaries Consolidated Statements of Earnings Years Ended March 31, 1998 1997 1996 ----------- ----------- ----------- Net Sales $504,206,000 $468,595,000 $404,996,000 Cost of goods sold 368,688,000 351,249,000 308,946,000 ___________ ___________ ___________ Gross profit 135,518,000 117,346,000 96,050,000 Selling, general and administrative expenses 97,840,000 83,282,000 72,473,000 ___________ ___________ ___________ Operating profit 37,678,000 34,064,000 23,577,000 Other income (expense) Interest income 1,837,000 1,798,000 2,228,000 Interest expense (59,000) (109,000) - ___________ ___________ ___________ 1,778,000 1,689,000 2,228,000 ___________ ___________ ___________ Earnings before income taxes 39,456,000 35,753,000 25,805,000 Income tax expense 14,007,000 12,692,000 9,159,000 ___________ ___________ ___________ Net Earnings $25,449,000 $23,061,000 $16,646,000 ----------- ----------- ----------- ----------- ----------- ----------- Basic and Diluted Net Earnings Per Share $ 0.88 $ 0.78 $ 0.56 ----------- ----------- ----------- ----------- ----------- ----------- Weighted average shares outstanding Basic Diluted 28,974,000 29,476,000 29,661,000 29,059,000 29,653,000 29,928,000 ---------- ----------- ----------- ---------- ----------- ----------- F-2 Arctic Cat Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Years ended March 31,
Class B Additional Common Stock Common Stock Paid-in Retained Shares Amount Shares Amount Capital Earnings Total ________________ ______ ______ ______ _______ ________ _____ ______ Balances at April 1, 1995 22,070,413 $221,000 7,560,000 $76,000 $22,903,000 $123,867,000 $147,067,000 Exercise of stock options 58,786 1,000 - - 302,000 - 303,000 Tax benefits from stock option exercises - - - - 62,000 - 62,000 Repurchase of common stock (73,228) (1,000) - - (765,000) - (766,000) Cash dividends ($0.24 per share) - - - - - (7,119,000) (7,119,000) Net earnings - - - - - 16,646,000 16,646,000 ________________________________________________________________________ Balances at March 31, 1996 22,055,971 221,000 7,560,000 76,000 22,502,000 133,394,000 156,193,000 Exercise of stock options 83,238 - - - 464,000 - 464,000 Tax benefits from stock option exercises - - - - 62,000 - 62,000 Repurchase of common stock (606,073) (6,000) - - (5,959,000) - (5,965,000) Cash dividends ($0.24 per share) - - - - - (7,077,000) (7,077,000) Net earnings - - - - - 23,061,000 23,061,000 _______________________________________________________________________ Balances at March 31, 1997 21,533,136 215,000 7,560,000 76,000 17,069,000 149,378,000 166,738,000 Exercise of stock options 230,949 3,000 - - 1,382,000 - 1,385,000 Repurchase of common stock (906,176) (9,000) - - (9,095,000) - (9,104,000) Cash dividends ($0.24 per share) - - - - - (6,963,000) (6,963,000) Net earnings - - - - - 25,449,000 25,449,000 ________________________________________________________________________ Balances at March 31, 1998 20,857,909 $209,000 7,560,000 $76,000 $9,356,000 $167,864,000 $177,505,000 - ------------------------------------------------------------------------ - ------------------------------------------------------------------------
F-3 Arctic Cat Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended March 31, 1998 1997 1996 ---------- ---------- ---------- Cash flows from operating activities $25,449,000 $23,061,000 $16,646,000 Net earnings Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation Deferred income taxes 13,369,000 11,350,000 7,646,000 Changes in operating assets and liabilities: (517,000) 1,388,000 (2,481,000) Trading securities Accounts receivable 11,670,000 (12,476,000) 25,280,000 Inventories (2,824,000) 9,072,000 (17,099,000) Prepaid expenses (1,647,000) 116,000 (16,692,000) Accounts payable (153,000) 786,000 (400,000) Accrued expenses (915,000) (2,229,000) 7,957,000 Income taxes 1,697,000 950,000 5,237,000 1,727,000 (3,908,000) 2,684,000 --------- --------- --------- Net cash provided by operating activities 47,856,000 28,110,000 28,778,000 Cash flows from investing activities Additions to property, plant and equipment Sales and maturities of available-for-sale(13,699,000)(21,270,000)(17,155,000) securities 1,070,000 4,500,000 2,292,000 Purchases of available-for-sale securities (1,321,000) (2,254,000) (2,933,000) --------- --------- --------- Net cash used in investing activities (13,950,000)(19,024,000)(17,796,000) Cash flows from financing activities Proceeds from issuance of common stock 827,000 357,000 209,000 Repurchase of common stock (8,546,000) (5,858,000) (672,000) Dividends paid (6,963,000) (7,077,000) (7,119,000) --------- --------- --------- Net cash used in financing activities (14,682,000)(12,578,000) (7,582,000) --------- --------- --------- Net increase (decrease) in cash and equivalents 19,224,000 (3,492,000) 3,400,000 Cash and equivalents at beginning of year 5,540,000 9,032,000 5,632,000 --------- --------- --------- Cash and equivalents at end of year $24,764,000 $ 5,540,000 $ 9,032,000 --------- --------- --------- --------- --------- --------- Supplemental disclosure of cash payments for income taxes $15,797,000 $15,212,000 $10,869,000 --------- --------- --------- --------- --------- --------- Supplemental disclosure of non-cash financing activities: During 1998, 1997 and 1996, common stock with a fair market value of $558,000, $107,000 and $94,000 was canceled as settlement for the exercise of certain stock options and associated payroll taxes. During 1997 and 1996, tax benefits derived from the exercise of stock options reduced income tax obligations and increased additional paid-in-capital by $62,000 each year. F-4 Arctic Cat Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1998, 1997 and 1996 Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Arctic Cat Inc. and Subsidiaries (the "Company") design, engineer, manufacture and market snowmobiles and all-terrain vehicles (ATVs) under the Arctic Cat brand name, and personal watercraft (PWC) under the Tigershark brand name, as well as related parts, garments and accessories, principally through its facilities in Thief River Falls, Minnesota. The Company operates in a single industry segment and its products are sold through a network of independent dealers and distributors located throughout the United States, Canada, Scandinavia and other international markets. Principal products, as a percentage of net sales, are as follows for the years ending March 31: 1998 1997 1996 ---- ---- ---- Snowmobiles 59% 58% 66% ATVs 18 11 3 Parts, garments & accessories 16 16 17 PWC 7 15 14 ---- ---- ---- 100% 100% 100% 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 to be a cash equivalent. Cash equivalents consist primarily of commercial paper and put bonds and are stated at cost, which approximates market value based upon quoted market prices. Cash equivalents totaled $23,932,000 and $10,109,000 at March 31, 1998 and 1997. Short-Term Investments: Short-term investments include trading securities, with unrealized gains and losses included in net earnings, and available-for-sale securities, with unrealized gains and losses reported within shareholders' equity. Short-term investments are reported at cost, which approximates market value based upon quoted market prices. The Company utilizes the specific identification method in accounting for its short-term investments. Inventories: Inventories are stated at the lower of cost or market, with cost determined using the first-in, first-out method. Property, Plant and Equipment: Depreciation is provided in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives, principally on a straight-line basis. Estimated service lives range from 15-25 years for buildings and improvements and 3-7 years for machinery, equipment and tooling. Accelerated and straight-line methods are used for income tax reporting. F-5 Product Warranties: The Company provides for estimated warranty costs at the time of sale and accrues for specific items after the sale at the time their existence is known and the amounts are determinable. Warranty costs on certain parts and components are reimbursed to the Company by supplying vendors. Insurance: The Company is self-insured for employee medical, workers' compensation, and product liability claims. Specific stop loss coverages are provided for catastrophic claims. Losses and claims are charged to operations when it is probable a loss has been incurred and the amount can be reasonably estimated. Revenue Recognition: The Company recognizes revenue when products are shipped to dealers. Research and Development: Research and development costs are expensed as incurred and are reported as a component of selling, general and administrative expenses. Research and development expense was $10,273,000, $9,911,000 and $9,317,000 during 1998, 1997 and 1996. Advertising: The Company expenses advertising costs as incurred. Advertising expense was $19,605,000, $17,049,000 and $12,296,000 during 1998, 1997 and 1996. Stock-Based Compensation: The Company utilizes the intrinsic value method of accounting for its employee stock-based compensation plans. Pro forma information related to the fair value based method of accounting is contained in Note J. Net Earnings Per Share: On December 31, 1997, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings per Share." All current and prior year earnings per share data have been restated to conform to the provisions of SFAS 128. The Company's basic net earnings per share is computed by dividing net earnings by the weighted average number of outstanding common shares. The Company's diluted net earnings per share is computed by dividing net earnings by the weighted average number of outstanding common shares and common share equivalents relating to stock options, when dilutive. Options to purchase 892,380, 930,817 and 318,511 shares of common stock with weighted average exercise prices of $12.44, $12.42 and $15.42 were outstanding during 1998, 1997 and 1996, but were excluded from the computation of common share equivalents because they were anti-dilutive. Foreign Currency: Effective April 1, 1996, the Company began marketing its products directly to Canadian dealers in Canadian currency. The Company's Canadian operations use the U.S. dollar as the functional currency. Canadian assets and liabilities are translated at the foreign exchange rates in effect at the balance sheet date. Revenues and expenses are translated at the average foreign exchange rate in effect for the period. Translation and exchange gains and losses are reflected in the results of operations. The Company enters into forward exchange contracts to hedge purchase commitments for ATV engines which are denominated in Japanese yen. Gains and losses on the forward exchange contracts are deferred and included in the valuation of the inventory, when acquired, as the forward exchange contracts hedge the underlying foreign exchange exposure. At March 31, 1998, the Company had open Japanese yen forward exchange purchase contracts with notional amounts totaling $9,155,000. The Company does not enter into forward exchange contracts for trading purposes. F-6 New Accounting Pronouncements: SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," are effective for fiscal years beginning after December 15, 1997. SFAS 130 requires a company to display an amount representing comprehensive income, as defined by the statement, as part of the company's basic financial statements. Comprehensive income will include items such as unrealized gains or losses on certain investment securities and foreign currency items. The adoption of SFAS 130 should not affect the Company's consolidated financial statements. SFAS 131 requires a company to disclose financial and other information, as defined by the statement, about its business segments, their products and services, geographic areas, major customers, revenues, profits, assets and other information. The Company has not yet assessed what impact SFAS 131 will have on its consolidated financial statement reporting. Use of Estimates: Preparation of the Company's consolidated financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and related revenues and expenses. Actual results could differ from those estimates. Reclassifications: Certain 1997 and 1996 amounts have been reclassified to conform to the 1998 presentation. NOTE B - SHORT-TERM INVESTMENTS Short-term investments consist primarily of a diversified portfolio of tax exempt municipal bonds and money market funds and are classified as follows at March 31: 1998 1997 ---------- ---------- Trading Securities $20,820,000 $32,490,000 Available-for-sale debt securities 12,961,000 12,710,000 ---------- ---------- $33,781,000 $45,200,000 ---------- ---------- ---------- ---------- The contractual maturities of available-for-sale debt securities at March 31, 1998, are as follows: $502,000 within one year, $4,176,000 from one year through five years, and $8,283,000 from five years through ten years. Gross realized and unrealized gains and losses related to available-for-sale securities were not material. At March 31, 1998 and 1997, $9,933,000 and $7,102,000 of the trading securities were invested in one money market fund. NOTE C - INVENTORIES Inventories consist of the following at March 31: 1998 1997 ---------- ---------- Raw materials and sub-assemblies $30,154,000 $32,784,000 Finished goods 31,756,000 32,573,000 Parts, garments and accessories 26,239,000 21,145,000 ---------- ---------- $88,149,000 $86,502,000 ---------- ---------- ---------- ---------- F-7 NOTE D - ACCRUED EXPENSES Accrued expenses consist of the following at March 31: 1998 1997 --------- --------- Compensation $ 8,876,000 $ 7,952,000 Warranty 5,548,000 7,971,000 Self-insured retentions 3,833,000 3,391,000 Other 8,710,000 5,956,000 --------- --------- $26,967,000 $25,270,000 --------- --------- --------- --------- NOTE E - CREDIT FACILITY The Company has a $75,000,000 unsecured credit agreement with a bank for documentary and stand-by letters of credit and for working capital purposes. Total working capital borrowings under the credit agreement are limited to $30,000,000. The credit agreement is due on demand and expires July 31, 1998; 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. At March 31, 1998, there was $15,133,000 of issued letters of credit outstanding and there was no working capital borrowings outstanding. Of the issued letters of credit outstanding, $8,232,000 were issued to Suzuki for engine purchases (see note G). Outstanding letters of credit expire through May 1999. The credit agreement contains certain reporting and financial statement covenants, which the Company was in compliance with at March 31, 1998. NOTE F - RETIREMENT SAVINGS PLAN The Company's 401(k) retirement savings plan covers substantially all eligible employees. Employees may contribute up to 20% of their compensation with the Company matching 100% of the employee contributions, up to a maximum of 3% of the employee's compensation. The Company can elect to make additional contributions at its discretion. Total Company contributions were $851,000, $773,000 and $724,000 in 1998, 1997 and 1996. NOTE G - RELATED PARTY TRANSACTIONS The Company purchases engines and related parts, which are manufactured in Japan, from Suzuki Motor Corporation (Suzuki see note J). Such purchases totaled $94,955,000, $103,285,000 and $95,619,000 in 1998, 1997 and 1996. The purchase price of the engines and related parts is determined annually. The Company has an agreement with Suzuki for snowmobile and watercraft engine purchases to share the impact of fluctuations in the exchange rate between the U.S. dollar and the Japanese yen above and below a fixed range contained in the agreement. This agreement renews annually. The Company is dependent on Suzuki for the near term supply of its engines and related parts. An interruption of this supply could have a material adverse effect on the Company's operations. Freight services and certain raw materials are purchased from companies where certain of the Company's directors are officers or significant shareholders. In 1998, 1997 and 1996, these transactions aggregated $5,053,000, $7,699,000 and $6,255,000. F-8 NOTE H - INCOME TAXES Income tax expense consists of the following for the years ended March 31: 1998 1997 1996 Current ---------- --------- ---------- - Federal $12,767,000 $ 9,767,000 $10,375,000 - State 1,757,000 1,537,000 1,265,000 Deferred (517,000) 1,388,000 (2,481,000) ---------- --------- ---------- $14,007,000 $12,692,000 $ 9,159,000 ---------- --------- ---------- ---------- --------- ---------- The cumulative temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes are as follows at March 31: 1998 1997 Deferred income taxes - assets --------- --------- Accrued expenses $6,599,000 $6,115,000 Inventory capitalization and reserves 1,973,000 1,827,000 Other 516,000 427,000 --------- --------- $9,088,000 $8,369,000 --------- --------- --------- --------- Deferred income taxes - liabilities Depreciation $2,802,000 $2,683,000 Other 1,773,000 1,690,000 --------- --------- $4,575,000 $4,373,000 --------- --------- --------- --------- The following is a reconciliation of the Federal statutory income tax rate to the effective tax rate for the years ended March 31: 1998 1997 1996 ---- ---- ---- Statutory income tax rate 35.0% 35.0% 35.0% State taxes 2.4 2.3 3.2 Tax exempt interest (0.7) (1.3) (2.9) Foreign sales corporation (1.3) (1.5) (2.0) Other 0.1 1.0 2.2 ----- ----- ----- 35.5% 35.5% 35.5% ----- ----- ----- ----- ----- ----- NOTE I - COMMITMENTS AND CONTINGENCIES Dealer Financing: Finance companies provide certain of the Company's dealers and distributors with floor plan financing. The Company has agreements with these finance companies to repurchase certain repossessed products sold to its dealers. At March 31, 1998, the Company was contingently liable under these agreements for a maximum repurchase amount of approximately $11,100,000. No material losses have been incurred under these agreements during the periods presented. The Company pays a specified portion of its dealers' floor plan interest obligations to the finance companies, under various Company marketing programs. Total payments under these programs were $13,026,000, $10,506,000 and $7,416,000 in 1998, 1997 and 1996 and are included in selling, general and administrative expenses. F-9 Effective April 1, 1998, the Company agreed to guarantee approximately 50% of the amounts financed by its dealers and distributors with one of the finance companies. At April 1, 1998, the Company's maximum level of exposure under this guarantee is approximately $61,500,000. Litigation: The Company is subject to legal proceedings and claims which arise in the ordinary course of business. In the opinion of management, the ultimate outcome of these matters will not be material to the Company's consolidated financial statements. NOTE J - SHAREHOLDERS' EQUITY Stock Option Plans: The Company has stock option plans that provide for incentive and non-qualified stock options to be granted to directors, officers and other key employees or consultants. The stock options granted generally have a five to ten year life, vest over a period of one to three years, and have an exercise price equal to the fair market value of the stock on the date of grant. At March 31, 1998, the Company had 1,060,300 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, 1998 are summarized as follows: Number of Weighted shares under average option exercise price -------- ------- Outstanding at April 1, 1995 1,028,784 $ 9.44 Granted 255,000 11.25 Exercised (58,786) 5.15 -------- ------- Outstanding at March 31, 1996 1,224,998 10.02 Granted 602,752 10.25 Exercised (83,238) 5.59 -------- ------- Outstanding at March 31, 1997 1,744,512 10.31 Granted 45,000 10.83 Exercised (230,949) 6.00 Canceled (15,000) 10.45 -------- ------- Outstanding at March 31, 1998 1,543,563 $10.96 -------- ------- -------- ------- Options exercisable at March 31: 1996 475,831 $ 7.62 1997 751,180 $ 8.94 1998 965,380 $11.08 F-10 The following tables summarize information concerning currently outstanding and exercisable stock options: Options Outstanding Weighted Average Weighted Range of Number Remaining Average Exercise Prices Outstanding Contractual Life Exercise Price - ------------ --------- ----------- ----------- $ 6.00 - $8.03 200,871 3.2 years $ 6.00 9.50 - 13.33 1,101,221 5.3 years 10.63 16.33 - 19.75 241,471 5.7 years 16.64 - -------------------------------------------------------------------- 1,543,563 - -------------------------------------------------------------------- Options Exercisable Range of Number Weighted Average Exercise Prices Exercisable Exercise Price - --------------- -------- ----------- $ 6.00 - $8.03 200,871 $ 6.00 9.50 - 13.33 568,038 10.93 16.33 - 19.75 196,471 16.71 - -------------------------------------------------------------------- 965,380 - -------------------------------------------------------------------- The Company's pro forma net earnings and basic and diluted net earnings per share would have been as follows had the fair value method been used for valuing stock options granted to employees in 1996 through 1998: 1998 1997 1996 ---- ---- ---- Pro forma net earnings $24,351,000 $22,290,000 $16,450,000 Pro forma basic and diluted net earnings per share $ 0.84 $ 0.76 $ 0.55 The impact on net earnings may not be representative of future disclosures because they do not take into effect pro forma compensation expense related to grants made before 1996. The weighted average fair value of options granted and the weighted average assumptions used in the binomial options pricing model are as follows: 1998 1997 1996 ---- ---- ---- Fair value of options granted $4.44 $3.40 $3.84 Dividend yield 2% 2% 2% Average term 8 years 4.7 years 5 years Volatility 35% 35% 35% Risk-free rate of return 6.2% 6.6% 6.2% F-11 Class B Common Stock: Suzuki owns all outstanding shares of the Company's Class B common stock. At the option of Suzuki, the Class B common stock is convertible into an equal number of shares of the Company's common stock. The Class B shareholder is entitled to elect one member of the Company's Board of Directors but cannot vote for the election of other directors of the Company. The Class B shareholder can vote on all other matters submitted to the common shareholders. The Class B common stock participates equally with the common stock in all dividends and other distributions duly declared by the Company's Board of Directors. The Class B common shares are converted into an equal number of shares of common stock if: Suzuki owns less than 15% of the aggregate number of outstanding common and Class B common shares; the Company becomes a non- surviving party due to a merger or recapitalization; the Company sells substantially all of its assets; or Suzuki transfers its Class B common stock to any person. In addition, the Company has a Stock Purchase Agreement with Suzuki that prohibits the purchase of additional shares of the Company's common stock unless, following such purchase, Suzuki's ownership is less than or equal to 32% of the aggregate outstanding shares of common and Class B common stock. The Company has the first right of refusal to purchase any shares Suzuki intends to sell. Suzuki has agreed not to compete in the manufacture of snowmobiles or related parts so long as it supplies engines to the Company or owns at least 10% of the aggregate common and Class B common shares outstanding. Preferred Stock: The Company's Board of Directors is authorized to issue 2,050,000 shares of $1.00 par value preferred stock in one or more series. The board can determine voting, conversion, dividend and redemption rights and other preferences of each series. No shares have been issued. Shareholders' Rights Plan: In connection with the adoption of a Shareholders' Rights Plan, the Company created a Series A Junior Participating preferred stock. Under terms of the Company's Shareholder Rights Plan, upon the occurrence of certain events, registered holders of common stock nd Class B common stock are entitled to purchase one-hundredth of a share of Series A Junior Participating preferred stock at a stated price, or to purchase either the Company's common shares or common shares of an acquiring entity at half their market value. The Rights related to this plan expire September 5, 2001. Share Repurchase Authorization: On March 31, 1998, the Company's Board of Directors authorized the repurchase of up to 1,500,000 shares of common stock. The Company invested $8,391,966, $5,858,000 and $672,000 during 1998, 1997 and 1996 to repurchase and cancel 834,900, 596,500 and 66,000 shares, pursuant to a previous Board of Directors' authorization for the repurchase of 1,500,000 shares. Cumulative shares repurchased through March 31, 1998 under this authorization totaled 1,497,400. NOTE K - EXPORT SALES AND MAJOR CUSTOMER Prior to March 31, 1996, the Company marketed its products to Canadian dealers through two distributors serving eastern and western Canada. Sales to one of these distributors amounted to $29,437,000 during 1996. Effective April 1, 1996, the Company began marketing all of its products directly to Canadian dealers. Sales to foreign customers, located primarily in Canada, amounted to $113,442,000, $94,468,000 and $73,964,000 in 1998, 1997 and 1996. F-12 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, 1998 and 1997, and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the three years in the period ended March 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Arctic Cat Inc. and Subsidiaries as of March 31, 1998 and 1997, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended March 31, 1998, in conformity with generally accepted accounting principles. We have also audited Schedule II of Arctic Cat Inc. and Subsidiaries for each of the three years in the period ended March 31, 1998. In our opinion, this Schedule presents fairly, in all material respects, the information required to be set forth therein. /s/Grant Thornton LLP - ------------------------------- Minneapolis, Minnesota May 8, 1998 F-13 Arctic Cat Inc. and Subsidiaries SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Three Years Ended March 31, 1998
Balance at Charged to Charged to Beginning Costs and Other Accounts Deductions- Balance at End Description of Period Expenses -Describe Describe of Period - ----------- ---------- ---------- --------- -------- ------------- Warranty Reserve: Year ended March 31, 1998 $7,971,000 $15,039,000 - $17,462,000 (a) $ 5,548,000 Year ended March 31, 1997 7,939,000 13,915,000 - 13,883,000 (a) 7,971,000 Year ended March 31, 1996 6,012,000 14,354,000 - 12,427,000 (a) 7,939,000 Self-insured Retentions: Year ended March 31, 1998 3,391,000 5,037,000 - 4,595,000 (b) 3,833,000 Year ended March 31, 1997 3,185,000 4,371,000 - 4,165,000 (b) 3,391,000 Year ended March 31, 1996 2,504,000 3,777,000 - 3,096,000 (b) 3,185,000 Other: Year ended March 31, 1998 3,190,000 - - - 2,669,000 Year ended March 31, 1997 3,037,000 - - - 3,190,000 Year ended March 31, 1996 1,608,000 - - - 3,037,000 (a) Warranty claims paid less vendor reimbursements. (b) Health and workers' comp claims and expenses paid.
F-14 ARCTIC CAT INC. EXHIBIT INDEX Exhibit Number 21 Subsidiaries of Registrant 23 Consent of Independent Certified Public Accountants 27 Financial Data Schedule - March 31, 1998 27.1 Restated Financial Data Schedule - September 30, 1996 EX-21 2 Exhibit 21 ARCTIC CAT INC. Subsidiaries of the Company Arctic Cat Sales Inc. organized under the laws of the State of Minnesota 100% of common stock owned by parent Arctco FSC, Inc. (a foreign sales corporation) Organized under the laws of the United States Virgin Islands 100% of common stock owned by parent EX-23 3 Exhibit 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated May 8, 1998, accompanying the consolidated financial statements and schedule of Arctic Cat Inc. and Subsidiaries included in the Annual Report on Form 10-K of Arctic Cat Inc. for the year ended March 31, 1998. We hereby consent to the incorporation by reference of said report in the Registration Statements of Arctic Cat Inc. on Forms S-8 (File No. 33-37065, effective October 1, 1990, File No. 33-69916, effective October 4, 1993, and File No. 33-97244, effective September 22, 1995). /s/Grant Thornton LLP ______________________ Minneapolis, Minnesota June 16, 1998 EX-27 4
5 12-MOS MAR-31-1998 MAR-31-1998 24,764,000 33,781,000 30,717,000 (500,000) 88,149,000 189,881,000 85,179,000 45,342,000 229,718,000 47,638,000 0 0 0 285,000 177,220,000 229,718,000 504,206,000 504,206,000 368,688,000 368,688,000 0 289,000 59,000 39,456,000 14,007,000 25,449,000 0 0 0 25,449,000 0.88 0.88
EX-27.1 5
5 6-MOS MAR-31-1997 SEP-30-1996 20,074,000 13,097,000 78,684,000 (500,000) 96,600,000 220,061,000 70,890,000 37,235,000 253,716,000 78,132,000 0 0 0 296,000 171,564,000 253,716,000 177,925,000 177,925,000 128,536,000 128,536,000 0 0 0 28,817,000 10,230,000 0 0 0 0 18,587,000 0.63 0.62
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