**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-K**

 
| **ý** |   | **Annual  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934  for the fiscal year ended March 31, 2003** |
|------------|--------|-------------------------------------------------------------------------------------------------------------------------------------|
|       |
| **or**     |
|       |   |                                                                                                                                |
| **o**      |   | **Transition  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**                                       |

 

**Commission File Number: 0-18607**

 

| **ARCTIC CAT INC.**                                              |
|------------------------------------------------------------------|
| (Exact name of  registrant as specified in its charter)          |
|                                                             |   |   |
| **Minnesota**                                                    |   | **41-1443470** |
| (State or other  jurisdiction  of incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                             |   |   |
| **601 Brooks Avenue South  Thief River Falls, Minnesota 56701**  |
| (Address of principal  executive offices) (Zip Code)             |

 

Registrant’s telephone number, including areacode:**(218) 681-8558**

Securities registered pursuant to Section12(b) of the Act:**None**

Securities registered pursuant to Section12(g) of the Act:**Common Stock, $.01 par value.**

**PreferredStock Purchase Rights.**

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to  file such reports), and (2)has been subject to such filing requirements for the past 90 days.

Yes  ý           No o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or any amendmentto this Form 10-K. o

 

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

Yes  ý           No o

 

The aggregate market value of the voting and non-voting common equityheld by non-affiliates computed by reference to the price at which the commonequity was last sold, or the average bid and asked price of such common equity,as of the last business day of the Registrant’s most recently completed secondfiscal quarter: $193,000,000.

 

At June 9, 2003, 14,304,735 shares of Common Stock and 7,560,000 sharesof Class B Common Stock of the  Registrantwere outstanding.

**Documents Incorporated by Reference:**

 

Portions of the Company’s Proxy Statement for its Annual Meeting of Shareholderscurrently scheduled to be held on August 7, 2003 are incorporated by referenceinto Part III of this Form 10-K.

 

 

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# **ARCTICCAT INC.**

# **FORM10-K**

# **TABLEOF 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 and Related Stockholder Matters                      |
| **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            |
|         |                                                                                             |
| 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.** | Controls  and Procedures                                                                         |
|         |                                                                                             |
| PART IV      |                                                                                             |
|         |                                                                                             |
| **ITEM 15.** | Exhibits,  Financial Statement Schedules, and Reports on Form 8-K                                |
|         | Signatures                                                                                       |
|         | Certifications                                                                                   |
|         | Consolidated Balance Sheets                                                                      |
|         | Consolidated  Statements of Earnings                                                             |
|         | Consolidated  Statements of Shareholders’ Equity                                            |
|         | Consolidated  Statements of Cash Flows                                                           |
|         | Notes to  Consolidated Financial Statements                                                      |
|         | Report  of Independent Certified Public Accountants                                              |
|         | Exhibit Index                                                                                    |
|         | Exhibit 21                                                                                       |
|         | Exhibit 23                                                                                       |
|         | Exhibit 99.1                                                                                     |
|         | Exhibit 99.2                                                                                     |

 

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**PART I**

 

**ITEM 1.   BUSINESS**

 

Arctic Cat Inc. (the “Company”), based in Thief River Falls, Minnesota,operates in a single industry segment and designs, engineers, manufactures andmarkets snowmobiles and all-terrain vehicles (ATVs) under the Arctic Catâbrand name, as well as related parts, garments and accessories. The Companymarkets its products through a network of independent dealers locatedthroughout the contiguous United States and Canada, and through distributorsrepresenting dealers in Alaska, Europe, the Middle East, Asia and otherinternational markets. The Arctic Cat brand name has existed for over 40 yearsand is among  the most widely recognizedand respected names in the snowmobile industry. The Company trades on theNasdaq National Market under the symbol ACAT.

 

## **Industry Background**

** **

**Snowmobiles–******The snowmobile, developed in the 1950’s,was originally intended to be used as a utility vehicle, but today theoverwhelming majority of the industry’s sales are for recreational use. Betweenthe late 1950’s and early 1970’s, the industry expanded dramatically reaching apeak of over 100 manufacturers and a high of almost 495,000 units sold toretail customers in North America in 1971. Gasoline shortages, significantgasoline price increases, high interest rates and recessions in the middle tolate 1970’s through the early 1980’s contributed to a significant industrydownsizing. Today the number of major industry participants has decreased tofour.

 

Industry-wide snowmobile sales to retail customers inNorth America were approximately 165,000 units for the 2003 model year. TheCompany believes these sales were due, in part, to a number of factors such asan expanded system of public and private snowmobile trails, a rapidly growingmarket among the “baby boomer” generation, product innovations that haveimproved ride, performance and handling, organized snowmobile clubs whichpromote the sport and ongoing snowmobile replacement. Since 1971, over sixmillion snowmobiles have been sold in North America, and the Company estimatesthat over 85 percent of current industry sales are to retail customers who own,or previously owned, a snowmobile.

 

The industry consolidation that occurred in themid-1970’s through the early 1980’s has left four major participants in theNorth American market: Arctic Cat, Bombardier (Ski-Doo), Polaris andYamaha.  The Company believes theindustry consolidation has contributed to improved industry profit margins andcloser monitoring of industry inventory levels. The Company believes there arecurrently more significant barriers to entry into the snowmobile market thanexisted in the 1970’s. These barriers include increased brand loyalty,long-standing dealer and distributor networks and relationships, limited enginesources, manufacturing and engineering expertise and higher initial start-upcosts.

 

Information in this document regarding the worldwideand North American snowmobile market is derived from the InternationalSnowmobile Manufacturers Association. Non-North American sales  for the industry are estimated to accountfor less than 10% of worldwide sales; specific yearly information, with respectto worldwide sales, is  not consideredby the Company as sufficiently consistent or reliable for presentation in thisreport. All industry information is based on a model year ending March 31,which is the same as the Company’s fiscal year-end, unless otherwise stated.

 

**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 theUnited States continued to grow until peaking in 1986 with approximately535,000 units sold during that calendar year. From 1987 to 1991, the number ofATVs sold declined to a low of approximately 151,000 units. Since 1992, saleshave gradually climbed until reaching approximately 769,000 units in calendar2002. Major competitors in the industry include Honda, Yamaha, Kawasaki,Bombardier, Polaris and Suzuki.

 

**Products**

** **

**Snowmobiles–** The Company produces a full line of snowmobiles,consisting of 40 models, marketed under the Arctic Cat brand name, and designedto satisfy various market niches. The 2003 Arctic Cat models carry suggestedU.S. retail prices ranging from $3,799 to $9,199, excluding a youth model whichis sold at a suggested U.S. retail price of $1,999. Arctic Cat snowmobiles aresold in the United States, Canada, Scandinavia and other international markets.

 

The Company’s 2003 year snowmobile models arecategorized as Performance, Trail Performance, Mountain, Touring and SportUtility. The Company markets: Performance Arctic Cat snowmobiles under  the names Firecat and ZR; Trail PerformanceArctic Cat snowmobiles under the name Z, ZL and Four-Stroke Trail; Mountainsnowmobiles under the name Mountain Cat; Touring models under the namesPantera, Panther and Four-Stroke Touring; and Sport Utility models under thename Bearcat. In addition, to encourage family involvement in snowmobiling, theCompany offers a youth snowmobile marketed under the ZR120 name.

 

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The Company believes the Arctic Cat brand name enjoysa premier image among snowmobile enthusiasts and that its snowmobiles have along-standing reputation for quality, performance, style, comfort, ride andhandling. Arctic Cat snowmobiles offer a wide range of standard and optionalfeatures which enhance the operation, riding comfort  and performance. Such features include hydraulic disc brakes,remote starters and a technologically advanced front and rear suspension.Arctic Cat is the industry leader in fuel management technology offeringelectronic fuel injection (EFI) system on its snowmobiles. The Company recentlyintroduced a snowmobile with a turbo four stroke intercooled engine. In 1999,the Company developed a new corporate brand “ACT”TM (Arctic CatTechnology) in order to recognize and leverage its industry-leading technology and engineering.

 

Arctic Cat believes that it has been able to grow inthe worldwide snowmobile retail sales due toits emphasis on new product development. A new model has been introducedby the Company nearly every year since its formation, and in recent years newmodels have been among the Company’s best sellers. In the 2003 model year, over75 percent of the Company’s snowmobile sales were from models or modelvariations not available three years earlier.

 

**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, multi-rack platform (MRP) anda large fuel tank, all make Arctic Cat ATVs consumer friendly. The 2003 ArcticCat ATV models carry suggested U.S. retail prices ranging from $1,999 to$7,199.

 

Arctic Cat has continued to expand into internationalmarkets  by adding new distributors,entering new territories, and developing new markets. Arctic Cat is the firstATV to have full European  approval,through its Austrian distributor, to operate ATVs on the road throughout theEuropean community. The Company produces ATVs for AGCO Corporation under theArctic Cat and Massey Ferguson/Delta Allis brands for distribution throughtheir dealer network outside of North America.

 

Arctic Cat believes its ATVs are renowned for theirpower and  durability and are wellreceived within the market. For model year 1998, the Arctic Cat 300 was named“Editors Choice” by *Sports Afield* and “Best In Class” by *ATV Magazine*.For model year 1999, *ATV Magazine* named the 300 4x4 as “Best inClass” and the 500 4x4 as the Editors Pick for “Best-for-Work” machine. *FarmIndustry News* gave Arctic Cat 2000 models the FinOvation Award forhaving the greatest reader interest. *ATV Magazine* awarded the Arctic Cat 2504x4 model “Best in Class” in fiscal 2001 and “Best Utility” in 2002. In 2003Arctic Cat MRP models received the 2003 Product Innovation Award from *ATV Magazine*.

 

**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 upgradeArctic Cat snowmobiles such as electric start and reverse kits, luggage racksand bags, backrests, machine covers, windshields, and colored accessories.Other items include maintenance supplies such as oil and fuel additives, trackstuds and carbide runners.  Arctic CatATV parts and accessories include winch kits, snow plow kits, MRP accessories,portable lights, utility bags as well as maintenance supplies.

 

The Company offers snowmobile garments for adults andchildren under the “Arcticwear” label. Suits, jackets, pants and accessorygarments are offered in a wide variety of styles and sizes combining fashionwith functional utility designed for the demands of snowmobiling and otherwinter activities. The Arcticwear line of clothing also includes pull-overs,riding gloves, hats, helmets, boots, gear bags, sweatshirts, T-shirts, andcaps. The colors and designs of many of these items are coordinated withspecific Arctic Cat snowmobile models.

 

The Company offers ATV garments under the “ArcticwearATV Gear” label. This line of clothing is geared toward function and comfortand includes suits, jackets, gloves,helmets, gear bags, sweatshirts, T-shirts, and caps.

 

## **Manufacturing and Engineering**

 

Arctic Cat snowmobiles, ATVs and garments are manufactured at theCompany’s facilities in Thief River Falls, Minnesota. The Company paintssnowmobile hoods and produces other parts for Arctic Cat snowmobiles and ATVsin Madison, South Dakota. The Company also has a facility in Bucyrus, Ohiowhich houses its service parts, garments and accessories distributionoperations. The Company has strategically identifiedspecific core manufacturing competencies for vertical integration andhas 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 enters into agreements with these vendors topurchase component parts manufactured utilizing the tooling. In itsvertically integrated operations, the Company manufactures hoods, foam seats,seat covers and machines, welds and paints other components. The Companycompletes the total assembly of its products at its facilities in Thief RiverFalls. Manufacturing operations include digital and computer-automatedequipment to speed production, reduce costs and improve the quality, fit andfinish of every product.

 

4

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** **

The Company believes that all raw materials used in its manufacturingprocess and all component parts, with the exception of engines and carburetors,are available from multiple alternative vendors on relatively short notice atcompetitive prices.

 

Since the Company’s inception, its snowmobile engineshave been manufactured by Suzuki Motor Corporation (“Suzuki”) pursuant to asupply agreement which is automatically renewed annually unless terminated.While notice of termination of the supply agreement may be given annually,effective cessation of supply would take at least one model year due to thecontractual notice requirement. The Company’s ATV models also incorporateengines manufactured by Suzuki.

 

The Company and Suzuki have enjoyed an excellentrelationship since the Company’s inception. Suzuki purchased approximately 31%of the Company’s then outstanding capital stock in July 1988, prior to theCompany’s initial public offering, and is currently the Company’s largestshareholder with approximately 34% of the Company’s outstanding capital stock.If Suzuki were ever to cease supplying engines to the Company, such aninterruption could materially and adversely affect production. The Companybelieves it could take up to two model years for a new engine supplier to be ina position to manufacture the Company’s specially designed engines.

 

Since the Company began snowmobile production, it hasfollowed a build-to-order policy to control inventory levels. Under thispolicy, the Company only manufactures a number of snowmobiles equivalent to theorders received from its dealers and distributors, plus a small number of uncommittedmachines used for new dealer development, in-house testing and miscellaneouspromotional purposes. Speculative production and excessive inventories incertain periods during the 1970’s and early 1980’s contributed to significantprice discounting in the snowmobile industry. Since the consolidation of thesnowmobile industry in the mid-1970’s through the early 1980’s, speculativeproduction in the industry has been reduced and dealer inventories haveremained consistently below historic peak levels. The Company believes dealerinventory levels of non-current Arctic Cat model snowmobiles and ATVs haveregularly been and are currently among the lowest in the industry.

 

Most sales of snowmobiles to retail customers begin inthe early fall and continue during the winter. Orders by dealers anddistributors for each year’s production are placed in the spring following aseries of dealer and distributor meetings. Snowmobiles are built-to-ordercommencing in the spring and continuing through late autumn or early winter.Since its inception, the Company has experienced a low level of snowmobileorder cancellations. Approximately 30% to 40% of the Company’s snowmobiles havehistorically been sold to retail customers prior to the end of October, longbefore the season’s snow conditions are known.

 

Retail sales of ATVs occur throughout the year withseasonal highs occurring in the spring and fall. The Company builds ATVs throughout the year to coincide with dealerand consumer demands.

 

The Company is committed to an ongoing engineeringprogram dedicated to innovation and to continued improvements in the qualityand performance of its products as well as product diversification. The Companycurrently employs 153 individuals in the design and development of new and existingproducts, with an additional 33 individuals directly involved in the testing ofsnowmobiles, and ATVs in normal and extraordinary conditions at the Company’stest track. In addition, snowmobiles and ATVs are tested in conditions andlocations similar to those in which they are used. The Company usescomputer-aided design and manufacturing systems to shorten the time betweeninitial concept and final production. For 2003, 2002, and 2001, the Companyspent approximately $14,254,000, $15,244,000, and $10,449,000 on engineering,research and development. In addition, utilizing their particular expertise,the Company’s vendors regularly test and apply new technologies to the designand production of component parts.

 

## **Sales and Marketing**

 

The Company’s products are currently sold through an extensive networkof independent dealers located throughout the contiguous United States andCanada, and through distributors representing dealers in Alaska, Europe, theMiddle East, Asia and other international markets. To promote new dealershipsand to service its existing dealer network,the Company also employs sales representatives throughout the United States andCanada to represent its products.

 

The Company’s dealers enter into an annual renewablecontract and are required to maintain status as an authorized dealer in orderto continue selling the Company’s products. To obtain and maintain such status,dealers are required to order a sufficient number of snowmobiles and/or ATVs toservice their market area adequately. In addition, the dealers must performservice on these units and maintain satisfactory service performance levels,and their mechanics must complete special training provided by the Company.Dealers are also required to carry an inventory of genuine Arctic Cat parts andaccessories. As is typical in the industry, most of the Company’s dealers alsosell some combination of motorcycles, marine products, lawn and garden productsand other related products. Approximately 50% of the Company’s dealers sell onlyArctic Cat snowmobiles, versus multiple brands of snowmobiles. Relations withdealers are generally considered excellent.

 

5

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The Company utilizes exclusive distributors outsidethe contiguous 48 United States and Canada to take advantage of their knowledgeand experience in their respective marketsand to increase market penetration of its products. Each distributor issubject to a distribution agreement which stipulates an exclusive territory fora term ranging from one to three years with specified minimum sales and servicerequirements for their territory. Canadian sales are made in Canadian dollars,nearly all of which is financed through certain Canadian financialinstitutions. Sales outside North America are normally made in U.S. dollars andmost are supported by letters of credit.

 

The Company’s marketing efforts are comprised ofdealer, distributor and customer promotions, advertising and cooperativeprograms with its dealers and distributors. Each year, the Company and itsdistributors conduct dealer shows in order to introduce the upcoming year’smodels and to promote dealer orders. Marketing activities are also designed topromote directly to consumers. Products are advertised by the Company in consumermagazines and through other media. In addition, the Company engages inextensive dealer cooperative advertising, on a local and national level,whereby the Company and its dealers share advertising costs. Each season theCompany produces promotional films, product brochures, point of purchasedisplays, leaflets, posters and banners, and other promotional items for use bydealers. The Company also participates in consumer shows and rallies withdealers and sponsors independent racers who participate in snowmobile racesthroughout the world. In order for its dealers and distributors to remain pricecompetitive and to reduce retail inventories, the Company will from time totime make available to them rebate programs, discounts, or other incentives.The Company publishes and mails, during the year, magazines called *Pride*(snowmobile) and *Ride* (ATV) to all registered owners of its products.

 

The Company places strong emphasis on identifying andaddressing the specific needs of its customers by periodically conductingdealer and consumer focus group meetings and surveys.

 

The Company warrants its snowmobiles and ATVs under alimited warranty against defects in materials and workmanship for a periodgenerally ranging from six months to one year from the date of retail sale orfor a period of 90 days from the date of commercial or rental use. Repairs orreplacements under warranty are administered through the Company’s dealers anddistributors.

 

**Competition**

 

The snowmobile and ATV markets are highly competitive, based on anumber of factors, including performance, styling, fit and finish, brandloyalty, reliability, durability and price. The Company believes Arctic Catsnowmobiles 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**

 

Both federal and state authorities have vigorous environmental controlrequirements relating to air, water and noise pollution that affect themanufacturing operations of the Company. The Company endeavors to insure thatits facilities comply with applicable environmental regulations and standards.Various states and other governmental agencies have also promulgated safetyregulations regarding the use of snowmobiles andATVs. The Company has supported laws and regulations pertainingto safety and noise abatement. The Companybelieves that the adoption of any pending laws or regulations would notnegatively affect its products to any greater degree than those of itscompetitors.

 

California regulations set emission standards forATVs, with which the Company currently complies. Although the snowmobileindustry is not currently required to comply with any federal or state exhaustemissions standards, the Environmental Protection Agency (EPA) recently adoptedregulations affecting snowmobiles and ATVs for model years 2006 and beyond. TheCompany believes that it will be in compliance with these regulations. TheCompany supports balanced and appropriate programs that educate the customer onsafe use of its products and protect the environment.

 

Certain materials used in snowmobile and ATVmanufacturing that are toxic, flammable, corrosive or reactive are classifiedby the federal and state governments as “hazardous materials.” Control of thesesubstances is regulated by the EPA and various state pollution controlagencies, which require reports and inspection of facilities to monitorcompliance. The Company’s cost of compliance with environmental regulations hasnot been, and is not expected to be, material. The Company’s manufacturingfacilities are subject to the regulations promulgated by, and may be inspectedby, the Occupational Safety and Health Administration.

 

The Company is a member of the InternationalSnowmobile Manufacturers Association (ISMA), a trade association formed topromote safety in the manufacture and use of snowmobiles, among other things.The ISMA is currently made up of Arctic Cat, Bombardier (Ski-Doo), Yamaha, andPolaris. 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 participating

 

6

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snowmobile manufacturers, have been adopted by the Canadian Departmentof Transport. Following the development of the SSCC standards, the U.S.Consumer Products Safety Commission denied a petition to develop a mandatoryfederal safety standard for snowmobiles in light of the high degree ofadherence to the SSCC standards in the United States. Since the Company’s inception,all of its models have complied with the SSCC standards.

 

The Company is a member of the Specialty VehicleInstitute of America (SVIA), a trade association organized to foster andpromote the safe and responsible use of ATVs manufactured and/or distributedthroughout the United States of America. The Company is also a member of theCanadian All-Terrain Vehicle Distributors Council (CATV), a council of similarfunction.

 

The Company has a Letter of Understanding with theU.S. Consumer Product Safety Commission and all Arctic Cat ATVs comply with thetechnical and performance requirements of the American National StandardsInstitute (ANSI) for ATVs.

 

**Effects of Weather**

 

While from time to time lack of snowfall in a particular region of theUnited States or Canada may adversely affect snowmobile retail sales withinthat region, the Company works to mitigate this effect by taking snowmobileorders in the spring for the following winter season and by working with itsdealers to move snowmobiles out of a region with light snowfall to anotherregion with heavier snowfall. Nonetheless, there is no assurance that weatherconditions will not materially affect the Company’s future sales ofsnowmobiles.

 

**Employees**

 

At March 31, 2003, the Company had 1,229 employees including 343salaried and 886 hourly and production personnel. The Company’s employees arenot represented by a union or subject to a collective bargaining agreement. TheCompany has never experienced a strike or work stoppage and considers its relationswith its employees to be excellent.

 

**Intellectual Property**

 

The Company makes an effort to patent all significant innovations thatit considers patentable and owns numerous patents and know-how of itssnowmobiles, ATVs and other products. Trademarks are important to the Company’ssnowmobile, ATVs and related parts, garments and accessories businessactivities. While from time to time the Company becomes aware of theunauthorized use of its trademarks, particularly in the sale of promotionalitems, the Company has a vigorous program of trademark enforcement to eliminatethe unauthorized use of its trademarks, thereby strengthening the value of itstrademarks and improving its image and customer goodwill. The Company believesthat its “Arctic Cat” registered trademark is its most significant trademark.Additionally, the Company has numerous registered trademarks, trade names andlogos, both in the United States and internationally.

 

**Available Information**

 

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

 

Since November 15, 2002, theCompany has made its annual reports, quarterly reports and currentreports available on its website as soon as reasonably practicable after suchreport has been filed with the SEC.

 

**ITEM 2.   PROPERTIES**

 

The following sets forth the Company’s material property holdings as ofMarch 31, 2003.

 
| **Location**                  |   | **FacilityType / Use**            |   | **Owned or  Leased** |   | **Sq Ft./  Acres** |   |
|-------------------------------|--------|-----------------------------------|--------|----------------------|--------|--------------------|--------|
| Thief  River Falls, Minnesota |   | Manufacturing  / Corporate Office |   | Owned                |   | 558,000            |   |
| Thief  River Falls, Minnesota |   | Warehouse                         |   | Leased               |   | 24,400             |   |
| Thief  River Falls, Minnesota |   | Warehouse                         |   | Leased               |   | 7,550              |   |
| Thief  River Falls, Minnesota |   | Land  (in acres)                  |   | Owned                |   | 140 Acres          |   |
| Madison,  South Dakota        |   | Manufacturing                     |   | Owned                |   | 40,000             |   |
| Madison,  South Dakota        |   | Land                              |   | Owned                |   | 10 Acres           |   |
| Bucyrus,  Ohio                |   | Distribution  Center              |   | Owned                |   | 220,000            |   |
| Winnipeg,  Manitoba           |   | Service  Center                   |   | Leased               |   | 10,602             |   |
| Island  Park, Idaho           |   | Test  & Development Facility  |   | Owned                |   | 3,000              |   |
| Island  Park, Idaho           |   | Land                              |   | Owned                |   | 10 Acres           |   |

 

**ITEM 3.   LEGALPROCEEDINGS**

 

Accidents involving personal injury and property damage occur in theuse of snowmobiles, PWC, and ATVs. Claims have been made against the Companyfrom time to time. It is the Company’s policy to vigorously defend againstthese actions. The Company believes that the cases in discovery are adequatelycovered by reserves and product liability insurance. The Company is notinvolved in any legal proceedings which it believes will have the potential fora materially adverse impact on the Company’s business or financial condition.

 

Product liability insurance is presently maintained bythe Company on a “per occurrence” basis (with coverage being provided inrespect of accidents which occurred during the policy year, regardless of whenthe related claim is made) in the amount of $10,000,000 in the aggregate, witha $5,000,000 self-insured retention. The Company believes such insurance isadequate.

 

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**ITEM4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

 

No matters were submitted to the shareholders during the fourth quarterof fiscal 2003.

 

**ITEM 4A.  EXECUTIVEOFFICERS OF REGISTRANT**

 
| **Name**               |   | **Age** |   | **Position**                                     |   |
|------------------------|--------|---------|--------|--------------------------------------------------|--------|
| William G. Ness        |   | 65      |   | Chairman of the Board of Directors               |   |
| Christopher A.  Twomey |   | 55      |   | President and Chief Executive Officer            |   |
| Timothy C.  Delmore    |   | 49      |   | Chief Financial Officer and Corporate Secretary  |   |
| Terry J. Blount        |   | 60      |   | Vice President – Human Resources            |   |
| Robert Bonev           |   | 45      |   | Vice President – Sales and Marketing        |   |
| Ronald G. Ray          |   | 54      |   | Vice President – Manufacturing              |   |
| Roger H. Skime         |   | 60      |   | Vice President – Research & Development |   |
| Ole E. Tweet           |   | 56      |   | Vice President – New Product Development    |   |

 

**Mr. Ness**has been Chairman of the Board of Directors of the Company since its inceptionin 1983. He is also a director of Northern State Bank and Itasca BemidjiIncorporated.

 

**Mr.Twomey** has been President and Chief Executive Officer of theCompany since January 1986 and a director since 1987. Mr. Twomey is currentlyserving as a director of The Toro Company and Universal Trailer Corporation.

 

**Mr.Delmore** has been Chief Financial Officer of the Company since1986 and has been Corporate Secretary of the Company since 1989. Mr. Delmore, aCPA with seven years of prior public accounting experience, joined the Companyin 1985 as Controller.

 

**Mr.Blount** has been Vice President – Human Resources since Augustof 1996. Mr. Blount has over 30 years of Human Resource experience in the manufacturingfield. Prior to joining the Company, Mr. Blount worked as Vice President-HumanResources at Washington Scientific Industries since 1981.

 

**Mr.Bonev** has been Vice President – Sales and Marketing sinceJune of 2001 and has over 20 years of marketing experience. From February 1999to January 2000, Mr. Bonev served as Vice President of Marketing for OutdoorMarine Corporation. From December 1998 to February 1999, Mr. Bonev was employedby Teledyne Continental Motors, a business segment of Teledyne TechnologiesIncorporated, as Vice President of Sales/Marketing. From June 1993 to December1998, Mr. Bonev was Director of Marketing for Mercury Marine, a division of TheBrunswick Corporation.

 

**Mr. Ray**has been Vice President – Manufacturing since April of 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** has been Vice President – Research and Development ofthe Company since its inception in 1983 and has been employed in the snowmobileindustry for over 40 years.

 

**Mr.Tweet** has been Vice President – New Product Development sinceMay 1992. Prior to that, he had been the Company’s Vice President – Marketingsince its inception in 1983 and has been employed either in the snowmobile orATV industry for over 30 years.

 

8

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**PART II**

 

**ITEM 5****.   MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATEDSTOCKHOLDER MATTERS**

 

The Company’s common stock is traded on the Nasdaq National Marketunder the Nasdaq symbol “ACAT”. Quotations below represent the high and lowsale prices as reported by Nasdaq. The Company’s stock began trading on theNasdaq National Market on June 26, 1990.

 
|                 |   | **Years  ended March 31,** |      |
|----------------------|--------|----------------------------|-----------|
|                 |   | **2003**                   |      | **2002** |   |
| **Quarterly Prices** |   | **High**                   |      | **Low** |   | **High** |   | **Low** |   |
| **First  Quarter**   |   | **$**                      | **20.75** | ** ** | **$** | **16.00** |   | $ | 15.54 |   | $ | 12.95 |   |
| **Second  Quarter**  |   | **$**                      | **17.41** | ** ** | **$** | **13.54** |   | $ | 16.46 |   | $ | 12.91 |   |
| **Third  Quarter**   |   | **$**                      | **18.20** | ** ** | **$** | **12.95** |   | $ | 17.90 |   | $ | 12.00 |   |
| **Fourth  Quarter**  |   | **$**                      | **17.93** | ** ** | **$** | **12.35** |   | $ | 20.35 |   | $ | 15.95 |   |

 

As of June 9, 2003, the Company had approximately 494stockholders of record, including the nominee of Depository Trust Company which held 12,918,173 shares of common stock.

 

The Company has paid a quarterly dividend of $0.06 pershare since February 2, 1995.

 

**ITEM 6****.   SELECTED FINANCIAL DATA**

 
|                                              |   | **Years  ended March 31,** |        |
|---------------------------------------------------|--------|----------------------------|-------------|
| **(In thousands, except per share amounts)**      |   | **2003**                   |        | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
| **INCOME STATEMENT DATA:**                        |   |                       | ** **  |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Net  sales**                                    |   | **$**                      | **577,070** |   | $ | 556,079 |   | $ | 502,449 |   | $ | 461,460 |   | $ | 464,738 |   |
| **Cost  of goods sold**                           |   | **448,266**                |        | 433,297 |   | 398,019 |   | 376,202 |   | 367,874 |   |
| **Gross  profit**                                 |   | **128,804**                |        | 122,782 |   | 104,430 |   | 85,258 |   | 96,864 |   |
| **Selling,  general and administrative expenses** |   | **81,757**                 |        | 83,228 |   | 68,712 |   | 79,550 |   | 63,933 |   |
| **Operating  profit**                             |   | **47,047**                 |        | 39,554 |   | 35,718 |   | 5,708 |   | 32,931 |   |
| **Interest  income**                              |   | **1,442**                  |        | 2,543 |   | 4,563 |   | 4,591 |   | 2,933 |   |
| **Interest  expense**                             |   | **—**                 |        | — |   | — |   | — |   | (27 | ) |
| **Earnings  before income taxes**                 |   | **48,489**                 |        | 42,097 |   | 40,281 |   | 10,299 |   | 35,837 |   |
| **Income  taxes**                                 |   | **15,786**                 |        | 13,471 |   | 13,293 |   | 2,678 |   | 12,722 |   |
| **Net  earnings**                                 |   | **$**                      | **32,703**  | **(1)** | $ | 28,626 |   | $ | 26,988 |   | $ | 7,621 | (2) | $ | 23,115 |   |
| **Net  earnings per share**                       |   |                       |        |   |   |   |   |   |   |   |   |
| **Basic**                                         |   | **$**                      | **1.46**    |   | $ | 1.21 |   | $ | 1.11 |   | $ | 0.30 | (2) | $ | 0.84 |   |
| **Diluted**                                       |   | **$**                      | **1.45**    |   | $ | 1.20 |   | $ | 1.10 |   | $ | 0.30 | (2) | $ | 0.84 |   |
| **Cash  dividends per share**                     |   | **$**                      | **0.24**    |   | $ | 0.24 |   | $ | 0.24 |   | $ | 0.24 |   | $ | 0.24 |   |
| **Weighted  average shares outstanding**          |   |                       |        |   |   |   |   |   |   |   |   |
| **Basic**                                         |   | **22,396**                 |        | 23,587 |   | 24,231 |   | 25,535 |   | 27,632 |   |
| **Diluted**                                       |   | **22,615**                 |        | 23,925 |   | 24,457 |   | 25,586 |   | 27,668 |   |
|                                              |   |                       |        |   |   |   |   |   |   |   |   |
|                                              |   | **As of March 31,**        |        |
|                                              |   | **2003**                   |        | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
| **BALANCE  SHEET DATA** (In  thousands):          |   |                       |        |   |   |   |   |   |   |   |   |
| **Cash  and short-term investments**              |   | **$**                      | **91,295**  |   | $ | 102,040 |   | $ | 99,828 |   | $ | 108,277 |   | $ | 95,208 |   |
| **Working  capital**                              |   | **136,964**                |        | 133,785 |   | 127,216 |   | 132,072 |   | 142,039 |   |
| **Total  assets**                                 |   | **278,291**                |        | 268,595 |   | 255,658 |   | 246,535 |   | 240,146 |   |
| **Long-term  debt**                               |   | **—**                 |        | — |   | — |   | — |   | — |   |
| **Shareholders’  equity**                    |   | **187,286**                |        | 181,638 |   | 170,442 |   | 162,558 |   | 175,479 |   |

 

----

(1)                                  Infiscal 2003, the Company’s results included a net reduction of restructuringaccruals and other costs related to the fiscal 2000 exit from the personalwatercraft (PWC) business.  Thisreduction increased: pretax earnings $5.4 million, net earnings $3.4 millionand diluted earnings per share $0.15.

 

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

 

9

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**QUARTERLYFINANCIAL DATA******(unaudited)

 
| **(In thousands, except per share amounts)** |        | **Total  Year** |        | **First  Quarter** |       | **Second  Quarter** |       | **Third  Quarter** |        | **Fourth  Quarter** |       |
|----------------------------------------------|-------------|-----------------|-------------|--------------------|------------|---------------------|------------|--------------------|-------------|---------------------|------------|
| **Net  Sales**                               |        |            |        |               |       |                |       |               |        |                |       |
| **2003**                                     |        | **$**           | **577,070** | ** **         | **$**      | **78,283**          | ** ** | **$**              | **211,242** | ** **          | **$**      | **176,175** | ** ** | **$** | **111,370** | ** ** |
| 2002                                         |        | 556,079         |        | 77,821             |       | 211,081             |       | 167,917            |        | 99,260              |       |
| 2001                                         |        | 502,449         |        | 86,024             |       | 190,582             |       | 145,628            |        | 80,215              |       |
|                                         |        |            |        |               |       |                |       |               |        |                |       |
| **Gross  Profit**                            |        |            |        |               |       |                |       |               |        |                |       |
| **2003**                                     |        | **$**           | **128,804** | ** **         | **$**      | **18,843**          | ** ** | **$**              | **52,970**  | ** **          | **$**      | **39,653** | ** ** | **$** | **17,338** | ** ** |
| 2002                                         |        | 122,782         |        | 18,876             |       | 51,925              |       | 35,642             |        | 16,339              |       |
| 2001                                         |        | 104,430         |        | 19,431             |       | 43,937              |       | 27,709             |        | 13,353              |       |
|                                         |        |            |        |               |       |                |       |               |        |                |       |
| **Net  Earnings (Loss)**                     |        |            |        |               |       |                |       |               |        |                |       |
| **2003**                                     |        | **$**           | **32,703**  | ** **         | **$**      | **1,969**           | ** ** | **$**              | **20,520**  | ** **          | **$**      | **11,912** | ** ** | **$** | **(1,698** | **)** |
| 2002                                         |        | 28,626          |        | 1,957              |       | 20,332              |       | 8,151              |        | (1,814              | )          |
| 2001                                         |        | 26,988          |        | 2,052              |       | 18,606              |       | 7,365              |        | (1,035              | )          |
|                                         |        |            |        |               |       |                |       |               |        |                |       |
| **Net  Earnings (Loss) Per Share**           |        |            |        |               |       |                |       |               |        |                |       |
| **2003**                                     | **Basic**   |            | **$**       | **1.46**           | ** ** | **$**               | **0.09**   | ** **         | **$**       | **0.92**            | ** ** | **$** | **0.54** | ** ** | **$** | **(0.08** | **)** |
|                                         | **Diluted** |            | **1.45**    | ** **         | **0.08**   | ** **          | **0.91**   | ** **         | **0.53**    | ** **          | **(0.08**  | **)** |
| 2002                                         | Basic       |            | 1.21        |               | 0.08       |                | 0.85       |               | 0.35        |                | (0.08      | ) |
|                                         | Diluted     |            | 1.20        |               | 0.08       |                | 0.84       |               | 0.34        |                | (0.08      | ) |
| 2001                                         | Basic       |            | 1.11        |               | 0.08       |                | 0.77       |               | 0.31        |                | (0.04      | ) |
|                                         | Diluted     |            | 1.10        |               | 0.08       |                | 0.76       |               | 0.30        |                | (0.04      | ) |

 

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

 

## **Results of Operations**

** **

**2003vs. 2002** – During fiscal 2003 net sales increased 3.8%to $577,070,000 from $556,079,000 in fiscal 2002. ATV unit volume increased9.2%, snowmobile unit volume decreased 11.5% and dollar sales of parts,garments and accessories increased $2,260,000. Net sales also increased$4,000,000 due to a reduction of a restructuring accrual for estimated salesincentives related to Arctic Cat’s exit from the PWC business in fiscal 2000.The Company believes the continued increase in ATV sales is due both 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.

 

Gross profit increased 4.9% to $128,804,000 in 2003from $122,782,000 in 2002. The gross profit percentage improved to 22.3% versus22.1% in 2002. The improvement of gross profit and gross profit percentages wasdue to the aforementioned reduction of estimated PWC accruals.

 

Selling, general and administrative expenses decreased1.8% to $81,757,000 in 2003 from $83,228,000 in 2002. Decreases in snowmobilemarketing expenses and a $2.4 million reduction of PWC restructuring accrualswere offset by a $1 million increase in other non-exit PWC related accruals andincreased ATV marketing expenses. As a percent of net sales, operating expenseswere 14.2% in 2003 compared with 15.0% in 2002.

 

Operating profits increased 18.9% to $47,047,000 in2003 from $39,554,000 in 2002. As a percent of net sales, operating profitswere 8.2% in 2003 compared to 7.1% in 2002.

 

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

 

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

 

10

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**2002vs. 2001****–** During fiscal 2002 net sales increased10.7% to $556,079,000 from $502,449,000 in fiscal 2001. ATV unit volumeincreased 13.6%, snowmobile unit volume increased 11.1% and dollar sales ofparts, garments and accessories were flat. The Company believes the continuedincrease in ATV net sales is due both to enthusiastic dealer and consumerreception of the Arctic Cat ATV and growth in the ATV market. Snowmobile unitvolume increased because of higher dealer orders related to normal snowfallsduring the prior winter season.

 

Gross profit increased 17.6% to $122,782,000 in 2002from $104,430,000 in 2001 and the gross profit percentage was 22.1% versus20.8% in 2001. The majority of the increase in fiscal 2002 gross profitpercentage is due to the improved dollar yen relationship.

 

Selling, general and administrative expenses increased21.1% to $83,228,000 in 2002 from$68,712,000 in 2001. The increase in operating expenses was mainly dueto increased ATV and snowmobile marketing expenses which were in line withsales increases as well as increased snowmobile and ATV research anddevelopment expenses. As a percent of netsales, operating expenses were 15.0% in 2002 compared with 13.7% in2001.

 

Operating profits increased 10.7% to $39,554,000 in2002 from $35,718,000 in 2001. As a percent of net sales, operating profitswere 7.1% in 2002 and 2001.

 

Interest income decreased 44.3% to $2,543,000 infiscal 2002 from $4,563,000 in fiscal 2001 due to lower yields on invested cashrelated to lower interest rates.

 

Net earnings increased 6.1% to $28,626,000 from$26,988,000 for fiscal 2001. Diluted earnings per share increased 9.1% to $1.20per share in fiscal 2002 from $1.10 per share in fiscal 2001. Net earnings as apercent of net sales were 5.1% and 5.4% in 2002 and 2001, respectively.

 

**Critical Accounting Policies**

 

The preparation of the consolidated financial statements in accordancewith accounting principles generally accepted in the United States requiresmanagement to make certain estimates and assumptions that affect the amount ofreported assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the consolidated financial statements and revenues and expensesduring the periods reported. Actual results may differ from those estimates.The Company reviewed the development and selection of the critical accountingpolicies and believes the following are the most critical accounting policiesthat could have an effect on the Company’s reported results. These criticalaccounting policies and estimates have been reviewed with the audit committeeof the Board of Directors.

** **

**RevenueRecognition –** The Company recognizes revenue andprovides for estimated marketing and sales incentive costs when products areshipped to dealers and distributors. Arctic Cat has agreements with financecompanies to repurchase products repossessed up to certain limits. Arctic Cat’sfinancial exposure to repurchase products is limited to the difference betweenthe amount paid to the finance company and the resale value of the repossessedproducts. Historically, Arctic Cat has not incurred material losses as a resultof repurchases nor has it provided a financial reserve for repurchases. Adversechanges in retail sales could cause this situation to change.

 

**Marketingand Sales Incentive Costs –** The Company provides forvarious marketing and sales incentive costs which are offered to its dealersand consumers at the latter of when the revenue is recognized or when themarketing and sales incentive program is approved and communicated. Examples ofthese costs include: dealer and consumer rebates, dealer floor plan financingassistance, sales associate incentives and other incentive and promo­tionprograms. Adverse market conditions resulting in lower than expected retailsales could cause accrued marketing and incentive costs to materially increaseif the Company authorizes and communicatesnew programs to its dealers. The Company esti­mates marketing and salesincentive costs based on expected usage and historical experience. The relatedmarketing and sales incentive costs accrual is included in accrued marketing inthe Company’s balance sheet. To the extent current experience differs with previousestimates the accrued liability for marketing and sales incentives is adjustedaccordingly.

 

**ProductWarranties –** The Company generally provides a limitedwarranty to the original owner of snowmobiles for twelve months from the dateof consumer registration and for six months on ATVs. The Company provides forestimated warranty costs at the time of sale based on historical rates andtrends and makes subsequent adjustments to their estimate as actual claimsbecome known or the amounts are determinable. The Company’s product warrantyaccrual was $12.2 million and $12.9 million at March 31, 2003 and 2002. Adversechanges in actual warranty costs compared to the Company’s initial estimatescould cause accrued warranty to materially change.

 

**ProductLiability and Litigation –** The Company is subject toproduct liability claims and other litigation in the normal course of business.Arctic Cat insures for product liability claims although it retains a modestself insured retention accrual within the balance sheet caption Insurance. Theestimated costs resulting from any losses over insured amounts are charged tooperating expenses when it is probable a loss has been incurred and the amountof the loss is reasonably determinable.

 

11

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The Company utilizes historical trends and otheranalysis to assist in determining the appropriate loss. Adverse changes in thefinal deter-mination of product liability or other claims made against theCompany could have a material impact on the Company’s financial condition.

 

**New Pronouncements**

 

The FASB issued FIN 45, Guarantor’s Accounting and DisclosureRequirements for Guarantees, including Indirect Guarantees of Indebtedness ofOthers, on November 25, 2002. The interpretation expands existing disclosurerequirements for most guarantees and clarifies that at the time a companyissues a guarantee, the company must recognize an initial liability for the fairvalue, or market value, of the obligations it assumes under that guarantee andmust disclose that information in itsinterim and annual financial statements. The provisions related torecognizing a liability at inception of the guarantee for the fair value of the guarantor’s obligations would notapply to product warranties or to guarantees accounting for as derivatives. TheCompany adopted the disclosure requirements on March 31, 2003. TheCompany believes FIN 45 will not have a material impact on its consolidatedfinancial statements.

 

FIN 46 is an interpretation of Accounting ResearchBulletin No. 51, *Consolidated Financial Statements*. FIN 46, which was issuedin January 2003, applies immediately to variable interest entitles created orobtained after January 31, 2003 and it applies in the first fiscal year orinterim period beginning after June 15, 2003, to variable interest entities inwhich an enterprise holds a variable interest that is acquired before February1, 2003. The adoption of FIN 46 will not have a material impact on theCompany’s consolidated financial statements.

 

In June 2002, FASB issued SFAS No. 146, Accounting forCosts Associated with Exit or Disposal Activities. SFAS No. 146 addressesaccounting and processing for costs associated with the exit or disposalactivities and nullifies Emerging Issues Task Force (EITF) Issue 94-3. SFAS No.146 requires the recognition of the liability for a cost associated with anexit or disposal activity when the liability is incurred versus the date acompany commits to an exit plan. In addition, SFAS No. 146 states the liabilityshould be initially measured at fair value. The requirements of SFAS No. 146are effective for exit or disposal activities that are initiated after December31, 2002. The adoption of SFAS No. 146 did not have a material effect on theCompany’s consolidated financial statements.

 

**Liquidity and Capital Resources**

 

The seasonality of the Company’s snowmobile production cycle and thelead time between the commencement of snowmobile and ATV production in theearly spring and commencement of shipments late in the first quarter haveresulted in significant fluctuations in the Company’s working capitalrequirements during the year. Historically, the Company has financed itsworking capital requirements out of available cash balances at the beginningand end of the production cycle and with short-term bank borrowings during themiddle of the cycle. The Company believes current available cash and cashgenerated from operations will provide sufficient funds to finance the Companyon a short and long-term basis.

 

**Cash and Short-Term Investments**

 

Cash and short-term investments were $91,295,000 at March 31, 2003compared to $102,040,000 at March 31, 2002. The Company’s cash balancestraditionally peak early in the fourth quarter and then decrease as workingcapital requirements increase when the Company’s snowmobile and spring ATV production cycles begin. The Company’s investment objectivesare first, safety of principal and second, rate of return.

 

**Financing Arrangements and Cash Flows**

 

The Company has a $60,000,000 unsecured bank credit agreement for thedocumentary and stand-by letters of credit and for working capital purposes.Total working capital borrowings under the credit agreement are limited to$45,000,000 during the last six months of the fiscal year. The total letters ofcredit issued at March 31, 2003 were $24,399,000, of which $21,712,000 wasissued to Suzuki Motor Corporation for engine purchases.

 

The Company has agreements with certain financecompanies to provide snowmobile and ATV floor plan financing for the Company’sNorth American dealers. These agreements improve the Company’s liquidity byfinancing dealer purchases of products without requiring substantial use of theCompany’s working capital. The Company is paid by the floor plan companiesshortly after shipment and as part of its marketing programs the Company paysthe floor plan financing of its dealers for certain set time periods dependingon the size of a dealer’s order. The financing agreements require repurchase ofrepossessed new and unused units and set limits upon the Company’s potentialliability for annual repurchases. The aggregate potential liability wasapproximately $15,612,000 at March 31, 2003. No material losses have beenincurred by the Company under these agreements, which are terminable by eitherparty upon 30 days notice. The Company has also guaranteed approximately 50% ofthe amounts financed by its dealers with its U.S. finance company. At March 31,2003, the Company’s maximum level of exposure under this guarantee wasapproximately $91,431,000. No material losses have been incurred by the Companyunder this agreement. The Company believes current available cash and cashgenerated from operations provide sufficient funding in the event there is arequirement to perform under this guarantee. As of

 

12

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April 1, 2003 the Company entered into a new dealer floorplan financingagreement with Textron Financial Corporation under which it believes dealerfloorplan guarantees will decrease to less than $1 million.

 

In 2003, the Company invested $21,475,000 in capitalexpenditures. The Company expects that fiscal 2004 capital expenditures,including tooling, will be approximately $27,000,000. Since 1996, the Companyhas repurchased over 8 million shares of common stock. In August 2002, theCompany’s Board of Directors authorized an additional $20,000,000 sharerepurchase of which $18,712,000 remains available for repurchase. The Companybelieves that cash generated from operations and available cash will besufficient to meet its working capital, regular quarterly dividend, sharerepurchase program and capital expenditure requirements on a short andlong-term basis.

.

**Inflation and Exchange Rates**

 

Inflation is not expected to have a significant impact on the Company’sbusiness. The Company generally has been able to offset the impact ofincreasing costs through a combination of productivity gains and priceincreases.

 

During fiscal 2003, approximately 30% of the Company’scost of sales were purchased from Japanese yen denominated suppliers. Themajority of these purchases were made from Suzuki Motor Corporation whosupplies engines for the Company’s snowmobiles and ATVs. The Company has anagreement with Suzuki Motor Corporation for snowmobile engine purchases toshare the impact of fluctuations in the exchange rate between the U.S. dollarand the Japanese yen above and below a fixed range contained in the agreement. Thisagreement renews annually. During fiscal 2003, the exchange rate fluctuationbetween the U.S. dollar and the Japanese yen had a modest positive impact onthe Company’s operating results. From time to time the Company utilizes foreignexchange hedging contracts to minimize the impact of exchange ratefluctuations. At March 31, 2003, there were no foreign exchange contractsoutstanding for Japanese yen.

 

Sales to Canadian dealers are made in Canadian dollarswith the U.S. dollar serving as the functional currency. During fiscal 2003,sales to Canadian dealers comprised 16.7% of total net sales. During fiscal2003, the exchange rate fluctuation between the U.S. dollar and the Canadiandollar had a modest positive impact on operating profits. The Company hedgedfor this exchange rate fluctuation. At March 31, 2003 there were foreignexchange contracts outstanding related to the Canadian dollar with notionalamounts of $46,770,000.

 

**Forward-Looking Statements**

 

The Private Securities Litigation Reform Act of 1995 provides a safeharbor for certain forward-looking statements. This Report on Form 10-K, aswell as the Company’s Annual Report and future filings with the Securities andExchange Commission, the Company’s press releases and oral statements made withthe approval of an authorized executive officer, contain forward-lookingstatements that reflect the Company’s current views with respect to futureevents and financial performance. These forward-looking statements are subjectto certain risks and uncertainties that could cause actual results to differmaterially from historical 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.

 

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

 

The Company is subject to certain market risk relating to changes  in interest rates and foreign currencyexchange rates. Information regarding foreign currency exchange rates isdiscussed within “Management’s Discussion and Analysis – Inflation and ExchangeRate” and footnote A to Financial Statements. Interest rate market risk ismanaged for cash and short-term investments by investing in a diversifiedfrequently maturing portfolio consisting of municipal bonds and money marketfunds 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.

 

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

 

Financial Statements, Notes, and Report of Independent Certified PublicAccountants appear on pages 20 through 32. Quarterly financial data appears inItem 6.

 

**ITEM 9****.     CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

13

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**PART III**

 

**ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

The information included under the heading “Election of Directors” and“Beneficial Ownership of Capital Stock-Section 16(a) Beneficial OwnershipReporting Compliance” in the Company’s definitive Proxy Statement for theAnnual Meeting of Shareholders to be held August 7, 2003, is incorporatedherein by reference.

 

Pursuant to instruction 3 to Item 401(b) of RegulationS-K, information as to executive officers of the Company is set forth in Item4A of this Form 10-K.

 

**ITEM 11.   EXECUTIVE COMPENSATION**

 

The information included under the heading “Executive Compensation andOther Information” in the Company’s definitive Proxy Statement for the AnnualMeeting of Shareholders to be held August 7, 2003, is incorporated herein byreference.

 

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

 

The information included under the heading “Beneficial Ownership ofCapital Stock” in the Company’s definitive Proxy Statement for the AnnualMeeting of Shareholders to be held August 7, 2003, is incorporated herein byreference.

 

**ITEM13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

 

Information with respect to certain relationships and relatedtransactions, appearing under the heading “Executive Compensation and OtherInformation-Certain Transactions” in the Company’s definitive Proxy Statementfor the Annual Meeting of Shareholders to be held on August 7, 2003, isincorporated herein by reference.

 

**ITEM 14.   CONTROLS AND PROCEDURES**

 

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, have conducted anevaluation of the effectiveness of the design and operation of theCompany’s disclosure controls and procedures pursuant to Rule 13a-15 under theSecurities Exchange Act of 1934 (the “1934 Act”) within 90 days prior to thefiling date of this annual report. Based onthat evaluation, the Company’s Chief ExecutiveOfficer 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.

 

Therehave been no significant changes in internal controls, or in other factors thatcould that could significantly affect internal controls, subsequent to the datethe Chief Executive Officer and Chief Financial Officer completed theirevaluation.

 

14

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**PART IV**

 

**ITEM 15.   EXHIBITS, FINANCIAL STATEMENTSCHEDULES, AND REPORTS ON FORM 8-K**

 

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

 

## **1. Financial Statements.**

 

The following consolidated financial statements of theCompany and its subsidiaries are filed as part of this Form 10-K:

 
| **(i)**   | Consolidated Balance Sheets as of March 31, 2003 and 2002                                                     |
|-----------|---------------------------------------------------------------------------------------------------------------|
|      |                                                                                                          |
| **(ii)**  | Consolidated Statements of Earnings for the three years ended March 31,  2003, 2002 and 2001                  |
|      |                                                                                                          |
| **(iii)** | Consolidated Statements of Shareholders’ Equity for the three years  ended March 31, 2003, 2002 and 2001 |
|      |                                                                                                          |
| **(iv)**  | Consolidated Statements of Cash Flows for the three years ended March  31, 2003, 2002 and 2001                |
|      |                                                                                                          |
| **(v)**   | Notes to Consolidated Financial Statements                                                                    |
|      |                                                                                                          |
| **(vi)**  | Report of Independent Certified Public Accountants                                                            |

 

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

None.

 

## **3. Exhibits**

 
|      |   |                                                                                                                                                                 |   | **Method of Filing** |   |
|-----------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------|--------|
| **3(a)**  |   | Amended and Restated Articles of Incorporation 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                   | )      |
|      |   |                                                                                                                                                                 |   |                 |   |
| **21**    |   | Subsidiaries of the Registrant                                                                                                                                       |   | (2                   | )      |
|      |   |                                                                                                                                                                 |   |                 |   |
| **23**    |   | Consent of Independent Certified Public Accountants                                                                                                                  |   | (2                   | )      |
|      |   |                                                                                                                                                                 |   |                 |   |
| **99.1**  |   | Certification  of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxly Act  of 2002.                                                                 |   | (2                   | )      |
|      |   |                                                                                                                                                                 |   |                 |   |
| **99.2**  |   | Certification  of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxly Act  of 2002.                                                                 |   | (2                   | )      |

 

**(b) Reports on Form 8-K**

No reports on Form 8-Kwere filed during the three months ended March 31, 2003.

 

**(c) Exhibits**

Reference is made to Item 14(a) 3.

 

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

 

(2)          Filed with this Form 10-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 to the Company’s Registrationon Form S-8 filed with the SEC on September 6, 2002.

 

15

----

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15 (d) of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto dulyauthorized, on the 27th day of June, 2002.

 
|   | **ARCTIC CAT INC.**                               |   |
|--------|---------------------------------------------------|--------|
|   |                                              |   |
|   | /s/Christopher A.  Twomey                         |   |
|   | Christopher A. Twomey                             |   |
|   | President, Chief  Executive Officer  and Director |   |

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theRegistrant and in the capacities and on the date indicated.

 
| **Signature** |                                            | **Date** |
|---------------|-------------------------------------------------|----------|
| /s/           | William G. Ness                                 |     | June 27, 2003 |
|          | William G. Ness                                 |     |   |
|          | Chairman of the Board and Director              |     |
|          |                                            |     |   |
| /s/           | Christopher A. Twomey                           |     | June 27, 2003 |
|          | Christopher A. Twomey                           |     |   |
|          | President, Chief Executive Officer and Director |     |
|          | (Principle Executive Officer)                   |     |   |
|          |                                            |     |   |
| /s/           | Timothy C. Delmore                              |     | June 27, 2003 |
|          | Timothy C. Delmore                              |     |
|          | Chief Financial Officer                         |     |
|          | (Principle Financial and Accounting Officer)    |     |
|          |                                            |     |   |
| /s/           | Robert J. Dondelinger                           |     | June 27, 2003 |
|          | Robert J. Dondelinger, Director                 |     |   |
|          |                                            |     |   |
| /s/           | William I. Hagen                                |     | June 27, 2003 |
|          | William I. Hagen, Director                      |     |   |
|          |                                            |     |   |
| /s/           | John C. Heinmiller                              |     | June 27, 2003 |
|          | John C. Heinmiller, Director                    |     |   |
|          |                                            |     |   |
| /s/           | Gregg A. Ostrander                              |     | June 27, 2003 |
|          | Gregg A. Ostrander, Director                    |     |   |
|          |                                            |     |   |
| /s/           | Kenneth J. Roering                              |     | June 27, 2003 |
|          | Kenneth J. Roering, Director                    |     |   |
|          |                                            |     |   |
| /s/           | Motoo Murakami                                  |     | June 27, 2003 |
|          | Motoo Murakami, Director                        |     |   |

 

16

----

 

**CERTIFICATIONS**

 

I, Christopher A. Twomey, certify that:

 

1.               I have reviewedthis annual report on Form 10-K of Arctic Cat Inc.;

 

2.               Based on myknowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report.

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this annual report, fairly present in all material respects the financialcondition, results of operations and cash flows of the Registrant as of, andfor, the periods presented in this annual report.

 

4.               The Registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the Registrant and have:

a.         Designed such disclosurecontrols and procedures to ensure that material information relating to theRegistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisannual report is being prepared.

b.        Evaluated theeffectiveness of the Registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

c.         Presented in this annualreport our conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date.

 

5.               The Registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofRegistrant’s board of directors (or persons performing the equivalentfunctions):

a.         All significantdeficiencies in the design or operation of internal controls which couldadversely affect the Registrant’s ability to record, process, summarize andreport financial data and have identified for the Registrant’s auditors anymaterial weakness in internal controls; and

b.        Any fraud, whether or notmaterial, that involves management or other employees who have a significantrole in the Registrant’s internal controls; and

 

6.               The Registrant’sother certifying officers and I have indicated in this annual report whether ornot there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 
| Date:  June 27, 2003 |                                   |   |
|----------------------|----------------------------------------|--------|
|                 | /s/  Christopher A. Twomey             |   |
|                 | Christopher  A. Twomey,                |   |
|                 | President  and Chief Executive Officer |   |

 

17

----

 

**CERTIFICATIONS**

 

I, Timothy C. Delmore, certify that:

 

1.               I have reviewedthis annual report on Form 10-K of Arctic Cat Inc.;

 

2.               Based on myknowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report.

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this annual report, fairly present in all material respects the financialcondition, results of operations and cash flows of the Registrant as of, andfor, the periods presented in this annual report.

 

4.               The Registrant’sother certifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the Registrant and have:

a.         Designed such disclosurecontrols and procedures to ensure that material information relating to theRegistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisannual report is being prepared.

b.        Evaluated theeffectiveness of the Registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

c.         Presented in this annualreport our conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date.

 

5.               The Registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofRegistrant’s board of directors (or persons performing the equivalentfunctions):

a.         All significantdeficiencies in the design or operation of internal controls which couldadversely affect the Registrant’s ability to record, process, summarize andreport financial data and have identified for the Registrant’s auditors anymaterial weakness in internal controls; and

b.        Any fraud, whether or notmaterial, that involves management or other employees who have a significantrole in the Registrant’s internal controls; and

 

6.               The Registrant’sother certifying officers and I have indicated in this annual report whether ornot there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date: June 27, 2003 |                                |   |
|---------------------|-------------------------------------|--------|
|                |   /s/  Timothy C. Delmore |   |
|                | Timothy  C. Delmore,                |   |
|                | Chief  Financial Officer            |   |

 

18

----

 

**CONSOLIDATED BALANCE SHEETS**

 
|                                                                                                                                    |   | **March 31,**   |            |
|-----------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------|-----------------|
| **Arctic Cat  Inc.**                                                                                                                    |   | **2003**        |            | **2002** |   |
| **ASSETS**                                                                                                                              |   |            | ** **      |   | ** ** |
| **Current Assets**                                                                                                                      |   |            |            |   |   |
| **Cash and equivalents**                                                                                                                |   | **$**           | **33,081,000**  | ** ** | **$** | 43,466,000 |   |
| **Short-term investments**                                                                                                              |   | **58,214,000**  | ** **      | **58,574,000** |   |
| **Accounts receivable,  less allowances**                                                                                               |   | **29,018,000**  | ** **      | **23,819,000** |   |
| **Inventories**                                                                                                                         |   | **71,723,000**  | ** **      | **61,552,000** |   |
| **Prepaid expenses**                                                                                                                    |   | **3,829,000**   | ** **      | **3,395,000** |   |
| **Income taxes receivable**                                                                                                             |   | **5,009,000**   | ** **      | **3,937,000** |   |
| **Deferred income taxes**                                                                                                               |   | **14,417,000**  | ** **      | **16,644,000** |   |
| **Total current  assets**                                                                                                               |   | **215,291,000** | ** **      | **211,387,000** |   |
|                                                                                                                                    |   |            |            |   |   |
| **Property and Equipment  – At Cost**                                                                                              |   |            |            |   |   |
| **Machinery, equipment  and tooling**                                                                                                   |   | **110,924,000** | ** **      | **101,296,000** |   |
| **Land, buildings and improvements**                                                                                                    |   | **20,428,000**  | ** **      | **19,257,000** |   |
|                                                                                                                                    |   | **131,352,000** |            | **120,553,000** |   |
| **Less accumulated depreciation**                                                                                                       |   | **68,352,000**  | ** **      | **63,345,000** |   |
|                                                                                                                                    |   | **63,000,000**  |            | **57,208,000** |   |
|                                                                                                                                    |   | **$**           | **278,291,000** |   | **$** | 268,595,000 | ** ** |
|                                                                                                                                    |   |            |            |   |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                          |   |            | ** **      |   | ** ** |
| **Current Liabilities**                                                                                                                 |   |            |            |   |   |
| **Accounts payable**                                                                                                                    |   | **$**           | **35,865,000**  | ** ** | **$** | 27,788,000 |   |
| **Accrued expenses**                                                                                                                    |   | **42,462,000**  | ** **      | **49,814,000** |   |
| **Total current  liabilities**                                                                                                          |   | **78,327,000**  | ** **      | **77,602,000** |   |
|                                                                                                                                    |   |            |            |   |   |
| **Deferred Income  Taxes**                                                                                                              |   | **12,678,000**  | ** **      | **9,355,000** |   |
|                                                                                                                                    |   |            |            |   |   |
| **Commitments and  Contingencies**                                                                                                      |   | **—**      | ** **      | **—** |   |
|                                                                                                                                    |   |            |            |   |   |
| **Shareholders’ Equity**                                                                                                           |   |            |            |   |   |
| **Preferred stock, par  value $1.00; 2,050,000 shares authorized; none issued**                                                         |   | **—**      | ** **      | **—** |   |
| **Preferred stock –  Series A Junior Participating, par value $1.00; 450,000 shares authorized;  none issued**                     |   | **—**      | ** **      | **—** |   |
| **Common stock, par value  $.01; 37,440,000 shares authorized; shares issued and outstanding, 14,487,849  in 2003; 15,694,316 in 2002** |   | **144,000**     | ** **      | **157,000** |   |
| **Class B common stock,  par value $.01; 7,560,000 shares authorized, issued, and outstanding**                                         |   | **76,000**      | ** **      | **76,000** |   |
| **Accumulated other  comprehensive loss**                                                                                               |   | **(336,000**    | **)**           | **(122,000** | ) |
| **Retained earnings**                                                                                                                   |   | **187,402,000** | ** **      | **181,527,000** |   |
|                                                                                                                                    |   | **187,286,000** |            | **181,638,000** |   |
|                                                                                                                                    |   | **$**           | **278,291,000** |   | **$** | 268,595,000 |   |

 

The accompanying notes are an integral part of these statements.

 

19

----

 

**CONSOLIDATED STATEMENTS OF EARNINGS**

** **
|                                              |   | **Years ended March 31,** |            |
|---------------------------------------------------|--------|---------------------------|-----------------|
| **Arctic Cat  Inc.**                              |   | **2003**                  |            | **2002** |   | **2001** |   |
| **Net sales**                                     |   | **$**                     | **577,070,000** | ** ** | **$** | 556,079,000 |   | $ | 502,449,000 |   |
| **Cost of goods sold**                            |   | **448,266,000**           | ** **      | **433,297,000** |   | 398,019,000 |   |
| **Gross profit**                                  |   | **128,804,000**           | ** **      | **122,782,000** |   | 104,430,000 |   |
|                                              |   |                      |            |   |   |   |   |
| **Selling, general and  administrative expenses** |   | **84,161,000**            | ** **      | **83,228,000** |   | 68,712,000 |   |
| **Watercraft exit costs**                         |   | **(2,404,000**            | **)**           | **—** | ** ** | **—** |   |
| **Operating profit**                              |   | **47,047,000**            | ** **      | **39,554,000** |   | 35,718,000 |   |
|                                              |   |                      |            |   |   |   |   |
| **Other income**                                  |   |                      |            |   |   |   |   |
| **Interest income**                               |   | **1,442,000**             | ** **      | **2,543,000** |   | 4,563,000 |   |
| **Earnings Before Income  Taxes**                 |   | **48,489,000**            | ** **      | **42,097,000** |   | 40,281,000 |   |
| **Income tax expense**                            |   | **15,786,000**            | ** **      | **13,471,000** |   | 13,293,000 |   |
| **Net Earnings**                                  |   | **$**                     | **32,703,000**  | ** ** | **$** | 28,626,000 |   | $ | 26,988,000 |   |
| **Net Earnings Per Share**                        |   |                      |            |   |   |   |   |
| **Basic**                                         |   | **$**                     | **1.46**        | ** ** | **$** | 1.21 |   | $ | 1.11 |   |
| **Diluted**                                       |   | **$**                     | **1.45**        | ** ** | **$** | 1.20 |   | $ | 1.10 |   |
| **Weighted average shares  outstanding**          |   |                      |            |   |   |   |   |
| **Basic**                                         |   | **22,396,000**            | ** **      | **23,587,000** |   | 24,231,000 |   |
| **Diluted**                                       |   | **22,615,000**            | ** **      | **23,925,000** |   | 24,457,000 |   |

 

The accompanying notes are an integral part of these statements.

 

20

----

 

**CONSOLIDATEDSTATEMENTS 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, 2000                                        |   | 17,327,975       |       | $                | 173,000     |          | 7,560,000     |              | $          | 76,000         |       | $               | —     |            | $          | **—**      | ** ** | **$** | 162,309,000 |   | $ | 162,558,000 |   |
| Exercise of stock options                                         |   | 290,859          |       | 3,000            | ** **  | **—**    | ** **    | **—**        |       | 2,984,000      | ** ** | **—**      | ** ** | **—**      |       | 2,987,000       |       |
| Tax benefits from stock  option exercises                         |   | **—**       | ** ** | **—**       | ** **  | **—**    | ** **    | **—**        |       | 95,000         | ** ** | **—**      | ** ** | **—**      |       | 95,000          |       |
| Repurchase of common stock                                        |   | (1,390,422       | )          | (14,000          | **)**       | **—**    | ** **    | **—**        |       | (3,079,000     | **)**      | **—**      |       | (13,598,000     | )          | (16,691,000     | )          |
| Other comprehensive income:                                       |   |             |       |             |        |          |          |              |       |           |       |            |       |            |       |            |       |
| Net earnings                                                      |   | **—**       | ** ** | **—**       | ** **  | **—**    | ** **    | **—**        | ** ** | **—**     | ** ** | **—**      |       | 26,988,000      |       | 26,988,000      |       |
| Unrealized gain on  securities available-for-sale, net of tax     |   | **—**       | ** ** | **—**       | ** **  | **—**    | ** **    | **—**        | ** ** | **—**     |       | 320,000         | ** ** | **—**      |       | 320,000         |       |
| Total other comprehensive  income                                 |   | **—**       | ** ** | **—**       | ** **  | **—**    | ** **    | **—**        | ** ** | **—**     | ** ** | **—**      | ** ** | **—**      |       | 27,308,000      |       |
| Dividends ($.24 per share)                                        |   | **—**       | ** ** | **—**       | ** **  | **—**    | ** **    | **—**        | ** ** | **—**     | ** ** | **—**      |       | (5,815,000      | )          | (5,815,000      | )          |
| Balances at March 31, 2001                                        |   | 16,228,412       |       | 162,000          |        | 7,560,000     |          | 76,000            | ** ** | **—**     |       | 320,000         |       | 169,884,000     |       | 170,442,000     |       |
| Exercise of stock options                                         |   | 801,869          |       | 8,000            | ** **  | **—**    | ** **    | **—**        |       | 7,922,000      | ** ** | **—**      | ** ** | **—**      |       | 7,930,000       |       |
| Tax benefits from stock  option exercises                         |   | **—**       | ** ** | **—**       | ** **  | **—**    | ** **    | **—**        |       | 1,256,000      | ** ** | **—**      | ** ** | **—**      |       | 1,256,000       |       |
| Repurchase of common stock                                        |   | (1,335,965       | )          | (13,000          | **)**       | **—**    | ** **    | **—**        |       | (9,178,000     | **)**      | **—**      |       | (11,316,000     | )          | (20,507,000     | )          |
| Other comprehensive income:                                       |   |             |       |             |        |          |          |              |       |           |       |            |       |            |       |            |       |
| Net earnings                                                      |   | **—**       | ** ** | **—**       | ** **  | **—**    | ** **    | **—**        | ** ** | **—**     | ** ** | **—**      |       | 28,626,000      |       | 28,626,000      |       |
| Unrealized loss on  securities available-for-sale, net of tax     |   | **—**       | ** ** | **—**       | ** **  | **—**    | ** **    | **—**        | ** ** | **—**     |       | (49,000         | **)**      | **—**      |       | (49,000         | )          |
| Effect  of adoption of SFAS No.133                                |   | **—**       | ** ** | **—**       | ** **  | **—**    | ** **    | **—**        | ** ** | **—**     |       | (741,000        | **)**      | **—**      |       | (741,000        | )          |
| Unrealized gain on  derivative instruments, net of tax            |   | **—**       | ** ** | **—**       | ** **  | **—**    | ** **    | **—**        | ** ** | **—**     |       | 348,000         | ** ** | **—**      |       | 348,000         |       |
| Total other comprehensive  income                                 |   | **—**       | ** ** | **—**       | ** **  | **—**    | ** **    | **—**        | ** ** | **—**     | ** ** | **—**      | ** ** | **—**      |       | 28,184,000      |       |
| Dividends ($.24 per share)                                        |   | **—**       | ** ** | **—**       | ** **  | **—**    | ** **    | **—**        | ** ** | **—**     | ** ** | **—**      |       | (5,667,000      | )          | (5,667,000      | )          |
| **Balances  at March 31, 2002**                                   |   | **15,694,316**   | ** ** | **157,000**      | ** **  | **7,560,000** | ** **    | **76,000**        | ** ** | **—**     | ** ** | **(122,000**    | **)**      | **181,527,000** | ** ** | **181,638,000** | ** ** |
| **Exercise of stock options**                                     |   | **256,160**      | ** ** | **2,000**        | ** **  | **—**    | ** **    | **—**        | ** ** | **2,777,000**  | ** ** | **—**      | ** ** | **—**      | ** ** | **2,779,000**   | ** ** |
| **Tax  benefits from stock option exercises**                     |   | **—**       | ** ** | **—**       | ** **  | **—**    | ** **    | **—**        | ** ** | **1,207,000**  | ** ** | **—**      | ** ** | **—**      | ** ** | **1,207,000**   | ** ** |
| **Repurchase  of common stock**                                   |   | **(1,462,627**   | **)**      | **(15,000**      | **)**       | **—**    | ** **    | **—**        | ** ** | **(3,984,000** | **)**      | **—**      | ** ** | **(21,445,000** | **)**      | **(25,444,000** | **)**      |
| **Other  comprehensive income:**                                  |   |             |       |             |        |          |          |              |       |           |       |            |       |            |       |            |       |
| **Net  earnings**                                                 |   | **—**       | ** ** | **—**       | ** **  | **—**    | ** **    | **—**        | ** ** | **—**     | ** ** | **—**      | ** ** | **32,703,000**  | ** ** | **32,703,000**  | ** ** |
| **Unrealized  gain on securities available-for-sale, net of tax** |   | **—**       | ** ** | **—**       | ** **  | **—**    | ** **    | **—**        | ** ** | **—**     | ** ** | **75,000**      | ** ** | **—**      | ** ** | **75,000**      | ** ** |
| **Unrealized  loss on derivative instruments, net of tax**        |   | **—**       | ** ** | **—**       | ** **  | **—**    | ** **    | **—**        | ** ** | **—**     | ** ** | **(289,000**    | **)**      | **—**      | ** ** | **(289,000**    | **)**      |
| **Total  other comprehensive income**                             |   | **—**       | ** ** | **—**       | ** **  | **—**    | ** **    | **—**        | ** ** | **—**     | ** ** | **—**      | ** ** | **—**      | ** ** | **32,489,000**  | ** ** |
| **Dividends  ($.24 per share)**                                   |   | **—**       | ** ** | **—**       | ** **  | **—**    | ** **    | **—**        | ** ** | **—**     | ** ** | **—**      | ** ** | **(5,383,000**  | **)**      | **(5,383,000**  | **)**      |
| **Balances at March 31, 2003**                                    |   | **14,487,849**   | ** ** | **$**            | **144,000** | ** **    | **7,560,000** | ** **        | **$**      | **76,000**     | ** ** | **$**           | **—** | ** **      | **$**      | **(336,000**    | **)**      | **$** | **187,402,000** | ** ** | **$** | **187,286,000** | ** ** |

 

The accompanying notes are an integral part of these statements.

 

21

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**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
|                                                                                    |   | **Years ended March 31,** |           |
|-----------------------------------------------------------------------------------------|--------|---------------------------|----------------|
| **Arctic Cat  Inc.**                                                                    |   | **2003**                  |           | **2002** |   | **2001** |   |
| **Cash flows from  operating activities**                                               |   |                      |           |   |   |   |   |
| **Net earnings**                                                                        |   | **$**                     | **32,703,000** | ** ** | **$** | 28,626,000 |   | $ | 26,988,000 |   |
| **Adjustments to  reconcile net earnings to net cash provided by operating activities** |   |                      |           |   |   |   |   |
| **Depreciation**                                                                        |   | **15,684,000**            | ** **     | **14,571,000** |   | 9,985,000 |   |
| **Deferred income taxes**                                                               |   | **5,674,000**             | ** **     | **4,694,000** |   | 1,164,000 |   |
| **Tax benefit from stock  option exercises**                                            |   | **1,207,000**             | ** **     | **1,256,000** |   | 95,000 |   |
| **Watercraft  exit costs**                                                              |   | **(6,404,000**            | **)**          | **—** | ** ** | **—** |   |
| **Changes in operating  assets and liabilities, net of effect of watercraft costs**     |   |                      |           |   |   |   |   |
| **Trading securities**                                                                  |   | **(1,031,000**            | **)**          | **(2,845,000** | ) | (8,855,000 | ) |
| **Accounts receivable**                                                                 |   | **(5,199,000**            | **)**          | **1,078,000** |   | (6,549,000 | ) |
| **Inventories**                                                                         |   | **(9,547,000**            | **)**          | **(1,237,000** | ) | 730,000 |   |
| **Prepaid expenses**                                                                    |   | **(436,000**              | **)**          | **(1,536,000** | ) | 479,000 |   |
| **Accounts payable**                                                                    |   | **6,996,000**             | ** **     | **(1,521,000** | ) | 1,991,000 |   |
| **Accrued expenses**                                                                    |   | **(948,000**              | **)**          | **229,000** |   | (192,000 | ) |
| **Income taxes**                                                                        |   | **(1,072,000**            | **)**          | **(3,395,000** | ) | (982,000 | ) |
| **Net cash  provided by operating activities**                                          |   | **37,627,000**            | ** **     | **39,920,000** |   | 24,854,000 |   |
|                                                                                    |   |                      |           |   |   |   |   |
| **Cash flows from  investing activities**                                               |   |                      |           |   |   |   |   |
| **Purchase of property  and equipment**                                                 |   | **(21,475,000**           | **)**          | **(22,231,000** | ) | (23,147,000 | ) |
| **Sale and maturity of available-for-sale securities**                                  |   | **1,861,000**             | ** **     | **1,140,000** |   | 665,000 |   |
| **Purchase of available-for-sale securities**                                           |   | **(350,000**              | **)**          | **—** | ** ** | **—** |   |
| **Net cash used in  investing activities**                                              |   | **(19,964,000**           | **)**          | **(21,091,000** | ) | (22,482,000 | ) |
|                                                                                    |   |                      |           |   |   |   |   |
| **Cash flows from  financing activities**                                               |   |                      |           |   |   |   |   |
| **Proceeds from issuance  of common stock**                                             |   | **2,767,000**             | ** **     | **6,514,000** |   | 2,184,000 |   |
| **Repurchase of common  stock**                                                         |   | **(25,432,000**           | **)**          | **(19,091,000** | ) | (15,888,000 | ) |
| **Dividends paid**                                                                      |   | **(5,383,000**            | **)**          | **(5,667,000** | ) | (5,815,000 | ) |
| **Net cash used in  financing activities**                                              |   | **(28,048,000**           | **)**          | **(18,244,000** | ) | (19,519,000 | ) |
|                                                                                    |   |                      |           |   |   |   |   |
| **Net increase (decrease)  in cash and equivalents**                                    |   | **(10,385,000**           | **)**          | **585,000** |   | (17,147,000 | ) |
| **Cash and equivalents at beginning of year**                                           |   | **43,466,000**            | ** **     | **42,881,000** |   | 60,028,000 |   |
| **Cash and equivalents at  end of year**                                                |   | **$**                     | **33,081,000** | ** ** | **$** | 43,466,000 |   | $ | 42,881,000 |   |
| **Supplemental disclosure  of cash payments for income taxes**                          |   | **$**                     | **12,978,000** | ** ** | **$** | 10,787,000 |   | $ | 14,686,000 |   |

 

Supplemental disclosure of non-cash investing and financing activities:

 

As of March 31, 2003 and2002, the unrealized gain on securities available-for-sale, net of tax was$346,000 and $271,000.

 

As of March 31, 2003 and2002, the unrealized loss on derivative instruments, net of tax was $682,000and $393,000.

 

During2003 and 2002, mature common shares with a fair market value of $12,000 and$1,416,000 were exchanged in settlement for the exercise of certain stockoptions.

 

The accompanying notesare an integral part of these statements.

 

22

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**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**ArcticCat Inc.  **March 31,2003, 2002 and 2001

 

**A             SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

 

Arctic Cat Inc. (the “Company”) operates in a single industry segmentand designs, engineers, manufactures and markets snowmobiles and all-terrainvehicles (ATVs) under the Arctic Cat® brand name, and related parts,garments and accessories principally through its facilities in Thief RiverFalls, Minnesota. The Company’s products are sold through a network ofindependent dealers and distributors located throughout the United States,Canada, Scandinavia and other international markets.

 

**Use of Estimates**

 

Preparation of the Company’s consolidated financial statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectreported amounts of assets and liabilities, related revenues and expenses anddisclosure about contingent assets and liabilities at the date of the financialstatements. Actual results could differ from the estimates used by management.

 

**Principles of Consolidation**

 

The consolidated financial statements include the accounts of ArcticCat Inc. and its wholly-owned subsidiaries. All significant intercompany accountsand transactions have been eliminated in consolidation.

 

**Cash and Equivalents**

 

The Company considers highly liquid temporary investments with anoriginal maturity of three months or less or with put options exercisable inthree months or less to be cash equivalents. Cash and equivalents consistprimarily of commercial paper and put bonds. The Company’s cash managementpolicy provides for bank disbursement accounts to be reimbursed on a dailybasis. Checks issued but not presented to the banks for payment are included incash and equivalents as a reduction of other cash balances.

 

**Fair Values of Financial Instruments**

 

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

 

**Short-Term Investments**

 

Short-term investments are reported at fair value and include tradingsecurities, with unrealized gains and losses included in net earnings, andavailable-for-sale securities, with unrealized gains and losses reported as a separatecomponent of shareholders’ equity. The Company utilizes the specificidentification method in accounting for its short-term investments.

 

**Accounts Receivable**

 

The Company’s accounts receivable balance consists of amounts due fromits dealers and certain finance companies. The Company extends credit to itsdealers based on an evaluation of the dealers’ financial condition. TheCompany’s collection exposure relating to accounts receivable amounts due fromcertain dealer finance companies is limited due to the financial strength ofthe finance companies and provisions of its existing agreements. Accountsreceivable is presented net of an allowance for estimated uncollectible amountsdue from its dealers. The Company estimates the uncollectible amounts consideringnumerous factors, mainly historical trends as well as current availableinformation. The Company’s allowance for uncollectible accounts was $1,083,000at March 31, 2003 and 2002. Accounts receivable amounts written off have beenwithin management’s expectations.

 

**Inventories**

 

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

 

**Derivative Instruments and HedgingActivities**

 

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

 

As of March 31, 2003, the Company had open Canadiandollar forward exchange contracts, maturing through December 2003, withnotional amounts totaling $46,770,000 and a fair value liability, included inaccounts payable, of $1,082,000. The related amount reported within othercomprehensive loss, net of tax, was $682,000. There were no open Japanese yenforward exchange contracts at March 31, 2003. As of March 31, 2002, the Companyhad open Japanese yen forward contracts, exchange maturing through September2002, with notional amounts totaling $30,998,000 and a fair value liability of$624,000, which is included as a component of inventory. The related amountreported within other comprehensive loss, net of tax, was $393,000.

 

23

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**Property and Equipment**

 

Depreciation is provided in amounts sufficient to relate the cost ofdepreciable assets to operations over their estimated service lives, using theunits of production method for tooling and the straight-line method for allother property and equipment. Tooling is amortized over the life of theproduct, generally three years. Estimated services lives range from 15 - 20years for buildings and improvements and 5 - 7 years for machinery andequipment. Accelerated and straight-line methods are used for income taxreporting.

 

**Product Warranties**

 

The Company generally provides a limited warranty to the original ownerof snowmobiles for twelve months from the date of consumer registration and forsix months on ATVs. The Company provides for estimated warranty costs at thetime of sale based on historical rates and trends and makes subsequentadjustments to its estimate as actual claims become known or the amounts aredeterminable. The change in the Company’s accrued warranty liability for fiscalyear 2003 is a result of expense of $15,318,000 less cash payments of$16,050,000.

 

**Insurance**

 

The Company is self-insured for employee medical, workers’compen-sation, and product liability claims. Specific stop loss coverages areprovided for catastrophic claims. Losses and claims are charged to operationswhen it is probable a loss has been incurred and the amount can be reasonablyestimated.

 

**Revenue Recognition**

 

The Company recognizes revenue and provides for estimated marketing andsales incentive costs when products are shipped to dealers and distributors.

 

**Marketing and Sales Incentive Costs**

 

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

 

**Research and Development**

 

Research and development costs are expensed as incurred and arereported as a component of selling, general and administrative expenses.Research and development expense was $14,254,000, $15,244,000 and $10,449,000during 2003, 2002 and 2001.

 

**Advertising**

 

The Company expenses advertising costs as incurred, except forcooperative advertising obligations arising related to the sale of theCompany’s products to its dealers. The estimated cost of cooperativeadvertising, which the dealer is required to support, is recorded as marketingexpense at the time the product is sold. Total advertising expense, includingcooperative advertising, was $20,784,000, $14,983,000 and $16,185,000 in 2003,2002 and 2001.

 

**Stock-Based Compensation**

 

The Company utilizes the intrinsic value method of accounting for itsemployee stock-based compensation plans.

 

TheCompany’s reported net earnings and basic and diluted net earn­ings per sharewould have been as follows had the fair value method been used for valuingstock options granted to employees:

 
|                                             |   | **2003**      |           | **2002**  |   | **2001**   |   |
|--------------------------------------------------|--------|---------------|----------------|-----------|--------|------------|--------|
| **Net earnings:**                                |   |          |           |      |   |       |   |
| **As  reported**                                 |   | **$**         | **32,703,000** |      | $      | 28,626,000 |   | $ | 26,988,000 |   |
| **Additional  compensation expense, net of tax** |   | **1,366,000** |           | 1,067,000 |   | 880,000    |   |
| **Pro forma**                                    |   | **$**         | **31,337,000** |      | $      | 27,559,000 |   | $ | 26,108,000 |   |
|                                             |   |          |           |      |   |       |   |
| **Net  earnings per share:**                     |   |          |           |      |   |       |   |
| **As  reported**                                 |   |          |           |      |   |       |   |
| **Basic**                                        |   | **$**         | **1.46**       |      | $      | 1.21       |   | $ | 1.11 |   |
| **Diluted**                                      |   | **$**         | **1.45**       |      | $      | 1.20       |   | $ | 1.10 |   |
| **Pro  forma**                                   |   |          |           |      |   |       |   |
| **Basic**                                        |   | **$**         | **1.40**       |      | $      | 1.17       |   | $ | 1.08 |   |
| **Diluted**                                      |   | **$**         | **1.39**       |      | $      | 1.15       |   | $ | 1.07 |   |

 

24

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

 
|                         |   | **2003**    |   | **2002** |   | **2001** |   |
|------------------------------|--------|-------------|--------|----------|--------|----------|--------|
| **Assumptions:**             |   |        |   |     |   |     |   |
| **Dividend  yield**          |   | **1.4**     | **%**  | 1.5      | %      | 2.0      | %      |
| **Average  term**            |   | **7 years** |   | 8 years  |   | 7 years  |   |
| **Volatility**               |   | **31**      | **%**  | 37       | %      | 35       | %      |
| **Risk-free rate of return** |   | **3.9**     | **%**  | 5.0      | %      | 6.2      | %      |

 

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

 
|                               |   | **2003** |     | **2002** |   | **2001** |   |
|------------------------------------|--------|----------|----------|----------|--------|----------|--------|
| **Fair  value of options granted** |   | **$**    | **5.32** |     | $      | 6.46     |   | $ | 4.58 |   |
|                                    |        |          |          |          |        |          |        |  |  |  |

 

See Note K for additional disclosures regarding stockoption plans.

 

**Net Earnings Per Share**

 

The Company’s diluted weighted average shares outstanding includecommon shares and common share equivalents relating to stock options, whendilutive. Options to purchase 369,295, 128,512 and 438,583 shares of commonstock with weighted average exercise prices of $15.80, $16.80 and $13.44 wereoutstanding during 2003, 2002 and 2001, but were excluded from the computationof common share equivalents because they were anti-dilutive.

 

**Foreign Currency Translation**

 

The Company’s sales and marketing activities with Canadian dealers aredenominated in Canadian currency with the U.S. dollar serving as the functionalcurrency. Assets and liabilities denominated in Canadian currency aretranslated using the exchange rate in effect at the balance sheet date.Revenues and expenses are translated at the average foreign exchange rate ineffect for the period. Exchange gains and losses are reflected in the resultsof operations.

 

**Comprehensive Income**

 

Comprehensive income represents net earnings adjusted for theunrealized gain or loss on derivative instruments and debt securitiesclassified as available-for-sale.

 

**Accounting Policy and DisclosureChanges**

 

**ProForma Effect of Stock-Based Compensation on Earnings –**OnDecember 31, 2002, the Financial Accounting Standards Board (FASB) issuedStatement of Financial Accounting Standards (SFAS) No. 148, *Accounting for Stock-Based Compensation – Transitionand Disclosure* (SFAS 148). SFAS 148 amends the disclosure andcertain transition provisions of Statement 123, *Accounting for Stock-Based Compensation.* New annual andinterim disclosures related to stock options are required in financialstatements after December 15, 2003. On March 31, 2003, the Company adopted thedisclosure requirements. The Company intends to continue to account for itsstock compensation under the intrinsic value method.

 

**Accountingfor Derivative Instruments and Hedging Activities –**TheCompany adopted SFAS No. 133, *Accountingfor Derivative Instruments and Hedging Activities*, and No. 138, *Accountingfor Certain Derivative Instruments and Certain Hedging Activities*,on April 1, 2001. These standards require entities to recognize derivatives intheir financial statements as either assets or liabilities measured at fair value.The accounting for changes in the fair value of a derivative is recognized intoearnings unless certain criteria are met. These Standards also require formaldocumentation, designation and effectiveness assessment of transactions receiving hedge accounting. At April 1,2001, the Company had open Japanese yen forward exchange contracts withnotional amounts totaling $21,495,000 maturing through June 2001. Under the newstandard the Company recorded a liability of $1,176,000 for the open Japaneseyen forward contracts, accumulated other comprehensive income, net of tax, of$741,000, and current deferred tax assets of $435,000.

 

**New Pronouncements**

 

The FASB issued FIN 45, *Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others*,on November 25, 2002. The Interpretation expands existing disclosurerequirements for most guarantees and clarifies that at the time a companyissues a guarantee, the company must recognize an initial liability for thefair value, or market value, of the obligations it assumes under that guaranteeand must disclose that information in its interim and annual financialstatements. The provisions related to recognizing a liability at inception ofthe guarantee for the fair value of the guarantor’s obligations would not applyto product warranties or to guarantees accounting for as derivatives. TheCompany adopted the disclosure requirement on March 31, 2003. The Companybelieves FIN 45 will not have a material impact on its consolidated financialstatements.

 

25

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FIN 46 is an interpretation of Accounting ResearchBulletin No. 51, *Consolidated FinancialStatements.* FIN 46, which was issued in January 2003, appliesimmediately to variable interest entities created or obtained afterJanuary 31, 2003 and it applies in the first fiscal year or interim periodbeginning after June 15, 2003, to variable interest entities in which anenterprise holds a variable interest that is acquired before February 1,2003. The adoption of FIN 46 will not have a material impact on the Company’sconsolidated financial statements.

 

In June 2002, FASB issued SFAS No. 146, *Accounting for Costs Associated with Exit or DisposalActivities.* SFAS No. 146 addresses accounting and processing forcosts associated with exit or disposal activities and nullifies Emerging IssuesTask Force (EITF) Issue 94-3. SFAS No. 146 requires the recognition of aliability for a cost associated with an exit or disposal activity when theliability is incurred versus the date a company commits to an exit plan. Inaddition, SFAS No. 146 states the liability should be initially measured atfair value. The requirements of SFAS No. 146 are effective for exit or disposalactivities that are initiated after December 31, 2002. The adoption ofSFAS No. 146 did not have a material effect on the Company’s consolidatedfinancial statements.

 

**B          SHORT-TERM INVESTMENTS**

 

Short-term investments consist primarily of a diversified portfolio ofmunicipal bonds and money market funds and are classified as follows at March31:

 
|                                   |   | **2003**      |           | **2002**   |   |
|----------------------------------------|--------|---------------|----------------|------------|--------|
| **Trading  securities**                |   | **$**         | **49,127,000** |       | $      | 48,096,000 |   |
| **Available-for-sale debt securities** |   | **9,087,000** |           | 10,478,000 |   |
|                                   |   | **$**         | **58,214,000** |       | $      | 58,574,000 |   |

 

Trading securitiesconsists of $38,946,000 and $32,451,000 invested in four money market funds atMarch 31, 2003 and 2002, while the remainder of trading securities andavailable-for-sale securities consists primarilyof A rated or higher municipal bond investments. The amortized cost andfair value of debt securities classified as available-for-sale was $8,538,000and $9,087,000, at March 31, 2003. The unrealized gain on available-for-saledebt securities is reported, net of tax, as a separate component ofshareholders’ equity. The contractual maturities of available-for-sale debtsecurities at March 31, 2003, are $1,769,000 within one year and $7,318,000from one year through five years.

 

**C          INVENTORIES**

 

Inventories consist of the following at March 31:

 
|                                  |   | **2003**       |           | **2002**   |   |
|---------------------------------------|--------|----------------|----------------|------------|--------|
| **Raw  materials and sub-assemblies** |   | **$**          | **17,575,000** |       | $      | 14,630,000 |   |
| **Finished  goods**                   |   | **22,293,000** |           | 17,111,000 |   |
| **Parts, garments and accessories**   |   | **31,855,000** |           | 29,811,000 |   |
|                                  |   | **$**          | **71,723,000** |       | $      | 61,552,000 |   |

 

**D          ACCRUED EXPENSES**

 

Accrued expenses consist of the following at March 31:

 
|                       |   | **2003**       |           | **2002**   |   |
|----------------------------|--------|----------------|----------------|------------|--------|
| **Marketing**              |   | **$**          | **13,275,000** |       | $      | 16,305,000 |   |
| **Compensation**           |   | **8,389,000**  |           | 7,662,000  |   |
| **Warranties**             |   | **12,205,000** |           | 12,937,000 |   |
| **Insurance**              |   | **5,619,000**  |           | 3,912,000  |   |
| **Watercraft  exit costs** |   | **877,000**    |           | 7,509,000  |   |
| **Other**                  |   | **2,097,000**  |           | 1,489,000  |   |
|                       |   | **$**          | **42,462,000** |       | $      | 49,814,000 |   |

 

**E          DISCONTINUED PERSONAL WATERCRAFT BUSINESS AND RELATED COSTS**

 

On October 7, 1999, the Company announced that it was exiting thepersonal watercraft (PWC) business effective September 30, 1999 and recorded acharge of $21,462,000. The charge included $8,961,000 for consumer incentives,$3,480,000 for the write-down and disposal of long-lived assets with noalternative use, $5,286,000 to reduce related inventory to a net realizablevalue and accrued $3,735,000 relating to other matters. The Company had nosignificant sales of the PWC product line in the years ended March 31, 2003,2002 and 2001. As of March 31, 2003, cumulative charges related to accruedconsumer incentives and other accrued exit costs were $4,883,000 and $881,000.The majority of the Company’s PWC exit plan has concluded while other aspectsof the plan will extend beyond March 31, 2003.

 

26

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During fiscal year 2003, the Company analyzed currentand future exit plan costs, and reduced theinitial recorded PWC exit plan consumer incentive and other exit costsaccruals in the amount of $4,000,000 and $2,404,000, respectively. Theremaining accrued expenses, included within the balance sheet caption accruedexpenses, for these items at March 31, 2003 were $427,000 for consumerincentives and $450,000 for other exit costs.

 

**F          FINANCING**

 

The Company has a $60,000,000 unsecured bank credit agreement fordocumentary and stand-by letters of credit and for working capital purposes.Total working capital borrowings under the credit agreement are limited to$45,000,000 during the last six months of the fiscal year. The credit agreementis due on demand and expires July 29, 2003, however, management believes they willbe able to renew the existing line of credit under materially similar terms.Interest on the working capital borrowings is payable monthly at alternativeinterest rates, at the Com­pany’s election. The credit agreement containscertain covenants. At March 31, 2003, there were $24,399,000 of issued lettersof credit outstanding and no working capital borrowings outstanding. Of theissued letters of credit outstanding, $21,712,000 were issued to Suzuki MotorCorporation (Suzuki) for engine purchases (see Note H). Outstanding letters ofcredit will be repaid over the following six months in accordance with thecredit agreement and any such renewal.

** **

**G          RETIREMENT SAVINGS PLAN**

 

The Company’s 401(k) retirement savings plan covers substantially alleligible employees. Employees may contribute up to 20% of their compensationwith the Company matching 100% of the employee contributions, up to a maximumof 3% of the employee’s compensation. TheCompany can elect to make additional contributions at its discretion. TotalCompany matching contributions were $1,284,000, $1,230,000 and $1,099,000 in2003, 2002 and 2001. There were no discretionary contributions made during2003, 2002 and 2001.

 

**H          RELATED PARTY TRANSACTIONS**

 

The Company purchases engines and related parts from Suzuki in Japan.Such purchases totaled $114,472,000, $124,438,000 and $124,910,000 in 2003,2002 and 2001. The purchase price of the engines and related 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 its engines andrelated parts. An interruption of this supply could have a material adverseeffect on the Company’s operations.

 

Certainraw materials and services are purchased from vendors in which certain of theCompany’s directors are officers or significant shareholders. In 2003, 2002 and2001, these transactions aggregated $6,165,000, $4,315,000 and $7,544,000.

 

**I           INCOME TAXES**

 

Income tax expense consists of the following for the years ended March31:

 
|         |   | **2003**      |           | **2002**  |   | **2001**   |   |
|--------------|--------|---------------|----------------|-----------|--------|------------|--------|
| **Current**  |   |          |           |      |   |       |   |
| **Federal**  |   | **$**         | **9,307,000**  |      | $      | 8,159,000  |   | $ | 10,285,000 |   |
| **State**    |   | **929,000**   |           | 973,000   |   | 1,656,000  |   |
| **Deferred** |   | **5,550,000** |           | 4,339,000 |   | 1,352,000  |   |
|         |   | **$**         | **15,786,000** |      | $      | 13,471,000 |   | $ | 13,293,000 |   |

 

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

 
|                           |   | **2003** |       | **2002** |   | **2001** |   |
|--------------------------------|--------|----------|------------|----------|--------|----------|--------|
| **Statutory  income tax rate** |   | **35.0** | **%**      | 35.0     | %      | 35.0     | %      |
| **State  taxes**               |   | **1.3**  | ** ** | 1.1      |   | 2.1      |   |
| **Tax  exempt interest**       |   | **(0.5** | **)**      | (0.8     | )      | (1.4     | )      |
| **Foreign  sales corporation** |   | **(1.8** | **)**      | (1.6     | )      | (1.7     | )      |
| **Other**                      |   | **(1.4** | **)**      | (1.7     | )      | (1.0     | )      |
|                           |   | **32.6** | **%**      | 32.0     | %      | 33.0     | %      |

 

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The cumulative temporarydifferences between the tax bases of assets and liabilities and their carryingamounts for financial reporting purposes under the liability methods are asfollows at March 31:

 
|                                         |   | **2003**      |           | **2002**  |   |
|----------------------------------------------|--------|---------------|----------------|-----------|--------|
| **Short-term  deferred income taxes**        |   |          |           |      |   |
| **Accrued  expenses**                        |   | **$**         | **11,188,000** |      | $      | 11,697,000 |   |
| **PWC  exit costs**                          |   | **325,000**   |           | 2,778,000 |   |
| **Inventory  capitalization and writedowns** |   | **2,503,000** |           | 1,768,000 |   |
| **Other**                                    |   | **401,000**   |           | 401,000   |   |
| **Net short-term deferred tax asset**        |   | **$**         | **14,417,000** |      | $      | 16,644,000 |   |
| **Long-term  deferred income taxes**         |   |          |           |      |   |
| **Property  and equipment**                  |   | **$**         | **8,279,000**  |      | $      | 5,443,000 |   |
| **Other**                                    |   | **4,399,000** |           | 3,912,000 |   |
| **Net long-term deferred tax liability**     |   | **$**         | **12,678,000** |      | $      | 9,355,000 |   |

 

**J          COMMITMENTS AND CONTINGENCIES**

 

**Dealer Financing**

 

Finance companies provide certain of the Company’s dealers anddis-tributors with floor plan financing. The Company has agreements with thesefinance companies to repurchase certain repossessed products sold to itsdealers. At March 31, 2003, the Company was contingently liable under theseagreements for a maximum repurchase amount of approximately $15,612,000. TheCompany has also guaranteed approximately50% of the amounts financed by its dealers and distrib-utors with one ofthe finance companies. At March 31, 2003, the Company’s maximum exposure underthis guarantee was $91,431,000. Losses incurred under these agreements duringthe periods presented have not been significant.

 

OnApril 1, 2003, the Company signed an agreement with a new finance companyto provide certain of the dealers and distributors with floor planfinancing.  The general terms of theagreement are similar to those described in the preceding paragraph althoughthe maximum exposure under the guarantee portion of the agreement has beensignificantly reduced.

 

**Litigation**

 

The Company is subject to legal proceedings and claims which arise inthe ordinary course of business. In the opinion of management, the ultimateoutcome of these matters will not be material to the Company’s consolidatedfinancial position, results of operations or cash flows.

 

**K          SHAREHOLDERS’ EQUITY**

 

**Stock Option Plans**

 

The Company has stock option plans that provide for incentive andnon-qualified stock options to be granted to directors, officers and other keyemployees. The stock options granted generally have a five to ten year life,vest over a period of one to three years, and have an exercise price equal tothe fair market value of the stock on the date of grant. At March 31, 2003, theCompany had 1,347,942 shares of common stock available for grant under theplans.

 

Transactions under theplans during each of the three years in the period ended March 31, 2003 aresummarized as follows:

 
|                               |   | **Number of  shares under  option** |       | **Weighted  average  exercise price** |      |
|------------------------------------|--------|-------------------------------------|------------|---------------------------------------|-----------|
| Outstanding at April 1, 2000       |   | 1,996,192                           |       | $                                     | 10.42     |   |
| Granted                            |   | 282,000                             |       | 12.06                                 |      |
| Exercised                          |   | (290,859                            | )          | 10.27                                 |      |
| Canceled                           |   | (78,721                             | )          | 11.75                                 |      |
| Outstanding at March 31, 2001      |   | 1,908,612                           |       | 10.60                                 |      |
| Granted                            |   | 282,500                             |       | 15.21                                 |      |
| Exercised                          |   | (801,869                            | )          | 9.89                                  |      |
| Outstanding at March 31, 2002      |   | 1,389,243                           |       | 11.87                                 |      |
| Granted                            |   | 327,000                             |       | 15.59                                 |      |
| Exercised                          |   | (256,160                            | )          | 10.85                                 |      |
| Cancelled                          |   | (3,000                              | )          | 15.21                                 |      |
| **Outstanding  at March 31, 2003** |   | **1,457,083**                       | ** ** | **$**                                 | **12.88** | ** ** |

 

Options exercisable atMarch 31 are as follows:

 
|     |   | **Number of  shares under  option** |       | **Weighted  average  exercise price** |      |
|----------|--------|-------------------------------------|------------|---------------------------------------|-----------|
| 2001     |   | 1,403,112                           |       | $                                     | 10.59     |   |
| 2002     |   | 937,906                             |       | $                                     | 11.26     |   |
| **2003** |   | **922,081**                         | ** ** | **$**                                 | **11.64** | ** ** |

 

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The following tables summarize information concerningcurrently outstanding and exercisable stock options at March 31, 2003:

 

**Options Outstanding**

 
| **Range of  Exercise Prices**   |   | **Number  Outstanding** |   | **Weighted  Average  RemainingContractual Life** |   | **Weighted  Average  Exercise  Price** |   |
|---------------------------------|--------|-------------------------|--------|--------------------------------------------------|--------|----------------------------------------|--------|
| $ 6.11 – $9.13             |   | 24,721                  |   | 3.0 years                                        |   | $                                      | 6.96   |   |
|    9.38 –  13.33 |   | 748,376                 |   | 5.2 years                                        |   | 10.55                                  |   |
|  14.41 – 20.36        |   | 683,986                 |   | 7.4 years                                        |   | 15.64                                  |   |
|                            |   | 1,457,083               |   |                                             |   | $                                      | 12.88  |   |

 

**Options Exercisable**

 
| **Range of  Exercise Prices**   |   | **Number  Exercisable** |   | **Weighted  Average  Exercise  Price** |   |
|---------------------------------|--------|-------------------------|--------|----------------------------------------|--------|
|                            |   |                    |   |                                   |   |
| $ 6.11 – $9.13             |   | 24,721                  |   | $                                      | 6.96   |   |
|    9.38 –  13.33 |   | 676,707                 |   | 10.39                                  |   |
|  14.41 – 20.36        |   | 220,653                 |   | 16.01                                  |   |
|                            |   | 922,081                 |   | $                                      | 11.64  |   |

 

**Class B Common Stock**

 

Suzuki owns all outstanding shares of the Company’s Class B commonstock. At the option of Suzuki, the Class B common stock is convertible into anequal number of shares of the Company’s common stock. The Class B shareholderis entitled to elect one member of the Company’s Board of Directors but cannotvote for the election of other directors of the Company. The Class Bshareholder can vote on all other matters submitted to the common shareholders.The Class B common stock participates equally with the common stock in alldividends and other distributions duly declared by the Company’s Board ofDirectors. The Class B common shares are converted into an equal number ofshares of common stock if: Suzuki owns less than 15% of the aggregate number ofoutstanding common and Class B common shares; the Company becomes a non-survivingparty due to a merger or recapitalization; the Company sells substantially allof its assets; or Suzuki transfers its Class B common stock to any person.

 

In addition, the Company has a Stock PurchaseAgreement with Suzuki that prohibits the purchase of additional shares of theCompany’s common stock unless, following such purchase, Suzuki’s ownership isless than or equal to 32% of the aggregate outstandingshares of common andClass B common stock. The Company has the first right of refusal to purchaseany shares Suzuki intends to sell. Suzuki has agreed not to compete in themanufacture of snowmobiles or related parts so long as it supplies engines tothe Company or owns at least 10% of the aggregate common and Class B commonshares outstanding.

 

**Preferred Stock**

 

The Company’s Board of Directors is authorized to issue 2,050,000shares of $1.00 par value preferred stock in one or more series. The board candetermine voting, conversion, dividend and redemption rights and otherpreferences of each series. No shares have been issued.

 

**Shareholders’ Rights Plan**

 

In connection with the adoption of a Shareholders’ Rights Plan, theCompany created a Series B Junior Participating preferred stock. Under terms ofthe Company’s Shareholder Rights Plan, upon the occurrence of certain events,registered holders of common stock and Class B common stock are entitled topurchase one-hundredth of a share of Series B Junior Participating preferredstock at a stated price, or to purchase either the Company’s common shares orcommon shares of an acquiring entity at half their market value. The Rightsrelated to this plan expire September 17, 2011.

 

**Share Repurchase Authorization**

 

The Company invested $20,409,000, $9,705,000 and $15,733,000 during2003, 2002 and 2001 to repurchase and cancel 1,203,700, 674,500 and 1,313,500shares, pursuant to Board of Directors’ authori-zations. At March 31, 2003,authorization to repurchase $18,712,000 or approximately 1,198,700 sharesremain outstanding. Cumulative shares repurchased through March 31, 2003 underall current and past authorizations totaled 8,239,000 shares for a total of$93,674,000.

 

**L          EXPORT SALES**

 

Sales to foreign customers, located primarily in Canada, amounted to$118,399,000, $100,694,000 and $93,307,000 in 2003, 2002 and 2001.

 

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**REPORTOF INDEPENDENTCERTIFIED PUBLIC ACCOUNTANTS**

 

**Board ofDirectors**

Arctic Cat Inc.

 

We have audited the accompanying consolidated balance sheets of ArcticCat Inc. and subsidiaries as of March 31, 2003 and 2002, and the relatedconsolidated statements of earnings, shareholders’ equity, and cash flows foreach of the three years in the period ended March 31, 2003. These financialstatements are the responsibility of the company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

 

Weconducted our audits in accordance with auditing standards generally acceptedin the United States of America. Those standards require that we plan and performthe audit to obtain reasonable assurance about whether the financial statementsare free of material misstatement. An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of Arctic Cat Inc. andsubsidiaries as of March 31, 2003 and 2002, and the consolidated results oftheir operations and their consolidated cash flows for each of the three yearsin the period ended March 31, 2003, in conformity with accounting principlesgenerally accepted in the United States of America.

 

 

 

Minneapolis, Minnesota

May 9, 2003

 

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**ARCTIC CAT INC. EXHIBIT INDEX**

 

**EXHIBIT NUMBER**

** **

**21**                                                                                  Subsidiaries of Registrant

**23**                                                                              Consent of Independent Certified PublicAccountants

**99.1**                                                                        Certificationof Chief Executive Officer

**99.2**                                                                        Certification of Chief Financial Officer

 

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