# **FORM10-K**

 
| **ý** | **Annual report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934  for the fiscal year ended March 31, 2005 or** |
|------------|----------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                   |
| **o**      | **Transition report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**                                          |

 

**CommissionFile Number: 0-18607**

 

**ARCTICCAT INC.**

(Exactname of registrant as specified in its charter)

 
| **Minnesota**                                                    | ** ** | **41-1443470**                         |
|------------------------------------------------------------------|------------|----------------------------------------|
| (State  or other jurisdiction  of incorporation or organization) |       | (I.R.S.  Employer  Identification No.) |

 

**601Brooks Avenue South**

**ThiefRiver Falls, Minnesota 56701**

(Addressof 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 markwhether the registrant (1) has filed all reports required by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.

Yes  ý   No  o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

 

Indicate by check markwhether Registrant is an accelerated filer (as defined in Exchange Act Rule12b-2).

Yes  ý   No  o

 

The aggregate marketvalue of the voting and non-voting common equity held by non-affiliatescomputed by reference to the price at which the common equity was last sold, orthe average bid and asked price of such common equity, as of the last businessday of the Registrant’s most recently completed second fiscal quarter: $388,000,000.

 

At June 2, 2005, 13,211,439shares of Common Stock and 6,717,000 shares of Class B Common Stock of the Registrantwere outstanding.

**DocumentsIncorporated by Reference:**

Portions of the Company’sProxy Statement for its Annual Meeting of Shareholders currently scheduled tobe held on August 3, 2005 are incorporated by reference into Part III of thisForm 10-K

 

 

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# **ARCTIC CAT INC.**

# **FORM 10-K**

# **TABLE OF CONTENTS**

 
| ** **       | ** ** | **Description**                                                                                                    |       |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|
| **PART  I**      | ** ** | ** **                                                                                                         | ** ** |
| ** **       | ** ** | ** **                                                                                                         | ** ** |
| ****ITEM 1.****  |       | Business                                                                                                           |       |
| ****ITEM 2.****  |       | Properties                                                                                                         |       |
| ****ITEM 3.****  |       | Legal Proceedings                                                                                                  |       |
| ****ITEM 4.****  |       | Submission of Matters to a Vote of Security  Holders                                                               |       |
| ****ITEM 4A.**** |       | Executive Officers of Registrant                                                                                   |       |
| ** **       |       |                                                                                                               |       |
| **PART  II**     | ** ** | ** **                                                                                                         | ** ** |
| ** **       | ** ** | ** **                                                                                                         | ** ** |
| ****ITEM 5.****  | ** ** | Market for Registrant’s Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities |       |
| ****ITEM 6.****  |       | Selected Financial Data                                                                                            |       |
|             |       | Quarterly Financial  Data                                                                                          |       |
| ****ITEM 7.****  |       | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                        |       |
| ****ITEM 7A.**** |       | Quantitative and Qualitative Disclosures About  Market Risk                                                        |       |
| ****ITEM 8.****  |       | Financial Statements and Supplementary Data                                                                        |       |
| ****ITEM 9.****  |       | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure                              |       |
| ****ITEM 9A.**** |       | Controls and Procedures                                                                                            |       |
| ****ITEM 9B.**** |       | Other Information                                                                                                  |       |
| ** **       |       |                                                                                                               |       |
| **PART  III**    | ** ** | ** **                                                                                                         | ** ** |
| ** **       | ** ** | ** **                                                                                                         | ** ** |
| ****ITEM 10.**** |       | Directors  and Executive Officers of the Registrant                                                                |       |
| ****ITEM 11.**** |       | Executive  Compensation                                                                                            |       |
| ****ITEM 12.**** |       | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                   |       |
| ****ITEM 13.**** |       | Certain  Relationships and Related Transactions                                                                    |       |
| ****ITEM 14.**** | ** ** | Principal  Accounting Fees and Services                                                                            |       |

 

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| **PART IV**      | ** ** | ** **                                                         | ** ** |
|------------------|------------|--------------------------------------------------------------------|------------|
| ** **       | ** ** | ** **                                                         | ** ** |
| ****ITEM 15.**** |       | Exhibits,  Financial Statement Schedules                           |       |
|             |       | Signatures                                                         |       |
|             |       | Consolidated  Balance Sheets                                       |       |
|             |       | Consolidated  Statements of Earnings                               |       |
|             |       | Consolidated Statements of Shareholders’  Equity              |       |
|             |       | Consolidated  Statements of Cash Flows                             |       |
|             |       | Notes  to Consolidated Financial Statements                        |       |
|             |       | Report  of Independent Registered Certified Public Accounting Firm |       |
|             |       | Exhibit  Index                                                     |       |
|             |       | Exhibit 10 (i)                                                     |       |
|             |       | Exhibit 10 (j)                                                     |       |
|             |       | Exhibit 10 (k)                                                     |       |
|             |       | Exhibit 21                                                         |       |
|             |       | Exhibit 23                                                         |       |
|             |       | Exhibit 31.1                                                       |       |
|             |       | Exhibit 31.2                                                       |       |
|             |       | Exhibit 32.1                                                       |       |
| ** **       | ** ** | Exhibit 32.2                                                       | ** ** |

 

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**PART I**

 

# **ITEM1**.BUSINESS

 

Arctic Cat Inc., aMinnesota corporation (the “Company”), is based in Thief River Falls, Minnesota.The Company operates in a single industry segment and designs, engineers,manufactures and markets snowmobiles and all-terrain vehicles (ATVs) under theArctic Catâ brand name,as well as related parts, garments and accessories. The Company markets itsproducts through a network of independent dealers located throughout the UnitedStates and Canada, and through distributors representing dealers in Europe, theMiddle East, Asia and other international markets. The Arctic Cat brand namehas existed for over 40 years and is among the most widely recognized and respected names in the snowmobile industry. TheCompany trades on the NASDAQ National Market under the symbol ACAT.

 

## **IndustryBackground**

 

**Snowmobiles–**The snowmobile, developed in the 1950’s, wasoriginally intended to be used as a utility vehicle, but today the overwhelmingmajority of the industry’s sales are for recreational use. Between the late1950’s and early 1970’s, the industry expanded dramatically reaching a peak ofover 100 manufacturers and a high of almost 495,000 units sold to retailcustomers in North America in 1971. Today the number of major industry participantshas decreased to four, Arctic Cat, Bombardier Recreational Products (BRP),Polaris and Yamaha. The Company believes there are currently more significantbarriers to entry into the snowmobile market than existed in the 1970’s. Thesebarriers include increased brand loyalty, long-standing dealer and distributornetworks and relationships, limited engine sources, manufacturing andengineering expertise and higher initial start-up costs. Industry-widesnowmobile sales to retail customers in North America were approximately 147,000units for the 2005 model year.

 

**All-TerrainVehicles (ATVs) –**The ATV industry evolved from thethree-wheel model that was developed in the early 1970s to the four-wheelmodels that are sold today. The most popular ATV use is general recreation,followed by hunting/fishing, farm/ranch use, hauling/towing, transportation,and commercial uses. From 1970 to 1986, the number of ATVs retailed in the UnitedStates continued to grow until peaking in 1986 with approximately 535,000 unitssold during that calendar year. From 1987 to 1991, the number of ATVs solddeclined to a low of approximately 151,000 units. Since 1992, sales haveincreased each year reaching approximately 814,000 units in calendar 2004.Major competitors in the industry include Honda, Yamaha, Kawasaki, BRP, Polarisand Suzuki and in early 2004 John Deere entered the market.

 

## **Products**

 

**Snowmobiles–**The Company produces a full line of snowmobiles,consisting of 50 models, marketed under the Arctic Cat brand name, and designedto satisfy various market niches. The 2005 Arctic Cat models carry suggestedU.S. retail prices ranging from $3,999 to $10,799, excluding a youth modelwhich is sold at a suggested U.S. retail price of $2,099. Arctic Catsnowmobiles are sold in the United States, Canada, Scandinavia and other internationalmarkets.

 

TheCompany’s 2005 year snowmobile models are categorized as Performance, TrailPerformance, Mountain, Touring and Utility. The Company markets: PerformanceArctic Cat snowmobiles under the names Firecat and ZR; Trail Performance ArcticCat snowmobiles under the name Z, Sabercat and T660 Turbo; Mountain snowmobilesunder the names M series and King Cat; Touring models under the names Panther, Pantera,and T660 Touring; and Utility models under the name Bearcat. In addition, toencourage family involvement in snowmobiling, the Company offers a youth snowmobilemarketed under the ZR120 name.

 

TheCompany believes the Arctic Cat brand name enjoys a premier image amongsnowmobile enthusiasts and that its snowmobiles have a long-standing reputationfor quality, performance, fuel management, style, comfort, ride and handling.Arctic Cat snowmobiles offer a wide range of standard and optional featureswhich enhance their operation, riding comfort and performance. Such featuresinclude hydraulic disc brakes, remote starters and a technologically advancedfront and rear suspension. Arctic Cat is the industry leader in fuel managementtechnology offering an electronic fuel injection (EFI) system on many of itssnowmobiles. The Company recently introduced a snowmobile with a turbo fourstroke inter-cooled engine. In 1999, the Company developed a new corporatebrand “ACT”TM (Arctic Cat Technology) in order to recognize andleverage its industry-leading technology and engineering.

 

ArcticCat focuses on new product development in order to grow its market share andintroduce at least one new model every year. These new models are consistentlythe Company’s best sellers in their respective category. In the 2005 modelyear, over 76 percent of the Company’s snowmobile sales were from models ormodel variations not available three years earlier. A recent example of thesuccess of Arctic Cat’s new product was the 2005 M7 Mountain Cat being named “Snowmobileof the Year” by *SnowGoer Magazine*.

 

Forthe last three fiscal years ended 2005, 2004, and 2003 snowmobiles accountedfor 37%, 40% and 43% of the Company’s revenues.

 

**All-TerrainVehicles (ATVs) –** In December 1995, the Companyintroduced its first ATV. Since that time the Arctic Cat line has grown to 20models. Features like fully independent front and rear suspensions, hydraulicdisc brakes, hi-low range, high ground clearance, MRP 

 

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Speedracks, automatictransmissions, shaft 2WD/4WD drive, locking differentials and a large fueltank, all make Arctic Cat ATVs consumer friendly. The 2005 Arctic Cat ATVmodels carry suggested U.S. retail prices ranging from $3,299 to $8,249,excluding youth models which are sold at suggested U.S. retail prices rangingfrom $1,799 to $2,299.

 

ArcticCat has continued to expand into international markets by focus on new productdevelopment, adding new distributors, entering new territories, and developingnew markets. The Company produces ATVs for AGCO Corporation under the ArcticCat and Massey Ferguson/Delta Allis brands for distribution through theirdealer network outside of North America.

 

ArcticCat believes its ATVs are recognized for their power and durability and arewell received within the market. For model year 1998, the Arctic Cat 300 wasnamed “Editors Choice” by *Sports Afield*and “Best In Class” by *ATV Magazine*.For model year 1999, *ATV Magazine*named the 300 4x4 as “Best in Class” and the 500 4x4 as the Editors Pick for “Best-for-Work”machine. *Farm Industry News* gave Arctic Cat 2000models the FinOvation Award for having the greatest reader interest. *ATV Magazine* awarded the Arctic Cat 250 4x4 model “Best inClass” in 2001 and “Best Utility” in 2002. In 2003 Arctic Cat MRP Speedrack modelsreceived the 2003 Product Innovation Award from *ATV Magazine*.In 2004 the Arctic Cat 650 V-twin received “ATV of the Year” award from both “*ATV Illustrated”* and “*ATV Guide”*.

 

Forthe last three fiscal years ended 2005, 2004, and 2003 ATVs accounted for 49%,45% and 41% of the Company’s revenues.

 

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

 

TheCompany offers snowmobile garments for adults and children under the “Arcticwear”label. Suits, jackets, pants and accessory garments are offered in a widevariety of styles and sizes combining fashion with functional utility designedfor the demands of snowmobiling and other winter activities. The Arcticwearline of clothing also includes pull-overs, riding gloves, hats, helmets, boots,gear bags, sweatshirts, T-shirts, and caps. The colors and designs of many ofthese items are coordinated with specific Arctic Cat snowmobile models.

 

TheCompany offers ATV garments under the “Arcticwear ATV Gear” label. This line ofclothing is geared toward function and comfort and includes suits, jackets,gloves, helmets, gear bags, sweatshirts, T-shirts, and caps.

 

Forthe last three fiscal years ended 2005, 2004, and 2003 parts, garments andaccessories accounted for 14%, 15% and 16% of the Company’s revenues.

 

## **Manufacturingand Engineering**

 

Arctic Cat snowmobilesand ATVs are manufactured at the Company’s facilities in Thief River Falls,Minnesota. The Company paints snowmobile hoods and produces other parts forArctic Cat snowmobiles and ATVs in its Madison, South Dakota plant. The Companyalso has a facility in Bucyrus, Ohio which houses its service parts, garmentsand accessories distribution operations. The Company has strategicallyidentified specific core manufacturing competencies for vertical integrationand has chosen outside vendors to provide other parts. The Company has developedrelationships with selected high quality vendors in order to obtain access toparticular capabilities and technologies outside the scope of the Company’sexpertise. The Company designs component parts often in cooperation with itsvendors, contracts with them for the development of tooling, and then entersinto agreements with these vendors to purchase component parts manufacturedutilizing the tooling. In its vertically integrated operations, the Companymanufactures foam seats, seat covers and machines, welds and paints othercomponents. The Company completes the total assembly of its products at itsfacilities in Thief River Falls. Manufacturing operations include digital andcomputer-automated equipment to speed production, reduce costs and improve thequality, fit and finish of every product. The Company believes that most rawmaterials used in its manufacturing process and most component parts, with theexception of engines are available from multiple alternative vendors onrelatively short notice at competitive prices.

 

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

 

TheCompany is in the third year of a three year agreement with Kawasaki to supplyArctic Cat certain ATV engines. In fiscal 2005 this amounted to approximately15% of the Company’s ATV engine requirements.

 

TheCompany and Suzuki have enjoyed an excellent relationship since the Company’sinception. Suzuki purchased approximately 31% of the Company’s then outstandingcapital stock in July 1988, prior to the Company’s initial public offering inJuly of 1990, and is currently the Company’s largest shareholder withapproximately 33% of the Company’s outstanding capital stock. If Suzuki orKawasaki were ever 

 

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tocease supplying engines to the Company, such an interruption could materiallyand adversely affect production. The Company believes it could take up to twomodel years for a new engine supplier to be in a position to manufacture the Company’sspecially designed engines.

 

Duringlate fiscal 2005 the Company began manufacturing its own designed 650 cc ATVengine as part of a strategic first step in a new engine program. The Companybelieves that having the capability to design and manufacture its own ATVengines will enable Arctic Cat to offer customers more choices, provideexcellent value, lower Japanese Yen currency exposure and enhance its long-termcompetitive position. In fiscal year 2005 the Company built approximately 1,000of its own 650 cc engines.

 

Sincethe Company began snowmobile production, it has followed a build-to-orderpolicy to control inventory levels. Under this policy, the Company onlymanufactures a number of snowmobiles equivalent to the orders received from itsdealers and distributors, plus a number of uncommitted machines used for dealerand market development, in-house testing and miscellaneous promotionalpurposes. Since the consolidation of the snowmobile industry in the mid-1970’sthrough the early 1980’s, speculative production in the industry has beenreduced and the Company believes dealer inventories have remained consistentlybelow historic peak levels.

 

Mostsales of snowmobiles to retail customers begin in the early fall and continueduring the winter. Orders by dealers and distributors for each year’sproduction are placed in the spring following dealer and distributor meetings.Snowmobiles are built commencing in the spring and continuing through lateautumn or early winter.

 

Retailsales of ATVs occur throughout the year with seasonal highs occurring in thespring and fall. The Company builds ATVs throughout the year to coincide withdealer and consumer demand.

 

TheCompany is committed to an ongoing engineering program dedicated to innovationand to continued improvements in the quality and performance of its products aswell as new product introduction. The Company currently employs 164 individualsin the design and development of new and existing products, with an additional 31individuals directly involved in the testing of snowmobiles and ATVs in normaland extraordinary conditions. In addition, snowmobiles and ATVs are tested inconditions and locations similar to those in which they are used. The Companyuses computer-aided design and manufacturing systems to shorten the timebetween initial concept and final production. For 2005, 2004, and 2003, theCompany spent approximately $17,350,000, $14,736,000, and $14,254,000 onengineering, research and development. In addition, utilizing their particularexpertise, the Company’s vendors regularly test and apply new technologies tothe design and production of component parts.

 

## **Salesand Marketing**

 

The Company’s productsare currently sold through an extensive network of independent dealers locatedthroughout the United States and Canada, and through distributors representingdealers in Europe, the Middle East, Asia and other international markets. Topromote new dealerships and to service its existing dealer network, the Companyalso employs sales representatives throughout the United States and Canada. Seeitem 7A, Consolidated Statements of Earnings and Notes A & L of Notes toConsolidated Financial Statements for a discussion of export sales.

 

TheCompany’s dealers enter into an annual renewable contract and are required tomaintain status as an authorized dealer in order to continue selling theCompany’s products. To obtain and maintain such status, dealers are expected toorder a sufficient number of snowmobiles and/or ATVs to service their marketarea adequately. In addition, the dealers must perform service on these unitsand maintain satisfactory service performance levels, and their mechanics mustcomplete special training provided by the Company. Dealers are also expected tocarry adequate levels of inventory of genuine Arctic Cat parts and accessories.As is typical in the industry, most of the Company’s dealers also sell somecombination of motorcycles, marine products, lawn and garden products and otherrelated products.

 

TheCompany utilizes distributors outside the United States and Canada to takeadvantage of their knowledge and experience in their respective markets and toincrease market penetration of its products. Canadian sales are made inCanadian dollars, nearly all of which is financed through certain Canadianfinancial institutions. Sales outside North America are normally made in U.S.dollars and most are supported by letters of credit.

 

TheCompany’s sales and marketing efforts are comprised of dealer, and consumerpromotions, direct advertising and cooperative advertising programs with itsdealers and distributors. Each year, the Company and its distributors conductdealer shows in order to introduce the upcoming year’s models and to promotedealer orders. Marketing activities are designed to promote directly toconsumers. Products are advertised by the Company in consumer magazines andthrough other media. In addition, the Company engages in extensive dealercooperative advertising, on a local and national level, whereby the Company andits dealers share advertising costs. Each season the Company producespromotional films, product brochures, point of purchase displays, leaflets,posters and banners, and other promotional items for use by dealers. TheCompany also participates in consumer shows and rallies with dealers andsponsors independent racers who participate in snowmobile races throughout theworld. In order for its dealers and distributors to remain price competitiveand to reduce retail inventories, the Company will 

 

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fromtime to time make available to them rebate programs, discounts, or otherincentives. In order to build brand loyalty the Company publishes and mails, duringthe year, magazines called *Pride*(snowmobile) and *Ride* (ATV) to registered ownersof its products.

 

TheCompany places strong emphasis on identifying and addressing the specific needsof its customers by periodically conducting dealer and consumer focus groupmeetings and surveys.

 

TheCompany warrants its snowmobiles and ATVs under a limited warranty againstdefects in materials and workmanship for a period generally ranging from sixmonths to one year from the date of retail sale or for a period of 90 days fromthe date of commercial or rental use. Repairs or replacements under warrantyare administered through the Company’s dealers and distributors.

 

## **Competition**

 

The snowmobile and ATVmarkets are highly competitive, based on a number of factors, includingperformance, innovation, technology, styling, fit and finish, brand loyalty,reliability, durability, price and distribution. The Company believes ArcticCat snowmobiles and ATVs are highly regarded by consumers in all of thesecompetitive categories. Certain of the Company’s competitors are morediversified and have financial and marketing resources which are substantiallygreater than those of the Company.

 

## **Regulation**

 

Bothfederal and state authorities have vigorous environmental control requirementsrelating to air, water and noise pollution that affect the manufacturingoperations of the Company. The Company endeavors to insure that its facilitiescomply with applicable environmental regulations and standards.

 

Certainmaterials used in snowmobile and ATV manufacturing that are toxic, flammable,corrosive or reactive are classified by the federal and state governments as “hazardousmaterials.” Control of these substances is regulated by the EnvironmentalProtection Agency (EPA) and various state pollution control agencies, whichrequire reports and inspection of facilities to monitor compliance. The Company’scost of compliance with environmental regulations has not been, and is notexpected to be, material. The Company’s manufacturing facilities are subject tothe regulations promulgated by, and may be inspected by, the OccupationalSafety and Health Administration.

 

Variousstates and other governmental agencies have also promulgated safety regulationsregarding the use of snowmobiles and ATVs. The Company has supported laws andregulations pertaining to safety and exhaust emissions. The Company believesthat the adoption of any pending laws or regulations would not negativelyaffect its products to any greater degree than those of its competitors.

 

TheEPA recently adopted regulations affecting snowmobiles and ATVs for model years2006 and beyond. The Company believes that it will be in compliance with these regulations.The Company supports balanced and appropriate programs that educate thecustomer on the safe use of its products and protect the environment.

 

The Company is a memberof the International Snowmobile Manufacturers Association (ISMA), a tradeassociation formed to promote safety in the manufacture and use of snowmobiles,among other things. The ISMA is currently made up of Arctic Cat, BRP, Yamaha,and Polaris. The ISMA members are also members of the Snowmobile Safety andCertification Committee (SSCC), which promulgated voluntary safety standardsfor snowmobiles. The SSCC standards, which require testing and evaluation by anindependent testing laboratory of each model category produced by participatingsnowmobile manufacturers, have been adopted by the Canadian Ministry ofTransport. Following the development of the SSCC standards, the U.S. ConsumerProducts Safety Commission denied a petition to develop a mandatory federalsafety standard for snowmobiles in light of the high degree of adherence to theSSCC standards in the United States. Since the Company’s inception, all of itsmodels have complied with the SSCC standards.

 

TheCompany is a member of the Specialty Vehicle Institute of America (SVIA), atrade association organized to foster and promote the safe and responsible useof ATVs manufactured and/or distributed throughout the United States. The Companyis also a member of the Canadian All-Terrain Vehicle Distributors Council(CATV), as well as the All-Terrain Vehicle Association of Europe (ATVEA).

 

## **Effectsof Weather**

 

While from time to timelack of snowfall in a particular region of the United States or Canada mayadversely affect snowmobile retail sales within that region, the Company worksto mitigate this effect by taking snowmobile orders in the spring for thefollowing winter season and some years works with its dealers to facilitate themovement of snowmobiles out of a region with light snowfall to another regionwith heavier snowfall. Nonetheless, there is no assurance that weatherconditions will not materially affect the Company’s future sales ofsnowmobiles.

 

## **Employees**

 

At March 31, 2005, theCompany had 1,631 employees including 300 salaried and 1,331 hourly andproduction personnel. The Company’s employees are not represented by a union orsubject to a collective bargaining agreement. The Company has never experienceda strike or work stoppage and considers its relations with its employees to beexcellent.

 

## **Intellectual**Property

 

The Company makes aneffort to patent all significant innovations that it considers patentable andowns numerous patents for its snowmobiles, ATVs and other products. Trademarksare important to 

 

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the Company’s snowmobile,ATVs and related parts, garments and accessories business activities. Whilefrom time to time the Company becomes aware of the unauthorized use of itstrademarks, particularly in the sale of promotional items, the Company has aprogram of trademark enforcement to eliminate the unauthorized use of itstrademarks, thereby strengthening the value of its trademarks and improving itsimage and customer goodwill. The Company believes that its “Arctic Cat” registeredtrademark is its most significant trademark. Additionally, the Company hasnumerous registered trademarks, trade names and logos, both in the UnitedStates and internationally.

 

## **AvailableInformation**

 

The Company is subject tothe reporting requirements of the Securities Exchange Act of 1934 and its rulesand regulations (the “1934 Act”). The 1934 Act requires the Company to filereports, proxy statements and other information with the Securities andExchange Commission (the “SEC”). Copies of these reports, proxy statements andother information can be read and copied at: SEC Public Reference Room, 450Fifth Street, N.W., Washington D.C. 20549. Information on the operation of thePublic Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. TheSEC maintains a website that contains reports, proxy statements, and otherinformation regarding issuers that file electronically with the SEC. Thesematerials may be obtained electronically by accessing the SEC’s home page athttp://www.sec.gov.

 

The Company has awebsite at www.arcticcat.com, the contents of which are not part of orincorporated by reference into this annual report. The Company makes its annualreports, quarterly reports and current reports available on its website, freeof charge, as soon as reasonably practicable after such report has been filedwith the SEC. The Company’s Code of Conduct, as well as any waivers from andamendments to the Code, are also posted on the Company’s website.

 

# **ITEM2**.PROPERTIES

 

The following sets forththe Company’s material property holdings as of March 31, 2005.

 
| **Location**                  | ** ** | **Facility Type / Use**           | ** ** | **Owned or  Leased** | ** ** | **Sq Ft.** | ** ** |
|-------------------------------|------------|-----------------------------------|------------|----------------------|------------|------------|------------|
| Thief  River Falls, Minnesota |       | Manufacturing /  Corporate Office |       | Owned                |       | 558,000    |       |
| Thief  River Falls, Minnesota |       | Warehouse                         |       | Leased               |       | 92,135     |       |
| Thief  River Falls, Minnesota |       | Warehouse                         |       | Leased               |       | 14,350     |       |
| Madison,  South Dakota        |       | Manufacturing                     |       | Owned                |       | 40,000     |       |
| Bucyrus,  Ohio                |       | Distribution Center               |       | Owned                |       | 220,000    |       |
| Winnipeg,  Manitoba           |       | Service Center                    |       | Leased               |       | 10,602     |       |
| Island  Park, Idaho           |       | Test & Development  Facility  |       | Owned                |       | 3,000      |       |

 

# **ITEM3**.LEGAL PROCEEDINGS

 

Accidents involvingpersonal injury and property damage occur in the use of snowmobiles and ATVs.Claims have been made against the Company from time to time. It is the Company’spolicy to vigorously defend against these actions. The Company believes thatthe cases in discovery are adequately covered by reserves and product liabilityinsurance. The Company is not involved in any legal proceedings which itbelieves will have the potential for a materially adverse impact on the Company’sbusiness or financial condition.

 

Productliability insurance is presently maintained by the Company on a “per occurrence”basis (with coverage being provided in respect of accidents which occurredduring the policy year, regardless of when the related claim is made) in theamount of $10,000,000 in the aggregate, with a $5,000,000 self-insuredretention. The Company believes such insurance is adequate.

 

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# **ITEM4**.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

No matters were submittedto the shareholders during the fourth quarter of fiscal 2005.

 

# **ITEM4A**.EXECUTIVE OFFICERS OF REGISTRANT

 
| **Name**              | ** ** | **Age** | ** ** | **Position**                                                               |
|-----------------------|------------|---------|------------|----------------------------------------------------------------------------|
| Christopher A. Twomey |       | 57      |       | Chairman of the Board  of Directors, President and Chief Executive Officer |
| Timothy C. Delmore    |       | 51      |       | Chief Financial Officer  and Corporate Secretary                           |
| Terry J. Blount       |       | 62      |       | Vice President – Human  Resources                                     |
| Robert Bonev          |       | 47      |       | Vice President – Sales  and Marketing                                 |
| Ronald G. Ray         |       | 56      |       | Vice President –  Operations                                          |
| Roger H. Skime        |       | 62      |       | Vice President –  Research & Development                          |
| Ole E. Tweet          |       | 58      |       | Vice President – New  Product Development                             |

 

**Mr. Twomey** hasbeen Chairman since 2003, President and Chief Executive Officer of the Companysince January 1986 and director since 1987. Mr. Twomey is currently serving asa director of The Toro Company and Universal Trailer Corporation.

 

**Mr. Delmore** hasbeen Chief Financial Officer of the Company since 1986 and has been CorporateSecretary of the Company since 1989. Mr. Delmore, a CPA with seven years ofprior public accounting experience, joined the Company in 1985 as Controller.

 

**Mr. Blount** hasbeen Vice President – Human Resources since August of 1996. Mr. Blount has over30 years of Human Resource experience in the manufacturing field. Prior tojoining the Company, Mr. Blount worked as Vice President-Human Resources atWashington Scientific Industries since 1981.

 

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

 

**Mr. Ray** hasbeen Vice President – Operations since April of 2004; prior to that he servedas the Company’s Vice President – Manufacturing since 1992 and has over 30years of manufacturing experience. Before joining Arctic Cat he served eightyears as Vice President of Manufacturing for a Minnesota-based company.

 

**Mr. Skime** hasbeen Vice President – Research and Development of the Company since itsinception in 1983 and has been employed in the snowmobile industry for over 40years.

 

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

 

9

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**PARTII**

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

 

The Company’s commonstock is traded on the NASDAQ National Market under the NASDAQ symbol “ACAT”.Quotations below represent the high and low sale prices as reported by NASDAQ.The Company’s stock began trading on the NASDAQ National Market on June 26,1990.

 
| **Years  ended March 31,** | ** ** | **2005** | ** ** | **2004**   | ** ** |
|----------------------------|------------|----------|------------|------------|------------|
| **Quarterly  Prices**      | ** ** | **High** | ** ** | **Low**    | ** ** | **High** | ** ** | **Low** | ** ** |
| **First Quarter**          | ** ** | **$**    | **28.07**  | ** ** | **$**      | **20.58** |   | $ | 19.71 |   | $ | 15.03 |   |
| **Second Quarter**         | ** ** | **$**    | **27.96**  | ** ** | **$**      | **24.88** |   | $ | 22.25 |   | $ | 18.25 |   |
| **Third Quarter**          | ** ** | **$**    | **27.30**  | ** ** | **$**      | **23.76** |   | $ | 25.45 |   | $ | 18.52 |   |
| **Fourth Quarter**         | ** ** | **$**    | **29.20**  | ** ** | **$**      | **23.82** |   | $ | 28.55 |   | $ | 22.68 |   |

 

Asof June 2, 2005, the Company had approximately 435 stockholders of record,including the nominee of Depository Trust Company which held 12,244,362 sharesof common stock.

 

**Cash Dividends Paid**

 

CashDividends are declared quarterly and have been paid since 1995. As of October23, 2003, the quarterly dividend was increased to $0.07 per share.

 
| **Quarter**     | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------|------------|----------|------------|----------|------------|
| First  Quarter  | ** ** | **$**    | **0.07**   |     | $          | 0.06 |   |
| Second  Quarter | ** ** | **$**    | **0.07**   |     | $          | 0.06 |   |
| Third  Quarter  | ** ** | **$**    | **0.07**   |     | $          | 0.07 |   |
| Fourth  Quarter | ** ** | **$**    | **0.07**   |     | $          | 0.07 |   |
| Total           | ** ** | **$**    | **0.28**   |     | $          | 0.26 |   |

 

**Purchases of Company Equity Securities**

 
| **Period**                                 | ** ** | **Total Number of  Shares Purchased** | ** ** | **Average Price   Paid per Share** | ** ** | **Total number of  Shares Purchased   as Part of Publicly   Announced Plans  or Programs** | ** ** | **Maximum Number   of Shares that May  Yet be Purchased  Under the Plans   or Programs** | ** ** |
|--------------------------------------------|------------|---------------------------------------|------------|------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|
| January  1, 2005 – January 31, 2005   |       | 241,600                               |       | $                                  | 25.32      |                                                                                       | 241,600    |                                                                                     | 215,700    |   |
| February  1, 2005 – February 28, 2005 |       | 0                                     |       | $                                  | —     |                                                                                       | 0          |                                                                                     | 201,800    |   |
| March  1, 2005 – March 31, 2005       |       | 0                                     |       | $                                  | —     |                                                                                       | 0          |                                                                                     | 202,100    |   |

 

The Company purchasesCompany common stock primarily to offset the dilution created by employee stockoption programs and because the Board of Directors believes investment in theCompany’s common stock is an excellent use of its excess cash.

 

The Company has apublicly announced stock repurchase programs which have been approved by theBoard of Directors. On June 24, 2004 the Company announced the Board approved a$20 million repurchase program and on May 12, 2005, the Company announced theBoard approved a $20 million repurchase program. Pricing under this program hasbeen delegated to management. There is no expiration date for this program.

 

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

 

10

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# **ITEM6**.SELECTED FINANCIAL DATA

 
| **(In  thousands, except per share amounts)  Years ended March 31,** | ** ** | **2005**    | ** **  | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** | **2001**   | ** ** |
|----------------------------------------------------------------------|------------|-------------|-------------|------------|------------|------------|------------|------------|------------|------------|------------|
|                                                                 |       |        |        |       |       |       |       |       |       |       |       |
| **INCOME STATEMENT DATA:**                                           | ** ** | ** **  | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net sales**                                                        | ** ** | **$**       | **689,145** |       | $          | 649,617    |       | $          | 577,070    |       | $          | 556,079 |   | $ | 502,449 |   |
| **Cost of goods sold**                                               | ** ** | **553,365** |        | 510,445    |       | 448,266    |       | 433,297    |       | 398,019    |       |
| **Gross profit**                                                     | ** ** | **135,780** |        | 139,172    |       | 128,804    |       | 122,782    |       | 104,430    |       |
| **Selling, general and administrative expenses**                     | ** ** | **95,745**  |        | 95,511     |       | 81,757     |       | 83,228     |       | 68,712     |       |
| **Operating profit**                                                 | ** ** | **40,035**  |        | 43,661     |       | 47,047     |       | 39,554     |       | 35,718     |       |
| **Interest income**                                                  | ** ** | **1,213**   |        | 993        |       | 1,442      |       | 2,543      |       | 4,563      |       |
| **Interest expense**                                                 | ** ** | **—**  |        | —     |       | —     |       | —     |       | —     |       |
| **Earnings before income taxes**                                     | ** ** | **41,248**  |        | 44,654     |       | 48,489     |       | 42,097     |       | 40,281     |       |
| **Income taxes**                                                     | ** ** | **12,949**  |        | 14,289     |       | 15,786     |       | 13,471     |       | 13,293     |       |
| **Net earnings**                                                     | ** ** | **$**       | **28,299**  |       | $          | 30,365     |       | $          | 32,703     | (1)        | $          | 28,626 |   | $ | 26,988 |   |
| **Net earnings per share**                                           |       |        |        |       |       |       |       |       |       |       |       |
| **Basic**                                                            | ** ** | **$**       | **1.38**    |       | $          | 1.42       |       | $          | 1.46       | (1)        | $          | 1.21 |   | $ | 1.11 |   |
| **Diluted**                                                          | ** ** | **$**       | **1.36**    |       | $          | 1.40       |       | $          | 1.45       | (1)        | $          | 1.20 |   | $ | 1.10 |   |
| **Cash dividends per share**                                         | ** ** | **$**       | **0.28**    |       | $          | 0.26       |       | $          | 0.24       |       | $          | 0.24 |   | $ | 0.24 |   |
| **Weighted average shares outstanding**                              |       |        |        |       |       |       |       |       |       |       |       |
| **Basic**                                                            | ** ** | **20,516**  |        | 21,424     |       | 22,396     |       | 23,587     |       | 24,231     |       |
| **Diluted**                                                          | ** ** | **20,794**  |        | 21,730     |       | 22,615     |       | 23,925     |       | 24,457     |       |
| ** **                                                           | ** ** | ** **  |        |       |       |       |       |       |       |       |       |
| **As of March 31,**                                                  | ** ** | **2005**    | ** **  | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** | **2001**   | ** ** |
| **BALANCE SHEET DATA**(In  thousands):                               |       |        |        |       |       |       |       |       |       |       |       |
| **Cash and short-term investments**                                  | ** ** | **$**       | **88,394**  |       | $          | 106,440    |       | $          | 91,295     |       | $          | 102,040 |   | $ | 99,828 |   |
| **Working capital**                                                  | ** ** | **123,069** |        | 128,036    |       | 132,525    |       | 129,873    |       | 123,028    |       |
| **Total assets**                                                     | ** ** | **291,733** |        | 280,586    |       | 273,852    |       | 264,683    |       | 255,470    |       |
| **Long-term debt**                                                   | ** ** | **0**       |        | 0          |       | 0          |       | 0          |       | 0          |       |
| **Shareholders’ equity**                                        | ** ** | **185,510** |        | 185,953    |       | 187,286    |       | 181,638    |       | 170,442    |       |

 

----

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

 

11

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# **QUARTERLY**FINANCIALDATA (unaudited)

 
| **(In  thousands, except per share amounts)** | ** **  | **Total  Year** | ** **  | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** **  | **Fourth  Quarter** | ** ** |
|-----------------------------------------------|-------------|-----------------|-------------|--------------------|------------|---------------------|------------|--------------------|-------------|---------------------|------------|
| **Net Sales**                                 |        |            |        |               |       |                |       |               |        |                |       |
| **2005**                                      | ** **  | **$**           | **689,145** | ** **         | **$**      | **102,594**         | ** ** | **$**              | **240,673** | ** **          | **$**      | **188,855** | ** ** | **$** | **157,023** |   |
| 2004                                          |        | 649,617         |        | 77,189             |       | 237,650             |       | 194,618            |        | 140,160             |       |
| 2003                                          |        | 577,070         |        | 78,283             |       | 211,242             |       | 176,175            |        | 111,370             |       |
|                                          |        |            |        |               |       |                |       |               |        |                |       |
| **Gross Profit**                              |        |            |        |               |       |                |       |               |        |                |       |
| **2005**                                      | ** **  | **$**           | **135,780** | ** **         | **$**      | **18,956**          | ** ** | **$**              | **52,612**  | ** **          | **$**      | **37,849** | ** ** | **$** | **26,363** |   |
| 2004                                          |        | 139,172         |        | 18,526             |       | 56,172              |       | 43,981             |        | 20,493              |       |
| 2003                                          |        | 128,804         |        | 18,843             |       | 52,970              |       | 39,653             |        | 17,338              |       |
|                                          |        |            |        |               |       |                |       |               |        |                |       |
| **Net Earnings (Loss)**                       |        |            |        |               |       |                |       |               |        |                |       |
| **2005**                                      | ** **  | **$**           | **28,299**  | ** **         | **$**      | **124**             | ** ** | **$**              | **19,651**  | ** **          | **$**      | **5,792** | ** ** | **$** | **2,732** |   |
| 2004                                          |        | 30,365          |        | 102                |       | 21,569              |       | 9,733              |        | (1,039              | )          |
| 2003                                          |        | 32,703          | (1)         | 1,969              |       | 20,520              |       | 11,912             | (1)         | (1,698              | )          |
|                                          |        |            |        |               |       |                |       |               |        |                |       |
| **Net Earnings (Loss) Per Share**             |        |            |        |               |       |                |       |               |        |                |       |
| **2005**                                      | **Basic**   | ** **      | **$**       | **1.38**           | ** ** | **$**               | **0.01**   | ** **         | **$**       | **0.95**            | ** ** | **$** | **0.28** | ** ** | **$** | **0.14** | ** ** |
| ** **                                    | **Diluted** | ** **      | **1.36**    | ** **         | **0.01**   | ** **          | **0.94**   | ** **         | **0.28**    | ** **          | **0.13**   |   |
| 2004                                          | Basic       |            | 1.42        |               | 0.00       |                | 0.99       |               | 0.46        |                | (0.05      | )  |
|                                          | Diluted     |            | 1.40        |               | 0.00       |                | 0.98       |               | 0.46        |                | (0.05      | ) |
| 2003                                          | Basic       |            | 1.46        | (1)                | 0.09       |                | 0.92       |               | 0.54        | (1)                 | (0.08      | ) |
|                                          | Diluted     |            | 1.45        | (1)                | 0.08       |                | 0.91       |               | 0.53        | (1)                 | (0.08      | ) |

 

----

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

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

 

## **ExecutiveLevel Overview**

 

Fiscal 2005 was the fifthconsecutive year of record sales for Arctic Cat. Fiscal 2005 net salesincreased over 6% to $689.1 million from $649.6 million in fiscal 2004. Fiscal2005 net earnings were $28.3 million or $1.36 per diluted share compared to netearnings of $30.4 million or $1.40 per diluted share in fiscal 2004. Thedecrease in net earnings was mainly due to increased engine costs resultingfrom the stronger yen versus dollar relationship. During the year the Company repurchasedover 1 million shares of the common stock and ended the year with $88.4 millionin cash and short-term investments.

 

TheCompany’s product lines consist of all-terrain vehicles (ATVs), snowmobiles andparts, garments and accessories.

 

ATVsales increased 16% in fiscal 2005 to $341.0 million from $294.4 million infiscal 2004. ATV net sales surpassed snowmobile net sales in fiscal 2004 andare the Company’s largest product line, comprising over 49% of net sales. TheCompany’s ATV growth is due to Arctic Cat’s expanded product line-up that nowfills nearly every market segment as well as overall growth in the ATV market.

 

Snowmobilesales decreased 2% in fiscal 2005 to $252.5 million from $258.4 million infiscal 2004 because of less than normal snowfall during the prior winterseason. Snowmobiles comprised 37% of the Company’s net sales in fiscal 2005.

 

Parts,garments and accessory sales decreased 1% in fiscal 2005 to $95.7 million from$96.8 million in fiscal 2004. Sales of snowmobile related parts, garments andaccessories decreased due to the mild winter weather across much of the UnitedStates.   Parts, garments and accessorysales were 14% of the Company’s net sales in fiscal 2005. The followingdiscussions should read in conjunction with the consolidated financialstatements and notes thereto include elsewhere in this report.

 

## **Resultsof Operations**

 

**2005vs. 2004****–** During fiscal2005 net sales increased 6.1% to $689,145,000 from $649,617,000 in fiscal 2004.ATV unit volume increased 8.4%, snowmobile unit volume decreased 4.1% anddollar sales of parts, garments and accessories decreased $1,101,000. TheCompany believes the continued increase in ATV sales is due both toenthusiastic dealer and consumer reception of the Arctic Cat ATV and growth inthe ATV market. Snowmobile unit volume decreased because of lower dealer ordersrelated to less than normal snowfalls during the prior winter season in certainkey regions in North America.

 

Grossprofit decreased 2.4% to $135,780,000 in 2005 from $139,172,000 in 2004. Thegross profit percentage decreased to 19.7% versus 21.4% in 2004. The decreasein the 2005 gross profit percentage was mainly due to increased engine costsresulting from the stronger yen versus dollar relationship, and to a lesserextent increased raw material and freight costs.

 

Selling,general and administrative expenses were flat at $95,745,000 in 2005 from $95,511,000in 2004. Selling, general and administrative costs increased at a rate in linewith the overall sales increase when considering that fiscal 2004 operatingexpenses included approximately $5 million of Canadian currency hedge costs. 

 

12

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Asa percent of net sales, operating expenses were 13.9% in 2005 compared with 14.7%in 2004.

 

Operatingprofits decreased 8.3% to $40,035,000 in 2005 from $43,661,000 in 2004. As apercent of net sales, operating profits were 5.8% in 2005 compared to 6.7% in2004. The decrease in operating profits is attributable to the decrease ingross profit.

 

Interestincome increased 22.2% to $1,213,000 in fiscal 2005 from $993,000 in fiscal 2004due to higher yields on invested cash related to higher rates of return thanthe prior year.

 

Netearnings decreased 6.8% to $28,299,000 or $1.36 per diluted share from $30,365,000or $1.40 per diluted share for fiscal 2004. Net earnings as a percent of netsales were 4.1% and 4.7% in 2005 and 2004, respectively. The decrease in netearnings is attributable to the decrease in gross profit.

 

**2004vs. 2003****–** During fiscal2004 net sales increased 12.6% to $649,617,000 from $577,070,000 in fiscal2003. ATV unit volume increased 13.0%, snowmobile unit volume decreased 6.0%and dollar sales of parts, garments and accessories increased $4,727,000. TheCompany believes the continued increase in ATV sales is due both toenthusiastic dealer and consumer reception of the Arctic Cat ATV and growth inthe ATV market. Snowmobile unit volume decreased because of lower dealer ordersrelated to less than normal snowfalls during the prior winter season in certainkey regions in North America.

 

Grossprofit increased 8.0% to $139,172,000 in 2004 from $128,804,000 in 2003. The grossprofit percentage decreased to 21.4% versus 22.3% in 2003. The decrease in the2004 gross profit percentage was mainly due to the fact that the fiscal 2003gross profit benefited from a one-time $4,000,000 increase from the netreduction in PWC related restructuring accruals.

 

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

 

Operatingprofits decreased 7.2% to $43,661,000 in 2004 from $47,047,000 in 2003. As apercent of net sales, operating profits were 6.7% in 2004 compared to 8.2% in2003. The principal reason for this decrease was the PWC matter described inthe gross profit discussion.

 

Interestincome decreased 31.1% to $993,000 in fiscal 2004 from $1,442,000 in fiscal2003 due to lower yields on invested cash related to lower rates of return.

 

Netearnings decreased 7.1% to $30,365,000 or $1.40 per diluted share from$32,703,000 or $1.45 per diluted share for fiscal 2003. Net earnings as apercent of net sales were 4.7% and 5.7% in 2004 and 2003, respectively. Netearnings in fiscal 2003 would have been $29,298,000 or $1.30 per diluted sharewithout the net reduction in PWC related restructuring accruals.

 

## **CriticalAccounting Policies**

 

The preparation of theconsolidated financial statements in accordance with accounting principlesgenerally accepted in the United States requires management to make certainestimates and assumptions that affect the amount of reported assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe consolidated financial statements and revenues and expenses during theperiods reported. Actual results may differ from those estimates. The Companyreviewed the development and selection of the critical accounting policies andbelieves the following are the most critical accounting policies that couldhave an effect on the Company’s reported results. These critical accountingpolicies and estimates have been reviewed with the audit committee of the Boardof Directors.

 

**RevenueRecognition****–** The Companyrecognizes revenue and provides for estimated marketing and sales incentivecosts, when products are shipped to dealers and distributors pursuant to theirorder, the price is fixed and collection is reasonably assured. Arctic Cat hasagreements with finance companies to repurchase products repossessed up tocertain limits. Arctic Cat’s financial exposure to repurchase products islimited to the difference between the amount paid to the finance company andthe resale value of the repossessed products. Historically, Arctic Cat has notincurred material losses as a result of repurchases nor has it provided afinancial reserve for repurchases. Adverse changes in retail sales could causethis situation to change.

 

**Marketingand Sales Incentive Costs****–**The Company provides for various marketing and sales incentive costs which areoffered to its dealers and consumers at the latter of when the revenue isrecognized or when the marketing and sales incentive program is approved andcommunicated. Examples of these costs include: dealer and consumer rebates,dealer floor plan financing assistance and other incentive and promo­tionprograms. Adverse market conditions resulting in lower than expected retailsales or the matching of competitor programs could cause accrued marketing andincentive costs to materially increase if the Company authorizes andcommunicates new programs to its dealers. The Company esti­mates marketing andsales incentive costs based on expected usage and historical experience. Therelated marketing and sales incentive costs accrual is included in accruedmarketing in the Company’s balance sheet. To the extent current experiencediffers with previous estimates the accrued liability for marketing and salesincentives is adjusted accordingly.

 

**ProductWarranties****–** The Companygenerally provides a limited warranty to the owner of snowmobiles for twelvemonths from the date of consumer registration and for six months on ATVs. The Companyprovides for estimated warranty costs at the time of sale based on historicalrates and trends and makes subsequent adjustments to their estimate as actualclaims become known or the amounts are determinable. Adverse changes in actualwarranty costs compared to the Company’s initial estimates could cause accruedwarranty to materially change.

 

**ProductLiability and Litigation****–**The Company is subject to product liability claims and other litigation in thenormal course of business. Arctic Cat insures for product liability claimsalthough it retains a modest self insured retention accrual within the balancesheet caption Insurance. The estimated costs resulting from any losses overinsured amounts are charged to operating expenses 

 

13

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when it is probable aloss has been incurred and the amount of the loss is reasonably determinable.

 

TheCompany utilizes historical trends and other analysis to assist in determiningthe appropriate loss. Adverse changes in the final determination of productliability or other claims made against the Company could have a material impacton the Company’s financial condition.

 

## **Liquidityand Capital Resources**

 

The seasonality of theCompany’s snowmobile production cycle and the lead time between thecommencement of snowmobile and ATV production in the early spring andcommencement of shipments late in the first quarter have resulted insignificant fluctuations in the Company’s working capital requirements duringthe year. Historically, the Company has financed its working capitalrequirements out of available cash balances at the beginning and end of theproduction cycle and with short-term bank borrowings during the middle of thecycle. In fiscal 2005 the Company incurred no short-term bank borrowings. TheCompany believes current available cash and cash generated from operationstogether with its available line of credit will provide sufficient funds tofinance the Company on a short and long-term basis.

 

## **Cashand Short-Term Investments**

 

Cash and short-terminvestments were $88,394,000 at March 31, 2005 compared to $106,440,000 atMarch 31, 2004. The Company’s cash balances traditionally peak early in thefourth quarter and then decrease as working capital requirements increase whenthe Company’s snowmobile and spring ATV production cycles begin. The Company’sinvestment objectives are first, safety of principal and second, rate ofreturn.

 

## **FinancingArrangements and Cash Flows**

 

The Company has a$60,000,000 unsecured bank credit agreement for the documentary and stand-byletters of credit and for working capital purposes. Total working capitalborrowings under the credit agreement are limited to $45,000,000 during thelast six months of the fiscal year. The total letters of credit issued at March31, 2005 were $24,396,000, of which $21,616,000 was issued to Suzuki MotorCorporation for engine and service parts purchases.

 

TheCompany has agreements with certain finance companies to provide snowmobile andATV floor plan financing for the Company’s North American dealers. These agreementsimprove the Company’s liquidity by financing dealer purchases of productswithout requiring substantial use of the Company’s working capital. The Companyis paid by the floor plan companies shortly after shipment and as part of itsmarketing programs the Company pays the floor plan financing of its dealers forcertain set time periods depending on the size of a dealer’s order. Thefinancing agreements require repurchase of repossessed new and unused units andset limits upon the Company’s potential liability for annual repurchases. Theaggregate potential liability was approximately $31,283,000 at March 31, 2005.No material losses have been incurred by the Company under these agreements.The Company believes current available cash and cash generated from operationsprovide sufficient funding in the event there is a requirement to perform underthis guarantee and repurchase agreement.

 

In2005, the Company invested $25,954,000 in capital expenditures. The Companyexpects that capital expenditures, will increase to approximately $45,000,000in fiscal 2006. This increase is mainly due to an increase in toolingexpenditures for new product development across all product lines andinvestment in a new ATV engine production facility. Since 1996, the Company hasrepurchased over 10 million shares of common stock. There is approximately $5.5million remaining on the June 2004 repurchase authorization and in May 2005,the Company’s Board of Directors authorized an additional $20,000,000 sharerepurchase. The Company believes that cash generated from operations andavailable cash will be sufficient to meet its working capital, regularquarterly dividend, share repurchase program and capital expenditurerequirements on a short and long-term basis.

 

## **ContractualObligations**

 

The following tablesummarizes the Company’s significant future contractual obligations at March31, 2005 (in millions):

 
| ** **                     | ** ** | **Payment Due by Period** | ** ** |
|--------------------------------|------------|---------------------------|------------|
| **Contractual  Obligations**   | ** ** | **Total**                 | ** ** | **Less than  1 Year** | ** ** | **1-3 Years** | ** ** | **More  than  3 Years** | ** ** |
| Operating  Lease Obligations   |       | $                         | 0.2        |   | $ | 0.2 |   | 0 |   | 0 |   |
| Purchase  Obligations(1)       |       | 138.0                     |       | 138.0 |   | 0 |   | 0 |   |
| Total  Contractual Obligations |       | $                         | 138.2      |   | $ | 138.2 |   | 0 |   | 0 |   |

 

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(1)           The Company has outstanding purchaseobligations with suppliers and vendors  atMarch 31, 2005 for raw materials and other supplies as part of the normalcourse of business.

 

## **Forward-LookingStatements**

 

The Private SecuritiesLitigation Reform Act of 1995 provides a safe harbor for certainforward-looking statements. This Report on Form 10-K, as well as the Company’sAnnual Report and future filings with the Securities and Exchange Commission,the Company’s press releases and oral statements made with the approval of anauthorized executive officer, contain forward-looking statements that reflectthe Company’s current views with respect to future events and financialperformance. These forward-looking statements are subject to certain risks anduncertainties that could cause actual results to differ materially fromhistorical results or those anticipated. The words “aim,” “believe,” “expect,” “anticipate,”“intend,” “estimate” and other expressions that indicate future events andtrends identify forward-looking statements. Actual future results and trendsmay differ materially from historical results or those anticipated depending ona variety of factors, including, but not limited to: product mix and volume;competitive pressure on sales and pricing; increase in material or productioncost which cannot be recouped in product pricing; changes in the sourcing of enginesfrom Suzuki; warranty expenses; foreign currency exchange rate fluctuations;product liability claims and other legal proceedings in excess of insuredamounts; environmental and product safety regulatory activity; effects of theweather; overall economic conditions; and consumer demand and confidence. TheCompany does not undertake any obligation to publicly update or revise anyforward-looking statement, whether as a result of new information, futureevents or otherwise.

 

14

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# **ITEM 7A**. QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK

 

**Inflation, Foreign Exchange Rates and InterestRates**

 

Inflation is not expectedto have a significant impact on the Company’s business. The Company generallyhas been able to offset the impact of increasing costs through a combination ofproductivity gains and price increases.

 

Duringfiscal 2005, approximately 30% of the Company’s cost of sales was purchasedfrom Japanese yen denominated suppliers. The majority of these purchases weremade from Suzuki Motor Corporation who supplies engines for the Company’ssnowmobiles and ATVs. The Company has an agreement with Suzuki MotorCorporation for snowmobile engine purchases to share the impact of fluctuationsin the exchange rate between the U.S. dollar and the Japanese yen above andbelow a fixed range contained in the agreement. This agreement renews annually.During fiscal 2005, the exchange rate fluctuation between the U.S. dollar andthe Japanese yen had a modest negative impact on the Company’s operatingresults. From time to time the Company utilizes foreign exchange cash flow hedgingcontracts to minimize the impact of exchange rate fluctuations relating to ATVengine purchases. During 2005, the average contracted forward exchange rate onthese cash flow hedges was approximately 109 (Japanese Yen to the U.S. Dollar). At March 31, 2005, there were no foreignexchange contracts outstanding for Japanese Yen.

 

Salesto Canadian dealers are made in Canadian dollars with the U.S. dollar servingas the functional currency. During fiscal 2005, sales to Canadian dealerscomprised 18.0% of total net sales. During fiscal 2005, the exchange ratefluctuation between the U.S. dollar and the Canadian dollar had a modestpositive impact on operating profits. During 2005, the Company utilized cashflow hedges to mitigate the variability in Canadian exchange rate changesrelating to Canadian dollar fund transfers to the United States. During 2005,the average contracted forward exchange rate on these cash flows hedges wasapproximately $1.31 (Canadian Dollar to U.S. Dollar). At March 31, 2005 therewere Canadian dollar forward exchange contracts outstanding with notionalamounts of $1,080,000.

 

Thefair values of the Canadian dollar hedge contracts at March 31, 2005 representan unrealized gain of $4,000.  A tenpercent fluctuation in the currency rates as of March 31, 2005 would haveresulted in a change in the fair value of the Canadian dollar hedge contractsof approximately $108,000. However, since these contracts hedge foreigncurrency denominated transactions, any change in the fair value of thecontracts would be offset by changes in the underlying value of the transactionbeing hedged.

 

Interestrate market risk is managed for cash and short-term investments by investing ina diversified frequently maturing portfolio consisting of municipal bonds andmoney market funds that experience minimal volatility. The carrying amount ofavailable-for-sale debt securities approximate related fair value and theassociated market risk is not deemed to be significant.

 

TheCompany is a party to an unsecured bank line of credit arrangement under whichit may borrow an aggregate of up to $60 million. Interest is charged atvariable rates based on either LIBOR or prime. In fiscal 2005 the Companyincurred no short-term bank borrowings.

 

# **ITEM 8**. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Financial Statements,Notes, and Report of Independent Registered Certified Public Accounting Firmappear on pages 21 through 32. Quarterly financial data appears in Item 6.

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

 

None.

# ** **

# **ITEM9A**.CONTROLS AND PROCEDURES

 

The Company’s management,including the Chief Executive Officer and Chief Financial Officer, haveconducted an evaluation of the effectiveness of the design and operation of theCompany’s disclosure controls and procedures pursuant to Rule 13a-15 under the1934 Act as of March 31, 2005. Based on that evaluation, the Company’s ChiefExecutive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures are effective in ensuring that informationrequired to be disclosed by the Company in the reports it files or submitsunder the 1934 Act is recorded, processed, summarized and reported within thetime periods specified in the SEC’s rules and forms.

 

There have been nosignificant changes in internal controls over financial reporting during thefiscal quarter ended March 31, 2005 that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

15

----

 

**MANAGEMENT’SREPORT OF INTERNAL CONTROL OVER FINANCIAL REPORTING**

 

The management of ArcticCat Inc. is responsible for establishing and maintaining adequate internalcontrol over financial reporting as defined in Rule 13a-15(f) and 15d-15(f)under the Securities and Exchange Act of 1934. The Company’s internal controlsystem was designed to provide reasonable assurance to the Company’s managementand Board of Directors regarding the preparation and fair presentation ofpublished financial statements.

 

All internal controlsystems, no matter how well designed, have inherent limitations. Therefore,even those systems determined to be effective can provide only reasonableassurance with respect to financial statement preparation and presentation.

 

Arctic Cat Inc.’smanagement assessed the effectiveness of the Company’s internal control overfinancial reporting as of March 31, 2005. In making this assessment, it usedthe criteria set forth by the Committee of Sponsoring Organizations of theTreadway Commission (COSO) in *InternalControl – Integrated Framework*. Based on the assessment managementbelieves that, as of March 31, 2005, the Company’s internal control overfinancial reporting is effective based on those criteria.

 

Arctic Cat Inc.’s independentauditors have issued an audit report on our assessment of the Company’s internalcontrol over financial reporting. This report appears below.

 

# **REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLICACCOUNTING FIRM**

 

Stockholders and Board ofDirectors Arctic Cat Inc.

 

We have auditedmanagement’s assessment, included in the accompanying management reportincluded in Item 9 of this Form 10-K, that Arctic Cat Inc. and subsidiariesmaintained effective internal control over financial reporting as of March 31,2005, based on control criteria established in *InternalControl – Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (the COSO criteria). Arctic Cat Inc.and subsidiaries’ management is responsible for maintaining effective internalcontrol over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting. Our responsibility is to express anopinion on management’s assessment and an opinion on the effectiveness of thecompany’s internal control over financial reporting based on our audit.

 

We conducted our audit inaccordance with the statements of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects. Our audit includedobtaining an understanding of internal control over financial reporting,evaluating management’s assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such otherprocedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinions.

 

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2)provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management anddirectors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company’s assets that could have a material effect on the financialstatements.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

 

In our opinion,management’s assessment that Arctic Cat Inc. and subsidiaries maintainedeffective internal control over financial reporting as of March 31, 2005, isfairly stated, in all material respects, based on the COSO criteria. Also inour opinion, Arctic Cat Inc. and subsidiaries maintained, in all materialrespects, effective internal control over financial reporting as of March 31,2005, based on COSO criteria.

 

16

----

 

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balance sheets of Arctic Cat Inc. andsubsidiaries as of March 31, 2005 and 2004, and the related consolidatedstatements of earnings, stockholders’ equity, and cash flows for each of thethree years in the period ended March 31, 2005 and our report dated June 9,2005 expressed an unqualified opinion on those financial statements.

 
| /s/ GRANT THORNTON LLP |   |
|------------------------|--------|
| Minneapolis, Minnesota |
| June 9, 2005           |

 

**ITEM 9B**.**OTHER INFORMATION**

 

None.

 

17

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**PART III**

 

# **ITEM10.**DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

 

The information includedunder the heading “Election of Directors” and “Beneficial Ownership of CapitalStock-Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’sdefinitive Proxy Statement for the Annual Meeting of Shareholders to be heldAugust 3, 2005, is incorporated herein by reference.

 

Pursuant toinstruction 3 to Item 401(b) of Regulation S-K, information as to executiveofficers of the Company is set forth in Item 4A of this Form 10-K.

 

# **ITEM11**.EXECUTIVE COMPENSATION

 

The information includedunder the heading “Executive Compensation and Other Information” in the Company’sdefinitive Proxy Statement for the Annual Meeting of Shareholders to be heldAugust 3, 2005, is incorporated herein by reference.

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

 

The information includedunder the heading “Beneficial Ownership of Capital Stock” in the Company’s definitiveProxy Statement for the Annual Meeting of Shareholders to be held August 3, 2005,is incorporated herein by reference.

# ** **

# **ITEM 13**. CERTAIN RELATIONSHIPS ANDRELATED TRANSACTIONS

 

Information with respectto certain relationships and related transactions, appearing under the heading “ExecutiveCompensation and Other Information-Certain Transactions” in the Company’sdefinitive Proxy Statement for the Annual Meeting of Shareholders to be held onAugust 3, 2005, is incorporated herein by reference.

 

# **ITEM 14**. PRINCIPAL ACCOUNTING FEES AND SERVICES

 

The information requiredby this item is incorporated by reference to the information set forth underthe heading “Independent Public Accountants” in the Company’s definitive ProxyStatement for the Annual Meeting of Shareholders to be held August 3, 2005.

 

18

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**PART IV**

 

# **ITEM15.**EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

## **(a)Documents filed as part of report**

 

## **1.Financial Statements.**

 

The followingconsolidated financial statements of the Company and its subsidiaries are filedas part of this Form 10-K:

 
| **(i)**   |   | Consolidated  Balance Sheets as of March 31, 2005 and 2004                                                     |   |   |
|-----------|--------|----------------------------------------------------------------------------------------------------------------|--------|--------|
|      |   |                                                                                                           |   |   |
| **(ii)**  |   | Consolidated Statements of Earnings for the three  years ended March 31, 2005, 2004 and 2003                   |   |   |
|      |   |                                                                                                           |   |   |
| **(iii)** |   | Consolidated  Statements of Shareholders’ Equity for the three years ended March 31, 2005,  2004 and 2003 |   |   |
|      |   |                                                                                                           |   |   |
| **(iv)**  |   | Consolidated Statements of Cash Flows for the  three years ended March 31, 2005, 2004 and 2003                 |   |   |
|      |   |                                                                                                           |   |   |
| **(v)**   |   | Notes to Consolidated  Financial Statements                                                                    |   |   |
|      |   |                                                                                                           |   |   |
| **(vi)**  |   | Report of  Independent Registered Certified Public Accounting Firm                                             |   |   |

 

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

 

The information requiredto be disclosed within Schedule II – Valuation and Qualifying Accounts isprovided within the Consolidated Financial Statements of the Company, filed aspart of this Form 10-K.

 

## **3.Exhibits**

 
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                           | ** ** | **Method of Filing** |
|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|
| **3(a)**   |       | Amended and Restated  Articles of Incorporation of Company                                                                                                                                                                                                                                                                                           |       | (3)                  |
|       |       |                                                                                                                                                                                                                                                                                                                                                 |       |                 |
| **3(b)**   |       | Restated By-Laws of the  Company                                                                                                                                                                                                                                                                                                                     |       | (1)                  |
|       |       |                                                                                                                                                                                                                                                                                                                                                 |       |                 |
| **4(a)**   |       | Form of specimen Common  Stock Certificate                                                                                                                                                                                                                                                                                                           |       | (1)                  |
|       |       |                                                                                                                                                                                                                                                                                                                                                 |       |                 |
| **4(b)**   |       | Rights Agreement by and  between the Company and Wells Fargo Bank Minnesota, N.A., dated September 17,  2001                                                                                                                                                                                                                                         |       | (4)                  |
|       |       |                                                                                                                                                                                                                                                                                                                                                 |       |                 |
| **10(a)**  |       | 1989 Stock Option Plan,  as amended                                                                                                                                                                                                                                                                                                                  |       | (3)                  |
|       |       |                                                                                                                                                                                                                                                                                                                                                 |       |                 |
| **10(b)**  |       | 1995 Stock Option Plan,  as amended                                                                                                                                                                                                                                                                                                                  |       | (3)                  |
| ** ** |       |                                                                                                                                                                                                                                                                                                                                                 |       |                 |
| **10(c)**  |       | Purchase/Supply  Agreement dated as of March 1, 1985 between Suzuki Motor Co., Ltd. and the  Company, and related Agreement on Implementation of Warranty Provision.                                                                                                                                                                                 |       | (1)                  |
|       |       |                                                                                                                                                                                                                                                                                                                                                 |       |                 |
| **10(d)**  |       | Form of Employment  Agreement between the Company and each of its executive officers                                                                                                                                                                                                                                                                 |       | (1)                  |
|       |       |                                                                                                                                                                                                                                                                                                                                                 |       |                 |
| **10(e)**  |       | Floorplan Repurchase  Agreement dated July 13, 1984, between the Company and ITT Commercial Finance  Corp.                                                                                                                                                                                                                                           |       | (1)                  |
|       |       |                                                                                                                                                                                                                                                                                                                                                 |       |                 |
| **10(f)**  |       | Floorplan Repurchase  Agreement dated as of June 15, 1988, between the Company and ITT Commercial  Finance, a division of ITT Industries of Canada, Ltd.                                                                                                                                                                                             |       | (1)                  |
|       |       |                                                                                                                                                                                                                                                                                                                                                 |       |                 |
| **10(g)**  |       | Discretionary Revolving  Credit Facility, dated as of June 6, 1997, between the Company and Wells  Fargo Bank Minnesota, National Association.                                                                                                                                                                                                       |       | (3)                  |
|       |       |                                                                                                                                                                                                                                                                                                                                                 |       |                 |
| **10(h)**  |       | 2002  Stock Plan                                                                                                                                                                                                                                                                                                                                     |       | (5)                  |
|       |       |                                                                                                                                                                                                                                                                                                                                                 |       |                 |
| **10(i)**  |       | Form  of incentive stock option agreement for 2002 Stock Plan                                                                                                                                                                                                                                                                                        |       | (2)                  |
|       |       |                                                                                                                                                                                                                                                                                                                                                 |       |                 |
| **10(j)**  |       | Form  of non-qualified stock option agreement for 2002 Stock Plan                                                                                                                                                                                                                                                                                    |       | (2)                  |
|       |       |                                                                                                                                                                                                                                                                                                                                                 |       |                 |
| **10(k)**  |       | Form  of Director non-qualified stock option agreement for 2002 Stock Plan                                                                                                                                                                                                                                                                           |       | (2)                  |
|       |       |                                                                                                                                                                                                                                                                                                                                                 |       |                 |
| **10(l)**  |       | Program  agreement, dated as of January 20, 2003, by and between Arctic Cat Sales Inc.  and Textron Financial Corporation (Confidential treatment pursuant to 17 CFR Sections  200.80(b) and 240.246-2 has been granted for certain portions of this  exhibit. Such portions have been omitted herein and have been filed  separately with the SEC.) |       | (6)                  |
|       |       |                                                                                                                                                                                                                                                                                                                                                 |       |                 |
| **10(m)**  |       | Repurchase  Agreement, dated as of January 20, 2003, by and between Arctic Cat Sales Inc.  and Textron Financial Corporation.                                                                                                                                                                                                                        |       | (6)                  |

 

19

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| **21**   |   | Subsidiaries of the  Registrant                                                                       |   | (2)    |
|----------|--------|-------------------------------------------------------------------------------------------------------|--------|--------|
|     |   |                                                                                                  |   |   |
| **23**   |   | Consent of Independent Registered  Certified Public Accounting Firm                                   |   | (2)    |
|     |   |                                                                                                  |   |   |
| **31.1** |   | Section 302 Certificate  of Chief Executive Officer                                                   |   | (2)    |
|     |   |                                                                                                  |   |   |
| **31.2** |   | Section 302 Certificate  of Chief Financial Officer                                                   |   | (2)    |
|     |   |                                                                                                  |   |   |
| **32.1** |   | Certification  of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002. |   | (2)    |
|     |   |                                                                                                  |   |   |
| **32.2** |   | Certification  of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002. |   | (2)    |

 

## **(b) Exhibits**

Reference is made to Item15(a) 3.

 

**(c) Schedules**

Referenceis made to Item 15(a) 2.

 

----

(1)          Incorporated herein byreference to the Company’s Form S-1 Registration Statement (File Number33-34984).

 

(2)          Filed with this Form10-K.

 

(3)          Incorporated herein byreference to the Company’s Annual Report on Form 10-K for the fiscal year endedMarch 31, 1997.

 

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

 

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

 

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

 

20

----

 

**SIGNATURES**

** **

Pursuant to therequirements 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 dulyauthorized, on the 10th day of June, 2005.

 
| **ARCTIC CAT INC.**                                                        |
|----------------------------------------------------------------------------|
|                                                                       |
|                                                                       | /s/Christopher  A. Twomey |   |
|                                                                       | Christopher  A. Twomey |   |
| Chairman  of the Board of Directors, President and Chief Executive Officer |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the Registrant and in the capacities and on the dateindicated.

 
| **Signature**                                                           | ** ** | **Date**      |
|-------------------------------------------------------------------------|------------|---------------|
| /s/ Christopher A.  Twomey                                              |       |          |   |
| Christopher A. Twomey                                                   |       | June 10, 2005 |
| Chairman of the Board of Directors, President, Chief  Executive Officer |       |          |
| (Principle Executive Officer)                                           |       |          |
|                                                                    |       |          |
| /s/ Timothy C. Delmore                                                  |       |          | June 10, 2005 |
| Timothy C. Delmore                                                      |       |          |
| Chief Financial Officer                                                 |       |          |
| (Principle Financial and Accounting Officer)                            |       |          |
|                                                                    |       |          |
| /s/ Robert J.  Dondelinger                                              |       |          | June 10, 2005 |
| Robert J. Dondelinger, Director                                         |       |          |
|                                                                    |       |          |
| /s/ William I. Hagen                                                    |       |          | June 10, 2005 |
| William I. Hagen, Director                                              |       |          |
|                                                                    |       |          |
| /s/ William G. Ness                                                     |       |          | June 10, 2005 |
| William G Ness,  Vice Chairman of the   Board of Directors              |       |          |
|                                                                    |       |          |
| /s/ Gregg A. Ostrander                                                  |       |          | June 10, 2005 |
| Gregg A. Ostrander, Director                                            |       |          |
|                                                                    |       |          |
| /s/ Kenneth J. Roering                                                  |       |          | June 10, 2005 |
| Kenneth J. Roering, Lead Director                                       |       |          |
|                                                                    |       |          |
| /s/ Susan Lester                                                        |       |          | June 10, 2005 |
| Susan Lester, Director                                                  |       |          |
|                                                                    |       |          |
| /s/ Masayoshi Ito                                                       |       |          | June 10, 2005 |
| Masayoshi Ito, Director                                                 |       |          |

 

21

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** **

**Consolidate****d Balance Sheets**

 
| **Arctic  Cat Inc. March 31,**                                                                                                           | ** ** | **2005**        | ** **      | **2004**        | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|-----------------|-----------------|------------|
|                                                                                                                                     |       |            |            |            |       |
| **ASSETS**                                                                                                                               | ** ** | ** **      | ** **      | ** **      | ** ** |
| **Current Assets**                                                                                                                       |       |            |            |            |       |
| **Cash and  equivalents**                                                                                                                | ** ** | **$**           | **20,765,000**  | ** **      | **$**      | 44,045,000 |   |
| **Short-term  investments**                                                                                                              | ** ** | **67,629,000**  | ** **      | **62,395,000**  |       |
| **Accounts  receivable, less allowances**                                                                                                | ** ** | **46,472,000**  | ** **      | **28,274,000**  |       |
| **Inventories**                                                                                                                          | ** ** | **67,989,000**  | ** **      | **61,127,000**  |       |
| **Prepaid expenses**                                                                                                                     | ** ** | **3,578,000**   | ** **      | **3,592,000**   |       |
| **Income taxes  receivable**                                                                                                             | ** ** | **—**      | ** **      | **1,239,000**   |       |
| **Deferred income  taxes**                                                                                                               | ** ** | **9,428,000**   | ** **      | **10,412,000**  |       |
| **Total current  assets**                                                                                                                | ** ** | **215,861,000** | ** **      | **211,084,000** |       |
| ** **                                                                                                                               | ** ** | ** **      | ** **      | ** **      |       |
| **Property and  Equipment – At Cost**                                                                                               |       |            |            |            |       |
| **Machinery,  equipment and tooling**                                                                                                    | ** ** | **150,221,000** | ** **      | **125,584,000** |       |
| **Land, buildings  and improvements**                                                                                                    | ** ** | **22,883,000**  | ** **      | **22,213,000**  |       |
| ** **                                                                                                                               | ** ** | **173,104,000** | ** **      | **147,797,000** |       |
| **Less accumulated  depreciation**                                                                                                       | ** ** | **97,232,000**  | ** **      | **78,295,000**  |       |
| ** **                                                                                                                               | ** ** | **75,872,000**  | ** **      | **69,502,000**  |       |
| ** **                                                                                                                               | ** ** | **$**           | **291,733,000** | ** **      | **$**      | 280,586,000 |   |
| ** **                                                                                                                               | ** ** | ** **      | ** **      |            |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                            | ** ** | ** **      | ** **      |            |       |
| **Current  Liabilities**                                                                                                                 |       |            |            |            |       |
| **Accounts payable**                                                                                                                     | ** ** | **$**           | **53,202,000**  | ** **      | **$**      | 48,148,000 |   |
| **Accrued expenses**                                                                                                                     | ** ** | **36,181,000**  | ** **      | **34,900,000**  |       |
| **Income taxes  payable**                                                                                                                | ** ** | **3,409,000**   | ** **      | **—**      |       |
| **Total current  liabilities**                                                                                                           | ** ** | **92,792,000**  | ** **      | **83,048,000**  |       |
| ** **                                                                                                                               | ** ** | ** **      | ** **      | ** **      |       |
| **Deferred Income  Taxes**                                                                                                               | ** ** | **13,431,000**  | ** **      | **11,585,000**  |       |
| ** **                                                                                                                               | ** ** | ** **      | ** **      | ** **      |       |
| **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,  13,378,698, in 2005; 14,285,882 in 2004** | ** ** | **134,000**     | ** **      | **143,000**     |       |
| **Class B common  stock, par value $.01; 7,560,000 shares authorized, Shares issued, and  outstanding 6,717,000 in 2005 and 2004**       | ** ** | **67,000**      | ** **      | **67,000**      |       |
| **Accumulated  other comprehensive gain (loss)**                                                                                         | ** ** | **60,000**      | ** **      | **(221,000**    | )          |
| **Retained  earnings**                                                                                                                   | ** ** | **185,249,000** | ** **      | **185,964,000** |       |
| ** **                                                                                                                               | ** ** | **185,510,000** | ** **      | **185,953,000** |       |
| ** **                                                                                                                               | ** ** | **$**           | **291,733,000** | ** **      | **$**      | 280,586,000 |   |

 

The accompanying notesare an integral part of these statements.

 

22

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**Consolidated Statementsof Earnings**

 
| **Arctic  Cat Inc. Years ended March 31,**        | ** ** | **2005**        | ** **      | **2004**        | ** ** | **2003**    | ** ** |
|---------------------------------------------------|------------|-----------------|-----------------|-----------------|------------|-------------|------------|
| **Net sales**                                     | ** ** | **$**           | **689,145,000** | ** **      | **$**      | 649,617,000 |       | $ | 577,070,000 |   |
| **Cost of goods  sold**                           | ** ** | **553,365,000** | ** **      | **510,445,000** |       | 448,266,000 |       |
| **Gross profit**                                  | ** ** | **135,780,000** | ** **      | **139,172,000** |       | 128,804,000 |       |
| ** **                                        | ** ** | ** **      | ** **      | ** **      |       |        |       |
| **Selling, general  and administrative expenses** | ** ** | **95,745,000**  | ** **      | **95,511,000**  |       | 84,161,000  |       |
| **Watercraft exit  costs**                        | ** ** | **—**      | ** **      | **—**      |       | (2,404,000  | )          |
| **Operating profit**                              | ** ** | **40,035,000**  | ** **      | **43,661,000**  |       | 47,047,000  |       |
| ** **                                        | ** ** | ** **      | ** **      | ** **      |       |        |       |
| **Other income**                                  |       |            |            |            |       |        |       |
| **Interest income**                               | ** ** | **1,213,000**   | ** **      | **993,000**     |       | 1,442,000   |       |
| **Earnings Before  Income Taxes**                 | ** ** | **41,248,000**  | ** **      | **44,654,000**  |       | 48,489,000  |       |
| **Income tax expense**                            | ** ** | **12,949,000**  | ** **      | **14,289,000**  |       | 15,786,000  |       |
| **Net Earnings**                                  | ** ** | **$**           | **28,299,000**  | ** **      | **$**      | 30,365,000  |       | $ | 32,703,000 |   |
| **Net Earnings Per  Share**                       |       |            |            |            |       |        |       |
| **Basic**                                         | ** ** | **$**           | **1.38**        | ** **      | **$**      | 1.42        |       | $ | 1.46 |   |
| **Diluted**                                       | ** ** | **$**           | **1.36**        | ** **      | **$**      | 1.40        |       | $ | 1.45 |   |
| **Weighted average  shares outstanding**          |       |            |            |            |       |        |       |
| **Basic**                                         | ** ** | **20,516,000**  | ** **      | **21,424,000**  |       | 22,396,000  |       |
| **Diluted**                                       | ** ** | **20,794,000**  | ** **      | **21,730,000**  |       | 22,615,000  |       |

 

The accompanying notesare an integral part of these statements.

 

23

----

 

**Consolidated Statements of Shareholders’ Equity**

 
| ** **                                                        | ** ** | ** **        | ** ** | ** **        | ** **  | ** **    | ** **    | ** **        | ** ** | ** **     | ** ** | **Accumulated** | ** ** | ** **      | ** ** | ** **      | ** ** |
|-------------------------------------------------------------------|------------|-------------------|------------|-------------------|-------------|---------------|---------------|-------------------|------------|----------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|
| ** **                                                        | ** ** | ** **        | ** ** | ** **        | ** **  | **Class B**   | ** **    | **Additional**    | ** ** | **Other**      | ** ** | ** **      | ** ** | ** **      | ** ** |
| **Arctic Cat Inc.**                                               | ** ** | **Common  Stock** | ** ** | **Common  Stock** | ** **  | **Paid-in**   | ** **    | **Comprehensive** | ** ** | **Retained**   | ** ** | ** **      | ** ** |
| **Years ended March 31,**                                         | ** ** | **Shares**        | ** ** | **Amount**        | ** **  | **Shares**    | ** **    | **Amount**        | ** ** | **Capital**    | ** ** | **Income**      | ** ** | **Earnings**    | ** ** | **Total**       | ** ** |
| Balances  at March 31, 2002                                       |       | 15,694,316        |       | $                 | 157,000     |          | 7,560,000     |              | $          | 76,000         |       | $               | —     |            | $          | **(122,000**    | **)**      | **$** | 181,527,000 |   | $ | 181,638,000 |   |
| Exercise  of stock options                                        |       | 256,160           |       | 2,000             | ** **  | **—**    | ** **    | **—**        |       | 2,777,000      | ** ** | **—**      | ** ** | **—**      |       | 2,779,000       |       |
| Tax  benefits from stock option exercises                         | ** ** | **—**        | ** ** | **—**        | ** **  | **—**    | ** **    | **—**        |       | 1,207,000      | ** ** | **—**      | ** ** | **—**      |       | 1,207,000       |       |
| Repurchase  of common stock                                       |       | (1,462,627        | )          | (15,000           | **)**       | **—**    | ** **    | **—**        |       | (3,984,000     | **)**      | **—**      |       | (21,445,000     | )          | (25,444,000     | )          |
| Other  comprehensive income:                                      |       |              |       |              |        |          |          |              |       |           |       |            |       |            |       |            |       |
| Net  earnings                                                     | ** ** | **—**        | ** ** | **—**        | ** **  | **—**    | ** **    | **—**        | ** ** | **—**     | ** ** | **—**      |       | 32,703,000      |       | 32,703,000      |       |
| Unrealized  gain on securities available-for-sale, net of tax     | ** ** | **—**        | ** ** | **—**        | ** **  | **—**    | ** **    | **—**        | ** ** | **—**     |       | 75,000          | ** ** | **—**      |       | 75,000          |       |
| Unrealized  loss on derivative instruments, net of tax            |       | —            |       | —            |        | —        |          | —            |       | —         |       | (289,000        | )          | —          |       | (289,000        | )          |
| Total  other comprehensive income                                 | ** ** | **—**        | ** ** | **—**        | ** **  | **—**    | ** **    | **—**        | ** ** | **—**     |       | —          | ** ** | **—**      |       | 32,489,000      |       |
| Dividends  ($.24 per share)                                       | ** ** | **—**        | ** ** | **—**        | ** **  | **—**    | ** **    | **—**        | ** ** | **—**     | ** ** | **—**      |       | (5,383,000      | )          | (5,383,000      | )          |
| Balances  at March 31, 2003                                       |       | 14,487,849        |       | 144,000           |        | 7,560,000     |          | 76,000            | ** ** | **—**     |       | (336,000        | )          | 187,402,000     |       | 187,286,000     |       |
| Exercise  of stock options                                        |       | 644,305           |       | 6,000             | ** **  | **—**    | ** **    | **—**        |       | 7,649,000      | ** ** | **—**      | ** ** | **—**      |       | 7,655,000       |       |
| Tax  benefits from stock option exercises                         | ** ** | **—**        | ** ** | **—**        | ** **  | **—**    | ** **    | **—**        |       | 1,868,000      | ** ** | **—**      | ** ** | **—**      |       | 1,868,000       |       |
| Repurchase  of common stock                                       |       | (846,272          | )          | (7,000            | )           | (843,000      | )             | (9,000            | )          | (9,517,000     | **)**      | **—**      |       | (26,230,000     | )          | (35,763,000     | )          |
| Other  comprehensive income:                                      |       |              |       |              |        |          |          |              |       |           |       |            |       |            |       |            |       |
| Net  earnings                                                     | ** ** | **—**        | ** ** | **—**        | ** **  | **—**    | ** **    | **—**        | ** ** | **—**     | ** ** | **—**      |       | 30,365,000      |       | 30,365,000      |       |
| Unrealized  loss on securities available-for-sale, net of tax     | ** ** | **—**        | ** ** | **—**        | ** **  | **—**    | ** **    | **—**        | ** ** | **—**     |       | (154,000        | **)**      | **—**      |       | (154,000        | )          |
| Unrealized  gain on derivative instruments, net of tax            | ** ** | **—**        | ** ** | **—**        | ** **  | **—**    | ** **    | **—**        | ** ** | **—**     |       | 269,000         | ** ** | **—**      |       | 269,000         |       |
| Total  other comprehensive income                                 | ** ** | **—**        | ** ** | **—**        | ** **  | **—**    | ** **    | **—**        | ** ** | **—**     | ** ** | **—**      | ** ** | **—**      |       | 30,480,000      |       |
| Dividends  ($.26 per share)                                       | ** ** | **—**        | ** ** | **—**        | ** **  | **—**    | ** **    | **—**        | ** ** | **—**     | ** ** | **—**      |       | (5,573,000      | )          | (5,573,000      | )          |
| **Balances at March 31, 2004**                                    | ** ** | **14,285,882**    | ** ** | **143,000**       | ** **  | **6,717,000** | ** **    | **67,000**        | ** ** | **—**     | ** ** | **(221,000**    | **)**      | **185,964,000** | ** ** | **185,953,000** | ** ** |
| **Exercise of stock options**                                     | ** ** | **115,762**       | ** ** | **1,000**         | ** **  | **—**    | ** **    | **—**        | ** ** | **1,429,000**  | ** ** | **—**      | ** ** | **—**      | ** ** | **1,430,000**   | ** ** |
| **Tax benefits from stock option exercises**                      | ** ** | **—**        | ** ** | **—**        | ** **  | **—**    | ** **    | **—**        | ** ** | **618,000**    | ** ** | **—**      | ** ** | **—**      | ** ** | **618,000**     | ** ** |
| **Repurchase of common stock**                                    | ** ** | **(1,022,946**    | **)**      | **(10,000**       | **)**       | **—**    | ** **    | **—**        | ** ** | **(2,047,000** | **)**      | **—**      | ** ** | **(23,272,000** | **)**      | **(25,329,000** | **)**      |
| **Other comprehensive income:**                                   |       |              |       |              |        |          |          |              |       |           |       |            |       |            |       |            |       |
| **Net earnings**                                                  | ** ** | **—**        | ** ** | **—**        | ** **  | **—**    | ** **    | **—**        | ** ** | **—**     | ** ** | **—**      | ** ** | **28,299,000**  | ** ** | **28,299,000**  | ** ** |
| **Unrealized loss on securities available-for-sale, net of  tax** | ** ** | **—**        | ** ** | **—**        | ** **  | **—**    | ** **    | **—**        | ** ** | **—**     | ** ** | **(135,000**    | **)**      | **—**      | ** ** | **(135,000**    | **)**      |
| **Unrealized gain on derivative instruments, net of tax**         | ** ** | **—**        | ** ** | **—**        | ** **  | **—**    | ** **    | **—**        | ** ** | **—**     | ** ** | **416,000**     | ** ** | **—**      | ** ** | **416,000**     | ** ** |
| **Total other comprehensive income**                              | ** ** | **—**        | ** ** | **—**        | ** **  | **—**    | ** **    | **—**        | ** ** | **—**     | ** ** | **—**      | ** ** | **—**      | ** ** | **28,580,000**  | ** ** |
| **Dividends ($.28 per share)**                                    | ** ** | **—**        | ** ** | **—**        | ** **  | **—**    | ** **    | **—**        | ** ** | **—**     | ** ** | **—**      | ** ** | **(5,742,000**  | **)**      | **(5,742,000**  | **)**      |
| **Balances at March 31, 2005**                                    | ** ** | **13,378,698**    | ** ** | **$**             | **134,000** | ** **    | **6,717,000** | ** **        | **$**      | **67,000**     | ** ** | **$**           | **—** | ** **      | **$**      | **60,000**      | ** ** | **$** | **185,249,000** | ** ** | **$** | **185,510,000** | ** ** |

 

The accompanying notesare an integral part of these statements.

 

24

----

 

**Consolidated Statements ofCash Flows**

 
| **Arctic  Cat Inc.  Years ended March 31,**                                        | ** ** | **2005**        | ** **     | **2004**        | ** ** | **2003**    | ** ** |
|-----------------------------------------------------------------------------------------|------------|-----------------|----------------|-----------------|------------|-------------|------------|
| **Cash flows from  operating activities**                                               |       |            |           |            |       |        |       |
| **Net earnings**                                                                        | ** ** | **$**           | **28,299,000** | ** **      | **$**      | 30,365,000  |       | $ | 32,703,000 |   |
| **Adjustments to  reconcile net earnings to net cash provided by operating activities** |       |            | ** **     |            |       |        |       |
| **Depreciation**                                                                        | ** ** | **19,584,000**  | ** **     | **18,551,000**  |       | 15,684,000  |       |
| **Deferred income  taxes**                                                              | ** ** | **2,666,000**   | ** **     | **5,532,000**   |       | 5,547,000   |       |
| **Tax benefit from  stock option exercises**                                            | ** ** | **618,000**     | ** **     | **1,868,000**   |       | 1,207,000   |       |
| **Watercraft exit costs**                                                               | ** ** | **—**      | ** **     | —          |       | (6,404,000  | )          |
| **Changes in  operating assets and liabilities, net of effect of watercraft costs**     |       |            | ** **     |            |       |        |       |
| **Trading  securities**                                                                 | ** ** | **(9,151,000**  | **)**          | **(6,155,000**  | )          | (1,031,000  | )          |
| **Accounts  receivable**                                                                | ** ** | **(18,194,000** | **)**          | **744,000**     |       | (5,199,000  | )          |
| **Inventories**                                                                         | ** ** | **(6,862,000**  | **)**          | **10,596,000**  |       | (9,547,000  | )          |
| **Prepaid expenses**                                                                    | ** ** | **14,000**      | ** **     | **237,000**     |       | (436,000    | )          |
| **Accounts payable**                                                                    | ** ** | **5,709,000**   | ** **     | **12,710,000**  |       | 6,996,000   |       |
| **Accrued expenses**                                                                    | ** ** | **1,281,000**   | ** **     | **(7,562,000**  | )          | (948,000    | )          |
| **Income taxes**                                                                        | ** ** | **4,648,000**   | ** **     | **1,083,000**   |       | (945,000    | )          |
| **Net cash  provided by operating activities**                                          | ** ** | **28,612,000**  | ** **     | **67,969,000**  |       | 37,627,000  |       |
| ** **                                                                              |       |            | ** **     |            |       |        |       |
| **Cash flows from  investing activities**                                               |       |            | ** **     |            |       |        |       |
| **Purchase of  property and equipment**                                                 | ** ** | **(25,954,000** | **)**          | **(25,053,000** | )          | (21,475,000 | )          |
| **Sale and  maturity of available-for-sale securities**                                 | ** ** | **3,703,000**   | ** **     | **1,729,000**   |       | 1,861,000   |       |
| **Purchase of  available-for-sale securities**                                          |       | —          | ** **     | —          |       | (350,000    | )          |
| **Net cash used in  investing activities**                                              | ** ** | **(22,251,000** | **)**          | **(23,324,000** | )          | (19,964,000 | )          |
| ** **                                                                              |       |            | ** **     |            |       |        |       |
| **Cash flows from  financing activities**                                               |       |            | ** **     |            |       |        |       |
| **Proceeds from  issuance of common stock**                                             | ** ** | **1,273,000**   | ** **     | **6,425,000**   |       | 2,767,000   |       |
| **Repurchase of  common stock**                                                         | ** ** | **(25,172,000** | **)**          | **(34,533,000** | )          | (25,432,000 | )          |
| **Dividends paid**                                                                      | ** ** | **(5,742,000**  | **)**          | **(5,573,000**  | )          | (5,383,000  | )          |
| **Net cash used in  financing activities**                                              | ** ** | **(29,641,000** | **)**          | **(33,681,000** | )          | (28,048,000 | )          |
| ** **                                                                              | ** ** | ** **      | ** **     | ** **      |       |        |       |
| **Net increase  (decrease) in cash and equivalents**                                    | ** ** | **(23,280,000** | **)**          | **10,964,000**  |       | (10,385,000 | )          |
| **Cash and  equivalents at beginning of year**                                          | ** ** | **44,045,000**  | ** **     | **33,081,000**  |       | 43,466,000  |       |
| **Cash and  equivalents at end of year**                                                | ** ** | **$**           | **20,765,000** | ** **      | **$**      | 44,045,000  |       | $ | 33,081,000 |   |
| **Supplemental  disclosure of cash payments for income taxes**                          | ** ** | **$**           | **7,691,000**  | ** **      | **$**      | 9,423,000   |       | $ | 12,978,000 |   |

 

Supplemental disclosureof non-cash investing and financing activities:

Asof March 31, 2005 and 2004, the unrealized gain on securitiesavailable-for-sale, net of tax was $57,000 and $192,000.

Asof March 31, 2005 and 2004, the unrealized gain (loss) on derivativeinstruments, net of tax was $3,000 and $(413,000).

During 2005 and 2004,mature common shares with a fair market value of $157,000 and $1,230,000 wereexchanged in settlement for the exercise of certain stock options.

 

The accompanying notesare an integral part of these statements.

 

25

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**Notes to****Consolidated Financial Statements**

 

**Arctic Cat Inc.  **March 31, 2005, 2004 and2003

 

**A             SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

 

Arctic Cat Inc. (the “Company”)operates in a single industry segment and designs, engineers, manufactures andmarkets snowmobiles and all-terrain vehicles (ATVs) under the Arctic Cat®brand name, and related parts, garments and accessories principally through itsfacilities in Thief River Falls, Minnesota. The Company’s products are soldthrough a network of independent dealers located throughout the United Statesand Canada, and distributors in Scandinavia and other international markets.

 

## **Useof Estimates**

 

Preparation of theCompany’s consolidated financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect reported amounts ofassets and liabilities, related revenues and expenses and disclosure aboutcontingent assets and liabilities at the date of the financial statements.Actual results could differ from the estimates used by management.

 

## **Principlesof Consolidation**

 

The consolidatedfinancial statements include the accounts of Arctic Cat Inc. and its wholly-ownedsubsidiaries. All significant intercompany accounts and transactions have beeneliminated in consolidation.

 

## **Cashand Equivalents**

 

The Company considershighly liquid temporary investments with an original maturity of three monthsor less or variable rate demand notes with put options exercisable in threemonths or less to be cash equivalents. Cash and equivalents consist primarilyof commercial paper and put bonds. The Company’s cash management policyprovides for bank disbursement accounts to be reimbursed on a daily basis.Checks issued but not presented to the banks for payment are included in cashand equivalents as a reduction of other cash balances.

 

**Fair Values of FinancialInstruments**

 

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

 

## **Short-TermInvestments**

 

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

 

## **AccountsReceivable**

 

The Company’s accountsreceivable balance consists of amounts due from its dealers and certain financecompanies. The Company extends credit to its dealers based on an evaluation ofthe dealers’ financial condition. The Company’s collection exposure relating toaccounts receivable amounts due from certain dealer finance companies islimited due to the financial strength of the finance companies and provisionsof its existing agreements. Accounts receivable is presented net of anallowance for estimated uncollectible amounts due from its dealers. The Companyestimates the uncollectible amounts considering numerous factors, mainlyhistorical trends as well as current available information. The Company’sallowance for uncollectible accounts was $802,000, $1,083,000 and $1,083,000 atMarch 31, 2005, 2004 and 2003. The activity within the allowance foruncollectible accounts for the three years ending March 31, 2005 was notsignificant.  Accounts receivable amountswritten off have been within management’s expectations.

 

## **Inventories**

 

Inventories are stated atthe lower of cost or market, with cost determined using the first-in, first-outmethod.

 

## **DerivativeInstruments and Hedging Activities**

 

The Company enters intoforward exchange contracts to hedge the variability in foreign exchange ratesrelated to purchase commitments denominated in Japanese yen for ATV engines andtransfers of Canadian dollar funds to the United States of America. Thecontracts are designated as, and meet the criteria for, cash flow hedges. TheCompany does not enter into forward contracts for the purpose of trading. Gainsand losses on forward contracts are recorded in accumulated other comprehensiveincome (loss), net of tax, and subsequently reclassified within 12 months intocost of goods sold upon the sale of ATV units or into operating expense uponcompleting transfers of Canadian dollar funds.

 

Asof March 31, 2005 and 2004, the Company had open Canadian dollar forwardexchange contracts, maturing through April 2005 and December 2004, with notionalamounts totaling $1,080,000 and $73,101,000 and fair value assets and liabilities,included in accounts receivable, of $4,000 at March 31, 2005 and $655,0000included in accounts payable at March 31, 2004. The related amounts reportedwithin other comprehensive income (loss), net of tax, were $3,000 

 

26

----

 

and$(413,000). There were no open Japanese yen forward exchange contracts at March31, 2005 and 2004.

## ** **

## **Propertyand Equipment**

 

Depreciation is providedin amounts sufficient to relate the cost of depreciable assets to operationsover their estimated service lives, using the units of production method fortooling and the straight-line method for all other property and equipment. Repairsand maintenance cost that are considered not to extend the useful life of theproperty and equipment are expensed as incurred. Tooling is amortized over thelife of the product, generally three years. Estimated service lives range from15 - 20 years for buildings and improvements and 5 - 7 years for machinery andequipment. Accelerated and straight-line methods are used for income taxreporting.

 

## **ProductWarranties**

 

The Company generallyprovides a limited warranty to the owner of snowmobiles for twelve months fromthe date of consumer registration and for six months on ATVs. The Companyprovides for estimated warranty costs at the time of sale based on historicalrates and trends and makes subsequent adjustments to its estimate as actualclaims become known or the amounts are determinable. The following represents changesin the Company’s accrued warranty liability for the fiscal years ended March31,

 
| ** **               | ** ** | **2005**       | ** **     | **2004**   | ** ** | **2003**   | ** ** |
|--------------------------|------------|----------------|----------------|------------|------------|------------|------------|
| Balance  at April 1,     | ** ** | **$**          | **10,331,000** |       | $          | 12,205,000 |       | $ | 12,937,000 |   |
| Warranty  Provision      | ** ** | **14,237,000** |           | 14,141,000 |       | 15,318,000 |       |
| Warranty  Claim Payments | ** ** | **12,515,000** |           | 16,015,000 |       | 16,050,000 |       |
| Balance  at March 31,    | ** ** | **$**          | **12,053,000** |       | $          | 10,331,000 |       | $ | 12,205,000 |   |

 

## **Insurance**

 

The Company isself-insured for employee medical, workers’ compensation, and product liabilityclaims. Specific stop loss coverages are provided for catastrophic claims.Losses and claims are charged to operations when it is probable a loss has beenincurred and the amount can be reasonably estimated.

 

## **RevenueRecognition**

 

The Company recognizesrevenue and provides for estimated marketing and sales incentive costs when productsare shipped to dealers and distributors pursuant to their order, the price isfixed and collection is reasonably assured. Shipping and handling cost arerecorded as a component of costs of goods sold at the time product is shipped.

 

## **Marketingand Sales Incentive Costs**

 

At the time productrevenue is recognized the Company provides for various marketing and salesincentive costs which are offered to its dealers and consumers. Examples ofthese costs, which are recognized as a reduction of revenue when the productsare sold, include: dealer and consumer rebates, dealer floor plan financingassistance and other incentive and promo­tion programs. Generally, the Companyrecords costs related to these marketing programs at the later of when therevenue is recog­nized or when the sales incentive or marketing program isapproved and com­municated for products previously shipped. Sales incentivesthat involve a free product or service delivered to the consumer are recordedas a component of cost of goods sold. The Company esti­mates the costs of thesevarious incentive and marketing programs at the time of sale or subsequentlywhen programs are approved and communicated based on historical experience. Tothe extent current experience differs with previous estimates the accruedliability for marketing and sales incentives is adjusted accordingly.

 

Tohelp facilitate retail sales of snowmobiles, the Company, at its discretion,works with dealers to transfer units from lower snow fall or lower retailactivity regions to higher snow fall or higher retail activity regions. At thetime of a transfer the Company credits the transferring dealer and re-bills thereceiving dealer. There was no activity of this type in 2005 and the net effectof this activity was to reduce revenue by less than 1% in 2004 and 2003.

 

## **DealerHoldback**

 

## **The Company records a dealerholdback program liability at the time certain products are shipped to itsdealers. If the products subject to the holdback program are sold within theprogram time period, the Company refunds a portion of the original sale price,referred to as dealer holdback, to the dealer. The Company’s dealer holdbackprogram liability, included within the accounts payable, as of March 31, 2005,2004 and 2003 was $14,085,000, $9,673,000 and $1,566,000. The increases fromMarch 31, 2004 to 2005 and from March 31, 2003 to 2004 were principally relatedto qualifying additional products, the period of coverage under the program andthe timing of payments.**

 

## **Researchand Development**

 

Research and developmentcosts are expensed as incurred and are reported as a component of selling,general and administrative expenses. Research and development expense was $17,350,000,$14,736,000 and $14,254,000 during 2005, 2004 and 2003.

 

## **Advertising**

 

The Company expensesadvertising costs as incurred, except for cooperative advertising obligationsarising related to the sale of the

 

27

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Company’s products to itsdealers. The estimated cost of cooperative advertising, which the dealer isrequired to support, is recorded as marketing expense at the time the productis sold. Cooperative advertising was $6,681,000, $6,374,000, and $4,957,000 in2005, 2004 and 2003. Total advertising expense, including cooperativeadvertising, was $22,031,000, $18,900,000 and $20,784,000 in 2005, 2004 and 2003.

 

## **Stock-BasedCompensation**

 

The Company utilizes theintrinsic value method of accounting for its employee stock-based compensationplans. The Company’s reported net earnings and basic and diluted net earn­ingsper share would have been as follows had the fair value method been used forvaluing stock options granted to employees:

 
| ** **                                      | ** ** | **2005**      | ** **     | **2004**  | ** ** | **2003**   | ** ** |
|-------------------------------------------------|------------|---------------|----------------|-----------|------------|------------|------------|
| **Net earnings:**                               |       |          |           |      |       |       |       |
| **As reported**                                 | ** ** | **$**         | **28,299,000** |      | $          | 30,365,000 |       | $ | 32,703,000 |   |
| **Additional compensation expense, net of tax** | ** ** | **1,555,000** |           | 1,337,000 |       | 1,366,000  |       |
| **Pro forma**                                   | ** ** | **$**         | **26,744,000** |      | $          | 29,028,000 |       | $ | 31,337,000 |   |
| **Net earnings per share:**                     |       |          |           |      |       |       |       |
| **As reported**                                 |       |          |           |      |       |       |       |
| **Basic**                                       | ** ** | **$**         | **1.38**       |      | $          | 1.42       |       | $ | 1.46 |   |
| **Diluted**                                     | ** ** | **$**         | **1.36**       |      | $          | 1.40       |       | $ | 1.45 |   |
| **Pro forma**                                   |       |          |           |      |       |       |       |
| **Basic**                                       | ** ** | **$**         | **1.30**       |      | $          | 1.35       |       | $ | 1.40 |   |
| **Diluted**                                     | ** ** | **$**         | **1.29**       |      | $          | 1.34       |       | $ | 1.39 |   |

 

The fair value of each stock option awardwas estimated on the date of grant using the Black-Scholes options pricingmodel. The following assumptions were used to estimate the fair value ofoptions:

 
| ** **                   | ** ** | **2005**    | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------|------------|-------------|------------|----------|------------|----------|------------|
| **Assumptions:**             |       |        |       |     |       |     |       |
| **Dividend yield**           | ** ** | **1.1**     | **%**      | 1.3      | %          | 1.4      | %          |
| **Average term**             | ** ** | **7 years** | ** ** | 7 years  |       | 7 years  |       |
| **Volatility**               | ** ** | **36**      | **%**      | 39       | %          | 31       | %          |
| **Risk-free rate of return** | ** ** | **4.1**     | **%**      | 3.8      | %          | 3.9      | %          |

 

Theweighted average fair value of options granted during each of the followingyears ended March 31:

 
| ** **                        | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Fair value of options granted** | ** ** | **$**    | **10.94**  |     | $          | 8.46     |       | $ | 5.32 |   |
|                                   |            |          |            |          |            |          |            |  |  |  |

 

SeeNote K for additional disclosures regarding stock option plans.

 

## **NetEarnings Per Share**

 

The Company’s dilutedweighted average shares outstanding include common shares and common shareequivalents relating to stock options, when dilutive. Options to purchase 195,000,85,180, and 369,295 shares of common stock with weighted average exerciseprices of $27.68, $20.94, and $15.80 were outstanding during 2005, 2004 and 2003,but were excluded from the computation of common share equivalents because theywere anti-dilutive.

 

Weightedaverage shares outstanding consist of the following for the years ended March31,

 
| ** **                                            | ** ** | **2005**       | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-------------------------------------------------------|------------|----------------|------------|------------|------------|------------|------------|
| Weighted  average number Of common shares outstanding | ** ** | **20,516,000** |       | 21,424,000 |       | 22,396,000 |       |
| Dilutive  effect of option plan                       | ** ** | **278,000**    |       | 306,000    |       | 219,000    |       |
| Common  and potential shares outstanding - Diluted    | ** ** | **20,794,000** |       | 21,730,000 |       | 22,615,000 |       |

 

## **ForeignCurrency Translation**

 

The Company’s sales andmarketing activities with Canadian dealers are denominated in Canadian currencywith the U.S. dollar serving as the functional currency. Assets and liabilitiesdenominated in Canadian currency are translated using the exchange rate ineffect at the balance sheet date. Revenues and expenses are translated at theaverage foreign exchange rate in effect for the period. Exchange gains andlosses are reflected in the results of operations.

 

## **ComprehensiveIncome**

 

Comprehensive incomerepresents net earnings adjusted for the unrealized gain or loss on derivativeinstruments and debt securities classified as available-for-sale and shown inthe consolidated financial statements of stockholders’ equity.

 

28

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## **AccountingPolicy and Disclosure Changes**

 

On December 16, 2004, the Financial Standards Board (FASB) issuedStatement of Financial Accounting Standards No. SFAS 123(revised 2004) (SFAS123R), Share Based Payment. This statement requires the compensation costrelating to share-based payment transactions to be recognized in a company’sfinancial statements. That cost will be measured based on the fair value of theequity or liability instruments on the date they are issued. SFAS 123R covers awide range of share-based compensation arrangements including share options,restricted share plans, performance-based awards, share appreciation rights,and employee share repurchase.

 

TheCompany will be required to adopt SFAS 123R as of its first interim reportingperiod that begins after March 31, 2006 or the first quarter of fiscal year 2007.The Company has not completed its evaluation of SFAS 123R but expects theadoption of this new standard will have a significant impact due to the Company’suse of options as employee incentives.

 

InNovember 2004, the FASB issued SFAS No. 151, “Inventory Costs” (“SFAS 151”).The provisions of this statement become effective for the Company in fiscal2007. SFAS 151 amends the existing guidance on the recognition of inventorycosts to clarify the accounting for abnormal amounts of idle expense, freight,handling costs, and wasted material (spoilage). Existing rules indicate thatunder some circumstances, items such as idle facility expense, excessivespoilage, double freight, and rehandling costs may be so abnormal as to requiretreatment as current period charges.  SFAS 151 requires that allocation of fixedproduction overheads to the costs of conversion be based on the normal capacityof the production facilities. The adoption of this Statement is not expected tohave a material impact on the valuation of inventory or operating results.

 

**Reclassification**

 

Certain2004 amounts have been reclassified to conform with the 2005 financialstatement presentation. The reclassification had no effect on previouslyreported operating results.

 

**B             SHORT-TERMINVESTMENTS**

 

Short-term investmentsconsist primarily of a diversified portfolio of municipal bonds and moneymarket funds and are classified as follows at March 31:

 
| ** **                             | ** ** | **2005**      | ** **     | **2004**  | ** ** |
|----------------------------------------|------------|---------------|----------------|-----------|------------|
| **Trading securities**                 | ** ** | **$**         | **64,433,000** |      | $          | 55,282,000 |   |
| **Available-for-sale debt securities** | ** ** | **3,196,000** |           | 7,113,000 |       |
| ** **                             |       | **$**         | **67,629,000** |      | $          | 62,395,000 |   |

 

Tradingsecurities consists of $54,608,000 and $41,707,000 invested in various moneymarket funds at March 31, 2005 and 2004, respectively, while the remainder oftrading securities and available-for-sale securities consists primarily of “A”rated or higher municipal bond investments. The amortized cost and fair valueof debt securities classified as available-for-sale was $3,105,000 and $3,196,000,at March 31, 2005. The unrealized gain on available-for-sale debt securities isreported, net of tax, as a separate component of shareholders’ equity. Thecontractual maturities of available-for-sale debt securities at March 31, 2005,are $765,000 within one year and $2,431,000 from one year through five years.

 

**C             INVENTORIES**

 

Inventories consist ofthe following at March 31:

 
| ** **                           | ** ** | **2005**       | ** **     | **2004**   | ** ** |
|--------------------------------------|------------|----------------|----------------|------------|------------|
| **Raw materials and sub-assemblies** | ** ** | **$**          | **17,155,000** |       | $          | 16,942,000 |   |
| **Finished goods**                   | ** ** | **24,149,000** |           | 14,719,000 |       |
| **Parts, garments and accessories**  | ** ** | **26,685,000** |           | 29,466,000 |       |
| ** **                           |       | **$**          | **67,989,000** |       | $          | 61,127,000 |   |

 

 

**D             ACCRUEDEXPENSES**

 

Accrued expenses consistof the following at March 31:

 
| ** **       | ** ** | **2005**       | ** **     | **2004**   | ** ** |
|------------------|------------|----------------|----------------|------------|------------|
| **Marketing**    | ** ** | **$**          | **7,567,000**  |       | $          | 8,566,000 |   |
| **Compensation** | ** ** | **9,288,000**  |           | 9,206,000  |       |
| **Warranties**   | ** ** | **12,053,000** |           | 10,331,000 |       |
| **Insurance**    | ** ** | **5,315,000**  |           | 5,061,000  |       |
| **Other**        | ** ** | **1,958,000**  |           | 1,736,000  |       |
| ** **       |       | **$**          | **36,181,000** |       | $          | 34,900,000 |   |

 

**E              DISCONTINUEDPERSONAL WATERCRAFT BUSINESS AND RELATEDCOSTS**

 

On October 7, 1999, theCompany announced that it was exiting the personal watercraft (PWC) businesseffective September 30, 1999 

 

29

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and recorded a charge of$21,462,000. The charge included $8,961,000 for consumer incentives, $3,480,000for the write-down and disposal of long-lived assets with no alternative use,$5,286,000 to reduce related inventory to a net realizable value and accrued$3,735,000 relating to other matters. The Company had no significant sales ofthe PWC product line in the years ended March 31, 2005, 2004 and 2003. Themajority of the Company’s PWC exit plan has concluded while other aspects ofthe plan will extend beyond March 31, 2005. During fiscal year 2003, theCompany analyzed current and future exit plan costs, and reduced the initialrecorded PWC exit plan consumer incentive and other exit costs accruals in theamount of $4,000,000 and $2,404,000, respectively. The changes in the PWC exitaccrual (included in other expenses) were as follows:

 
| ** **                    | ** ** | **Consumer   Incentives** | ** **  | **Other   Matters** | ** ** | **Total**   | ** ** |
|-------------------------------|------------|---------------------------|-------------|---------------------|------------|-------------|------------|
| Balance  at April 1, 2002     |       | $                         | 4,655,000   |                | $          | 2,854,000   |       | $ | 7,509,000 |   |
| Change  in estimates          |       | (4,000,000                | )           | (2,404,000          | )          | (6,404,000  | )          |
| Cash  payments                |       | (228,000                  | )           | 0                   |       | (228,000    | )          |
| Balance  on March 31, 2003    |       | 427,000                   |        | 450,000             |       | 877,000     |       |
| Cash  payments                |       | (269,000                  | )           | —              |       | (269,000    | )          |
| Balance  at March 31, 2004    |       | 158,000                   |        | 450,000             |       | 608,000     |       |
| Cash  payments                |       | (57,000                   | )           | —              |       | (57,000     | )          |
| **Balance on March 31, 2005** | ** ** | **$**                     | **101,000** | ** **          | **$**      | **450,000** | ** ** | **$** | **551,000** | ** ** |

# ** **

**F              FINANCING**

 

The Company has a$60,000,000 unsecured bank credit agreement for documentary and stand-byletters of credit and for working capital purposes. In fiscal 2005 the Companyincurred no short term bank borrowings. Total working capital borrowings underthe credit agreement are limited to $45,000,000 during the last six months ofthe fiscal year. The credit agreement is due on demand and expires July 28,2005 , however, management believes they will be able to renew the existingline of credit under similar terms. Interest on the working capital borrowingsis payable monthly at alternative interest rates, at the Com­pany’s election.The credit agreement contains certain covenants. At March 31, 2005, there was $24,396,000of issued letters of credit outstanding and no working capital borrowingsoutstanding. Of the issued letters of credit outstanding, $21,616,000 was issuedto Suzuki Motor Corporation (Suzuki) for engine and service parts purchases(see Note H). Outstanding letters of credit will be repaid over the followingsix months in accordance with the credit agreement and any such renewal.

 

**G             RETIREMENTSAVINGS PLAN**

 

The Company’s 401(k)retirement savings plan covers substantially all eligible employees. Employeesmay contribute up to 50% of their compensation with the Company matching 100%of the employee contributions, up to a maximum of 3% of the employee’s compensation.The Company can elect to make additional contributions at its discretion. TotalCompany matching contributions were $1,448,000, $1,286,000 and $1,284,000 in2005, 2004 and 2003. There were no discretionary contributions made during 2005,2004 and 2003.

 

**H             RELATEDPARTY TRANSACTIONS**

 

The Company purchasesengines and service parts from Suzuki, owner of the Company’s Class B commonstock. Such purchases totaled $138,021,000, $129,700,000 and $114,472,000 in2005, 2004 and 2003. The purchase price of the engines and service parts isdetermined annually. The Company has an agreement with Suzuki for snowmobileengine purchases to share the impact of fluctuations in the exchange ratebetween the U.S. dollar and the Japanese yen above and below a fixed rangecontained in the agreement. This agreement renews annually.

 

TheCompany is dependent on Suzuki for the near term supply of most of its enginesand related service parts. An interruption of this supply could have a materialadverse effect on the Company’s operations. Certain raw materials and servicesare purchased from vendors in which certain of the Company’s directors areofficers or significant shareholders. In 2005, 2004 and 2003, thesetransactions aggregated $2,678,000, $7,150,000 and $6,165,000.

 

**I               INCOMETAXES**

# ** **

Income tax expenseconsists of the following for the years ended March 31:

 
| ** **   | ** ** | **2005**      | ** **     | **2004**  | ** ** | **2003**   | ** ** |
|--------------|------------|---------------|----------------|-----------|------------|------------|------------|
| **Current**  |       |          |           |      |       |       |       |
| **Federal**  | ** ** | **$**         | **9,166,000**  |      | $          | 7,831,000  |       | $ | 9,310,000 |   |
| **State**    | ** ** | **1,117,000** |           | 926,000   |       | 929,000    |       |
| **Deferred** | ** ** | **2,666,000** |           | 5,532,000 |       | 5,547,000  |       |
| ** **   |       | **$**         | **12,949,000** |      | $          | 14,289,000 |       | $ | 15,786,000 |   |

 

30

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Thefollowing is a reconciliation of the Federal statutory income tax rate to theeffective tax rate for the years ended March 31:

 
| ** **                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Statutory income tax rate** | ** ** | **35.0** | **%**      | 35.0     | %          | 35.0     | %          |
| **State taxes**               | ** ** | **1.8**  | ** ** | 1.4      |       | 1.3      |       |
| **Tax exempt interest**       | ** ** | **(0.7** | **)**      | (0.5     | )          | (0.5     | )          |
| **Foreign sales corporation** | ** ** | **(3.2** | **)**      | (2.1     | )          | (1.8     | )          |
| **Other**                     | ** ** | **(1.5** | **)**      | (1.8     | )          | (1.4     | )          |
| ** **                    |       | **31.4** | **%**      | 32.0     | %          | 32.6     | %          |

 

Thecumulative temporary differences between the tax bases of assets andliabilities and their carrying amounts for financial reporting purposes underthe liability methods are as follows at March 31:

 
| ** **                                                                | ** ** | **2005**       | ** **     | **2004**   | ** ** |
|---------------------------------------------------------------------------|------------|----------------|----------------|------------|------------|
| **Short-term deferred income tax assets**                                 |       |           |           |       |       |
| **Accrued expenses**                                                      | ** ** | **$**          | **8,352,000**  |       | $          | 9,127,000 |   |
| **Inventory capitalization and adjustments**                              | ** ** | **2,582,000**  |           | 2,492,000  |       |
| **Other**                                                                 | ** ** | **297,000**    |           | 401,000    |       |
| **Short-term  deferred income tax liability  prepaid expenses and other** | ** ** | **(1,803,000** | **)**          | (1,608,000 | )          |
| **Net short-term deferred tax asset**                                     | ** ** | **$**          | **9,428,000**  |       | $          | 10,412,000 |   |
| **Long-term deferred income tax liability**                               |       |           |           |       |       |
| **Property and equipment**                                                | ** ** | **$**          | **13,431,000** |       | $          | 11,585,000 |   |
| **Long-term deferred tax liability**                                      | ** ** | **$**          | **13,431,000** |       | $          | 11,585,000 |   |

 

**J              COMMITMENTSAND CONTINGENCIES**

 

## **DealerFinancing**

 

Finance companies providecertain of the Company’s dealers with floor plan financing. The Company hasagreements with these finance companies to repurchase certain repossessedproducts sold to its dealers. At March 31, 2005, the Company was contingentlyliable under these agreements for a maximum repurchase amount of approximately $31,283,000. The Company’s financial exposure underthese agreements is limited to the difference between the amount paid to thefinance companies for repurchases and the amount received upon the resale ofthe repossessed product. Losses incurred under these agreements during theperiods presented have not been material.

 

## **Litigation**

 

The Company is subject tolegal proceedings and claims which arise in the ordinary course of business. Accidentsinvolving personal injury and property damage occur in the use of snowmobilesand ATVs. Claims have been made against the Company from time to time. It isthe Company’s policy to vigorously defend against these actions. The Companybelieves that the cases in discovery are adequately covered by reserves andproduct liability insurance. The Company is not involved in any legalproceedings which it believes will have the potential for a materially adverseimpact on the Company’s business or financial condition, results of operationsor cash flows.

 

**K             SHAREHOLDERS’EQUITY**

 

## **StockOption Plans**

 

The Company has stockoption plans that provide for incentive and non-qualified stock options to begranted to directors, officers and other key employees. The stock optionsgranted generally have a five to ten year life, vest over a period of one tothree years, and have an exercise price equal to the fair market value of thestock on the date of grant. At March 31, 2005, the Company had 758,942 sharesof common stock available for grant under the plans.

 

Transactionsunder the plans during each of the three years in the period ended March 31, aresummarized as follows:

 
| ** **                        | ** ** | **Number of  shares under  option** | ** ** | **Weighted  average  exercise price** | ** ** |
|-----------------------------------|------------|-------------------------------------|------------|---------------------------------------|------------|
| Outstanding  at April 1, 2002     |       | 1,389,243                           |       | $                                     | 11.87      |   |
| Granted                           |       | 327,000                             |       | 15.59                                 |       |
| Exercised                         |       | (256,160                            | )          | 10.85                                 |       |
| Cancelled                         |       | (3,000                              | )          | 15.21                                 |       |
| Outstanding  at March 31, 2003    |       | 1,457,083                           |       | 12.88                                 |       |
| Granted                           |       | 316,000                             |       | 21.00                                 |       |
| Exercised                         |       | (644,305                            | )          | 11.88                                 |       |
| Outstanding  at March 31, 2004    |       | 1,128,778                           |       | 15.72                                 |       |
| Granted                           |       | 274,000                             |       | 27.60                                 |       |
| Exercised                         |       | (115,762                            | )          | 12.35                                 |       |
| Cancelled                         |       | (1,000                              | )          | 12.00                                 |       |
|                              |       |                                |       |                                  |       |
| **Outstanding at March 31, 2005** | ** ** | **1,286,016**                       | ** ** | **$**                                 | **18.56**  | ** ** |

 

Optionsexercisable at March 31 are as follows:

 
| ** ** | ** ** | **Number of  shares under  option** | ** ** | **Weighted  average  exercise price** | ** ** |
|------------|------------|-------------------------------------|------------|---------------------------------------|------------|
| 2003       |       | 922,081                             |       | $                                     | 11.64      |   |
| 2004       |       | 578,282                             |       | $                                     | 13.22      |   |
| **2005**   | ** ** | **762,189**                         | ** ** | **$**                                 | **15.51**  | ** ** |

 

31

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Thefollowing tables summarize information concerning currently outstanding and exercisablestock options at March 31, 2005:

 

**OptionsOutstanding**

 
| **Range  of  Exercise Prices** | ** ** | **Number  Outstanding**   | ** ** | **Weighted  Average  Remaining  Contractual Life** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|--------------------------------|------------|---------------------------|------------|----------------------------------------------------|------------|----------------------------------------|------------|
| $  6.11              |       |                      |       | 11,814                                             |       | 3.4 years                              |       | $ | 6.11 |   |
| 9.38                           |       |  –   13.33 |       | 235,717                                            |       | 4.2 years                              |       | 11.09 |   |
| 14.41                          |       |  –   21.03 |       | 764,485                                            |       | 7.1 years                              |       | 17.81 |   |
| 25.45                          |       |  –   28.00 |       | 274,000                                            |       | 9.0 years                              |       | 27.60 |   |
|                           |       | 1,286,016                 |       |                                               |       | $                                      | 18.56      |   |

** **

**Options Exercisable**

 
| **Range  of****Exercise  Prices** |   | **Number  Exercisable**   |   | **Weighted  Average  Exercise  Price** |   |
|-----------------------------------|--------|---------------------------|--------|----------------------------------------|--------|
| $  6.11                 |   |                      |   | 11,814                                 |   | $ | 6.11 |   |
| 9.38                              |   |  –   13.33 |   | 235,717                                |   | 11.09 |   |
| 14.41                             |   |  –   21.03 |   | 478,158                                |   | 16.99 |   |
| 25.45                             |   |  –   28.00 |   | 36,500                                 |   | 27.67 |   |
|                              |   | 762,189                   |   | $                                      | 15.51  |   |

## ** **

## **ClassB Common Stock**

 

Suzuki owns alloutstanding shares of the Company’s Class B common stock. At the option ofSuzuki, the Class B common stock is convertible into an equal number of sharesof the Company’s common stock. The Class B shareholder is entitled to elect onemember of the Company’s Board of Directors but cannot vote for the election ofother directors of the Company. The Class B shareholder can vote on all othermatters submitted to the common shareholders. The Class B common stockparticipates equally with the common stock in all dividends and otherdistributions duly declared by the Company’s Board of Directors. The Class Bcommon 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 andClass B common shares; the Company becomes a non-surviving party due to amerger or recapitalization; the Company sells substantially all of its assets;or Suzuki transfers its Class B common stock to any person.

 

In addition, the Companyhas a Stock Purchase Agreement with Suzuki that prohibits the purchase of additionalshares of the Company’s common stock unless, following such purchase, Suzuki’sownership is less than or equal to 32% of the aggregate outstanding shares ofcommon and Class B common stock. The Company has the first right of refusal topurchase any shares Suzuki intends to sell. Suzuki has agreed not to compete inthe manufacture of snowmobiles or related parts so long as it supplies enginesto the Company or owns at least 10% of the aggregate common and Class B commonshares outstanding.

 

## **PreferredStock**

 

The Company’s Board ofDirectors is authorized to issue 2,050,000 shares of $1.00 par value preferredstock in one or more series. The board can determine voting, conversion,dividend and redemption rights and other preferences of each series. No shareshave been issued.

 

## **Shareholders’Rights Plan**

 

In connection with theadoption of a Shareholders’ Rights Plan, the Company created a Series B JuniorParticipating preferred stock. Under terms of the Company’s Shareholder RightsPlan, upon the occurrence of certain events, registered holders of common stockand Class B common stock are entitled to purchase one-hundredth of a share ofSeries B Junior Participating preferred stock at a stated price, or to purchaseeither the Company’s common shares or common shares of an acquiring entity athalf their market value. The Rights related to this plan expire September 17,2011.

 

## **ShareRepurchase Authorization**

 

The Company invested $25,329,000,$35,763,000 and $25,444,000 during 2005, 2004 and 2003 to repurchase and cancel1,023,000, 1,689,500 and 1,463,000 shares of common stock, pursuant to Board ofDirectors’ authorizations. Included in the 2004 repurchases are 843,000 sharesof Class B stock from Suzuki Motor Corporation, repurchased for $18,259,000 or$21.66 per share.  At March 31, 2005,authorization to repurchase $5,469,000 or approximately 202,000 shares remainoutstanding.  In May 2005, the Board ofDirectors’ approved an additional $20,000,000 share repurchase.

 

**L             EXPORTSALES**

 

Sales to foreigncustomers, located primarily in Canada, amounted to $171,075,000, $152,657,000and $118,399,000 in 2005, 2004 and 2003.

 

32

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**REPORT OF****INDEPENDENT REGISTERED**

**CERTIFIED PUBLIC ACCOUNTING FIRM**

 

**Board of Directors**

Arctic Cat Inc.

 

Wehave audited the accompanying consolidated balance sheets of Arctic Cat Inc.and subsidiaries as of March 31, 2005 and 2004, and the related consolidatedstatements of earnings, stockholders’ equity, and cash flows for each of thethree years in the period ended March 31, 2005. These financial statements arethe responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of Arctic Cat Inc. andsubsidiaries as of March 31, 2005 and 2004, and the results of their operationsand their cash flows for each of the three years in the period ended March 31,2005 in conformity with accounting principles generally accepted in the UnitedStates of America.

 

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the effectiveness of Arctic CatInc. and subsidiaries’ internal control over financial reporting as of March31, 2005, based on *Internal Control –Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO) and our report dated June 9,2005 expressed an unqualified opinion on the effectiveness of Arctic Cat Inc.and subsidiaries’ internal control over financial reporting.

 

 
| /s/  GRANT THORNTON LLP |   |
|-------------------------|--------|
|                    |
|                    |
| Minneapolis, Minnesota  |
| June 9, 2005            |

 

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**ARCTICCAT INC. EXHIBIT INDEX**

 
| **EXHIBIT NUMBER** | ** ** | ** **                                                                 |
|--------------------|------------|----------------------------------------------------------------------------|
| **10(i)**          |       | Form of incentive stock  option agreement for 2002 Stock Plan.             |
| **10(j)**          |       | Form of non-qualified  stock option agreement for 2002 Stock Plan.         |
| **10(k)**          |       | Form of Director  non-qualified stock option agreement for 2002 Stock Plan |
| **21**             |       | Subsidiaries of  Registrant                                                |
| **23**             |       | Consent of Independent  Registered Certified Public Accounting Firm        |
| **31.1**           |       | Certificate  of Chief Executive Officer                                    |
| **31.2**           |       | Certificate  of Chief Financial Officer                                    |
| **32.1**           | ** ** | **Certification of Chief Executive Officer**                               |
| **32.2**           | ** ** | **Certification of Chief Financial  Officer**                              |

 

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