**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

# **FORM10-K**

 

| **ý** | **Annual report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**     |
|------------|----------------------------------------------------------------------------------------------------|
|       |                                                                                               |
|       | **for  the fiscal year ended March 31, 2004 or**                                              |
|       |                                                                                               |
| **o**      | **Transition report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934** |

 

**Commission File Number: 0-18607**

 

**ARCTIC CATINC.**

(Exact name ofregistrant as specified in its charter)

 
| **Minnesota**                                                    |   | **41-1443470**                         |
|------------------------------------------------------------------|--------|----------------------------------------|
| (State  or other jurisdiction  of incorporation or organization) |   | (I.R.S.  Employer  Identification No.) |
|                                                             |   |                                   |
| **601  Brooks Avenue South  Thief River Falls, Minnesota 56701** |
| (Address  of principal executive offices) (Zip Code)             |

 

| Registrant’s telephone number, including area code:**  (218)  681-8558** |
|-----------------------------------------------------------------------------------------|
| Securities registered pursuant to Section 12(b) of the Act:    **None**  |
| Securities registered pursuant to Section 12(g) of the Act:                        | **Common Stock, $.01 par value.** |
|                                                                                    | **Preferred Stock Purchase Rights.** |

 

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

 

Yes     ý      No       o

 

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

 

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

 

Yes     ý      No       o

 

The aggregate 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: $245,000,000.

 

At June 2, 2004,14,126,206 shares of Common Stock and 6,717,000 shares of Class B Common Stockof the Registrant were outstanding.

 

**Documents Incorporated by Reference:**

 

Portions of the Company’s Proxy Statement for its Annual Meeting ofShareholders currently scheduled to be held on August 4, 2004 areincorporated by reference into Part III of this Form 10-K

 

 

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**ARCTIC CAT INC.**

**FORM 10-K**

**TABLE OF CONTENTS**

 
|          | **Description**                                                                                                      |   |
|---------------|----------------------------------------------------------------------------------------------------------------------|--------|
| **PART I**    |                                                                                                                 |   |
|          |                                                                                                                 |   |
| **ITEM  1.**  | Business                                                                                                             |   |
| **ITEM  2.**  | Properties                                                                                                           |   |
| **ITEM  3.**  | Legal Proceedings                                                                                                    |   |
| **ITEM  4.**  | Submission  of Matters to a Vote of Security Holders                                                                 |   |
| **ITEM 4A.**  | Executive Officers of  Registrant                                                                                    |   |
|          |                                                                                                                 |   |
| **PART II**   |                                                                                                                 |   |
|          |                                                                                                                 |   |
| **ITEM  5.**  | Market  for Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of  Equity Securities |   |
| **ITEM  6.**  | Selected  Financial Data  Quarterly Financial Data                                                                   |   |
| **ITEM  7.**  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                          |   |
| **ITEM 7A.**  | Quantitative  and Qualitative Disclosures About Market Risk                                                          |   |
| **ITEM  8.**  | Financial  Statements and Supplementary Data                                                                         |   |
| **ITEM  9.**  | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure                                |   |
| **ITEM 9A.**  | Controls and Procedures                                                                                              |   |
|          |                                                                                                                 |   |
| **PART III**  |                                                                                                                 |   |
|          |                                                                                                                 |   |
| **ITEM 10.**  | Directors  and Executive Officers of the Registrant                                                                  |   |
| **ITEM 11.**  | Executive Compensation                                                                                               |   |
| **ITEM 12.**  | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                     |   |
| **ITEM 13.**  | Certain  Relationships and Related Transactions                                                                      |   |
| **ITEM 14.**  | Principal  Accountant Fees and Services                                                                              |   |
|          |                                                                                                                 |   |
| **PART IV**   |                                                                                                                 |   |
|          |                                                                                                                 |   |
| **ITEM  15.** | Exhibits, Financial Statement Schedules, and  Reports on Form 8-K                                                    |   |
|          | Signatures                                                                                                           |   |
|          | Consolidated Balance Sheets                                                                                          |   |
|          | Consolidated Statements  of Earnings                                                                                 |   |
|          | Consolidated  Statements of Shareholders’ Equity                                                                |   |
|          | Consolidated Statements  of Cash Flows                                                                               |   |
|          | Notes to  Consolidated Financial Statements                                                                          |   |
|          | Report  of Independent Certified Public Accountants                                                                  |   |
|          | Exhibit Index                                                                                                        |   |
|          | Exhibit 21                                                                                                           |   |
|          | Exhibit 23                                                                                                           |   |
|          | Exhibit 31.1                                                                                                         |   |
|          | Exhibit 31.2                                                                                                         |   |
|          | Exhibit 32.1                                                                                                         |   |
|          | **Exhibit 32.2**                                                                                                     |   |

 

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**PART I**

 

**ITEM 1.****BUSINESS**

 

Arctic Cat Inc. (the“Company”), based in Thief River Falls, Minnesota, operates in a singleindustry segment and designs, engineers, manufactures and markets snowmobilesand 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 years andis among the most widely recognized and respected names in the snowmobileindustry. The Company trades on the Nasdaq National Market under the symbolACAT.

 

## **IndustryBackground**

 

**Snowmobiles –******Thesnowmobile, developed in the 1950’s, was originally intended to be used as autility vehicle, but today the overwhelming majority of the industry’s salesare for recreational use. Between the late 1950’s and early 1970’s, theindustry expanded dramatically reaching a peak of over 100 manufacturers and ahigh of almost 495,000 units sold to retail customers in North America in 1971.Today the number of major industry participants has decreased to four, ArcticCat, Bombardier Recreational Products (Bombardier), Polaris and Yamaha. TheCompany believes there are currently more significant barriers to entry intothe snowmobile market than existed in the 1970’s. These barriers includeincreased brand loyalty, long-standing dealer and distributor networks andrelationships, limited engine sources, manufacturing and engineering expertiseand higher initial set-up costs. Industry-wide snowmobile sales to retailcustomers in North America were approximately 158,000 units for the 2004 modelyear.

 

**All-Terrain Vehicles (ATVs) –**TheATV industry evolved from the three-wheel model that was developed in the early1970s to the four-wheel models that are sold today. The most popular ATV use isgeneral recreation, followed by hunting/fishing, farm/ranch use,hauling/towing, transportation, and commercial uses. From 1970 to 1986, the numberof ATVs retailed in the United States continued to grow until peaking in 1986with approximately 535,000 units sold during that calendar year. From 1987 to1991, the number of ATVs sold declined to a low of approximately 151,000 units.Since 1992, sales have increased each year reaching approximately 799,000 unitsin calendar 2003. Major competitors in the industry include Honda, Yamaha,Kawasaki, Bombardier, Polaris and Suzuki and in early 2004 John Deere enteredthe market.

 

## **Products**

 

**Snowmobiles –** The Companyproduces a full line of snowmobiles, consisting of 56 models, marketed underthe Arctic Cat brand name, and designed to satisfy various market niches. The2004 Arctic Cat models carry suggested U.S. retail prices ranging from $3,899to $9,799, excluding a youth model which is sold at a suggested U.S. retailprice of $2,049. Arctic Cat snowmobiles are sold in the United States, Canada,Scandinavia and other international markets.

 

The Company’s 2004year snowmobile models are categorized as Performance, Trail Performance,Mountain, Touring and Utility. The Company markets: Performance Arctic Catsnowmobiles under the names Firecat and ZR; Trail Performance Arctic Catsnowmobiles under the name Z, Sabercat and T660 Turbo; Mountain snowmobiles underthe names Mountain Cat and King Cat; Touring models under the names Panther,Pantera, and T660 Touring; and Utility models under the name Bearcat. Inaddition, to encourage family involvement in snowmobiling, the Company offers ayouth snowmobile marketed under the ZR120 name.

 

The Companybelieves the Arctic Cat brand name enjoys a premier image among snowmobileenthusiasts and that its snowmobiles have a long-standing reputation forquality, performance, fuel management, style, comfort, ride and handling.Arctic Cat snowmobiles offer a wide range of standard and optional featureswhich enhance the operation, riding comfort and performance. Such featuresinclude hydraulic disc brakes, remote starters and a technologically advancedfront and rear suspension. Arctic Cat is the industry leader in fuel managementtechnology offering electronic fuel injection (EFI) system on its snowmobiles.The Company recently introduced a snowmobile with a turbo four strokeinter-cooled engine. In 1999, the Company developed a new corporate brand “ACT”TM(Arctic Cat Technology) in order to recognize and leverage its industry-leadingtechnology and engineering.

 

Arctic Catbelieves that it has been able to grow in the worldwide snowmobile retail salesdue to its 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 2004 model year, over75 percent of the Company’s snowmobile sales were from models or modelvariations not available three years earlier.

 

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

 

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

 

Arctic Cat hascontinued to expand into international markets by adding new distributors, enteringnew territories, and developing new markets. The Company produces ATVs for AGCOCorporation under the Arctic Cat and Massey Ferguson/Delta Allis brands fordistribution through their dealer network outside of North America.

 

Arctic Catbelieves its ATVs are renowned for their power 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*.In 2004 the Arctic Cat 650 V-twin received “ATV of the Year” award from both “*ATVIllustrated”* and “*ATV Guide”*.

 

**Parts, Garments and Accessories –**TheCompany is the exclusive provider of genuine Arctic Cat snowmobile and ATVparts, garments and accessories. Included are replacement parts and accessoryitems to upgrade Arctic Cat snowmobiles such as electric start and reversekits, luggage racks and bags, backrests, machine covers, windshields, andcolored accessories. Other items include maintenance supplies such as oil andfuel additives, track studs and carbide runners.  Arctic Cat ATV parts and accessories include winch kits, snowplow kits, MRP Speedrack accessories, portable lights, utility bags as well asmaintenance supplies.

 

The Company offerssnowmobile garments for adults and children under the “Arcticwear” label.Suits, jackets, pants and accessory garments are offered in a wide variety ofstyles and sizes combining fashion with functional utility designed for thedemands of snowmobiling and other winter activities. The Arcticwear line ofclothing also includes pull-overs, riding gloves, hats, helmets, boots, gearbags, sweatshirts, T-shirts, and caps. The colors and designs of many of theseitems are coordinated with specific Arctic Cat snowmobile models.

 

The Company offersATV garments under the “Arcticwear ATV Gear” label. This line of clothing isgeared toward function and comfort and includes suits, jackets, gloves,helmets, gear bags, sweatshirts, T-shirts, and caps.

 

## **Manufacturing andEngineering**

 

Arctic Cat snowmobilesand ATVs are manufactured at the Company’s facilities in Thief River Falls,Minnesota. The Company paints snowmobile hoods and produces other parts forArctic Cat snowmobiles and ATVs in Madison, South Dakota. The Company also hasa facility in Bucyrus, Ohio which houses its service parts, garments andaccessories distribution operations. The Company has strategically identifiedspecific core manufacturing competencies for vertical integration and haschosen outside vendors to provide other parts. The Company has developedrelationships with selected high quality vendors in order to obtain access toparticular capabilities and technologies outside the scope of the Company’sexpertise. The Company designs component parts often in cooperation with itsvendors, contracts with them for the development of tooling, and then entersinto agreements with these vendors to purchase component parts manufacturedutilizing the tooling. In its vertically integrated operations, the Companymanufactures hoods, foam seats, seat covers and machines, welds and paintsother components. The Company completes the total assembly of its products atits facilities in Thief River Falls. Manufacturing operations include digitaland computer-automated equipment to speed production, reduce costs and improvethe quality, fit and finish of every product. The Company believes that all raw materials used in its manufacturingprocess and all component parts, with the exception of engines are availablefrom multiple alternative vendors on relatively short notice at competitiveprices.

 

Suzuki MotorCorporation (“Suzuki”) has manufactured snowmobile and ATV engines for theCompany pursuant to supply agreements which are automatically renewed annuallyunless terminated. While notice of termination of the supply agreements may begiven annually, effective termination of supply would take at least one modelyear for snowmobile and two model years for ATVs due to contractual noticerequirements.

 

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

 

The Company andSuzuki have enjoyed an excellent relationship since the Company’s inception.Suzuki purchased approximately 31% of the Company’s then outstanding capitalstock in July 1988, prior to the Company’s initial public offering inJuly of 1990, and is currently the Company’s largest shareholder withapproximately 32% of the Company’s outstanding capital stock. If Suzuki orKawasaki 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.

 

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

 

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Since the Companybegan snowmobile production, it has followed a build-to-order policy to controlinventory levels. Under this policy, the Company only manufactures a number ofsnowmobiles equivalent to the orders received from its dealers anddistributors, plus a number of uncommitted machines used for dealer and marketdevelopment, in-house testing and miscellaneous promotional purposes.Speculative production and excessive inventories in certain periods during the1970’s and early 1980’s contributed to significant price discounting in thesnowmobile industry. Since the consolidation of the snowmobile industry in themid-1970’s through the early 1980’s, speculative production in the industry hasbeen reduced and the Company believes dealer inventories have remainedconsistently below historic peak levels. The Company believes dealer inventorylevels of non-current Arctic Cat model snowmobiles have regularly been and arecurrently among the lowest in the industry.

 

Most sales ofsnowmobiles to retail customers begin in the early fall and continue during thewinter. Orders by dealers and distributors for each year’s production areplaced in the spring following a series of dealer and distributor meetings.Snowmobiles are built commencing in the spring and continuing through lateautumn or early winter. Since its inception, the Company has experienced a lowlevel of snowmobile order cancellations.

 

Retail sales ofATVs occur throughout the year with seasonal highs occurring in the spring andfall. The Company builds ATVs throughout the year to coincide with dealer andconsumer demand.

 

The Company iscommitted to an ongoing engineering program dedicated to innovation and tocontinued improvements in the quality and performance of its products as wellas product diversification.  The Companycurrently employs 156 individuals in the design and development of new andexisting products, with an additional 28 individuals directly involved in thetesting of snowmobiles and ATVs in normal and extraordinary conditions at theCompany’s test track. In addition, snowmobiles and ATVs are tested inconditions and locations similar to those in which they are used. The Companyuses computer-aided design and manufacturing systems to shorten the timebetween initial concept and final production. For 2004, 2003, and 2002, theCompany spent approximately $14,736,000, $14,254,000, and $15,244,000 onengineering, research and development. In addition, utilizing their particularexpertise, the Company’s vendors regularly test and apply new technologies tothe design and production of component parts.

 

## **Sales andMarketing**

 

The Company’s productsare currently sold through an extensive 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. To promote new dealerships and to service its existingdealer network, the Company also employs sales representatives throughout theUnited States and Canada to represent its products.

 

The Company’sdealers enter into an annual renewable contract and are required to maintainstatus as an authorized dealer in order to continue selling the Company’sproducts. To obtain and maintain such status, dealers are expected to order asufficient number of snowmobiles and/or ATVs to service their market areaadequately. In addition, the dealers must perform service on these units andmaintain satisfactory service performance levels, and their mechanics mustcomplete special training provided by the Company. Dealers are also expected tocarry adequate levels of inventory of genuine Arctic Cat parts and accessories.As is typical in the industry, most of the Company’s dealers also sell somecombination of motorcycles, marine products, lawn and garden products and otherrelated products. Approximately 50% of the Company’s dealers are single linedealers and sell only Arctic Cat branded snowmobiles and ATVs. Relations withdealers are generally considered excellent.

 

The Companyutilizes distributors outside the contiguous 48 United States and Canada totake advantage of their knowledge and experience in their respective marketsand to increase market penetration of its products. Canadian sales are made inCanadian dollars, nearly all of which is financed through certain Canadianfinancial institutions. Sales outside North America are normally made in U.S.dollars and most are supported by letters of credit.

 

The Company’smarketing efforts are comprised of dealer, distributor and consumer promotions,advertising and cooperative programs with its dealers and distributors. Eachyear, the Company and its distributors conduct dealer shows in order tointroduce the upcoming year’s models and to promote dealer orders. Marketingactivities are also designed to promote directly to consumers. Products areadvertised by the Company in consumer magazines and through other media. Inaddition,  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 registered owners of its products.

 

The Company placesstrong emphasis on identifying and addressing the specific needs of itscustomers by periodically conducting dealer and consumer focus group meetingsand surveys.

 

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The Companywarrants its snowmobiles and ATVs under a limited warranty against defects inmaterials and workmanship for a period generally ranging from six months to oneyear from the date of retail sale or for a period of 90 days from the date ofcommercial or rental use. Repairs or replacements under warranty areadministered through the Company’s dealers and distributors.

 

## **Competition**

 

The snowmobile and ATVmarkets are highly competitive, based on a number of factors, includingperformance, styling, fit and finish, brand loyalty, reliability, durabilityand price. The Company believes Arctic Cat snowmobiles and ATVs are highlyregarded by consumers in all of these competitive categories. Certain of theCompany’s competitors are more diversified and have financial and marketingresources which are substantially greater than those of the Company.

 

## **Regulation**

 

Both federal and stateauthorities have vigorous environmental control requirements relating to air,water and noise pollution that affect the manufacturing operations of theCompany. The Company endeavors to insure that its facilities comply withapplicable environmental regulations and standards. Various states and othergovernmental agencies have also promulgated safety regulations regarding theuse of snowmobiles and ATVs. The Company has supported laws and regulationspertaining to safety and exhaust emissions. The Company believes that theadoption of any pending laws or regulations would not negatively affect itsproducts to any greater degree than those of its competitors.

 

Californiaregulations set emission standards for ATVs, with which the Company currentlycomplies. Although the snowmobile industry is not currently required to complywith any federal or state exhaust emissions standards, the EnvironmentalProtection Agency (EPA) recently adopted regulations affecting snowmobiles andATVs for model years 2006 and beyond. The Company believes that it will be incompliance with these regulations. The Company supports balanced andappropriate programs that educate the customer on safe use of its products andprotect the environment.

 

Certain materialsused in snowmobile and ATV manufacturing that are toxic, flammable, corrosiveor reactive are classified by the federal and state governments as “hazardousmaterials.” Control of these substances is regulated by the EPA and variousstate pollution control agencies, which require reports and inspection offacilities to monitor compliance. The Company’s cost of compliance withenvironmental regulations has not been, and is not expected to be, material.The Company’s manufacturing facilities are subject to the regulationspromulgated by, and may be inspected by, the Occupational Safety and HealthAdministration.

 

The Company is amember of the International Snowmobile Manufacturers Association (ISMA), atrade association formed to promote safety in the manufacture and use ofsnowmobiles, among other things. The ISMA is currently made up of Arctic Cat,Bombardier, Yamaha, and Polaris. The ISMA members are also members of theSnowmobile Safety and Certification Committee (SSCC), which promulgatedvoluntary safety standards for snowmobiles. The SSCC standards, which requiretesting and evaluation by an independent testing laboratory of each modelcategory produced by participating snowmobile manufacturers, have been adoptedby the Canadian Ministry of Transport. Following the development of the SSCC standards,the U.S. Consumer Products Safety Commission denied a petition to develop amandatory federal safety standard for snowmobiles in light of the high degreeof adherence to the SSCC standards in the United States. Since the Company’sinception, all of its models have complied with the SSCC standards.

 

The Company is amember of the Specialty Vehicle Institute of America (SVIA), a tradeassociation organized to foster and promote the safe and responsible use ofATVs manufactured and/or distributed throughout the United States of America.The Company is also a member of the Canadian All-Terrain Vehicle DistributorsCouncil (CATV), as well as the All-Terrain Vehicle Association of Europe.

 

## **Effects of Weather**

 

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

 

## **Employees**

 

At March 31, 2004,the Company had 1,469 employees including 285 salaried and 1,184 hourly andproduction personnel. The Company’s employees are not represented by a union orsubject to a collective bargaining agreement. The Company has never experienceda strike or work stoppage and considers its relations with its employees to beexcellent.

 

## **Intellectual**Property

 

The Company makes aneffort to patent all significant innovations that it considers patentable andowns numerous patents for its snowmobiles, ATVs and other products. Trademarksare important to the Company’s snowmobile, ATVs and related parts, garments andaccessories business activities. While from time to time the Company becomesaware of the unauthorized use of its trademarks, particularly in the sale ofpromotional items, the Company has a program of

 

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trademark enforcement toeliminate the unauthorized use of its trademarks, thereby strengthening thevalue of its trademarks and improving its image and customer goodwill. TheCompany believes that its “Arctic Cat” registered trademark is its mostsignificant trademark. Additionally, the Company has numerous registeredtrademarks, trade names and logos, both in the United States and internationally.

 

## **AvailableInformation**

 

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

 

SinceNovember 15, 2002, the Company has made its annual reports, quarterlyreports and current reports available on its website as soon as reasonablypracticable after such report has been filed with the SEC.

 

# **ITEM 2.** PROPERTIES

 

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

 
| **Location**                 |   | **FacilityType  / Use**          |   | **Owned or  Leased** |   | **Sq Ft.** |   |
|------------------------------|--------|----------------------------------|--------|----------------------|--------|------------|--------|
| Thief River Falls, Minnesota |   | Manufacturing / Corporate Office |   | Owned                |   | 558,000    |   |
| Thief River Falls, Minnesota |   | Warehouse                        |   | Leased               |   | 60,500     |   |
| Thief River Falls, Minnesota |   | Warehouse                        |   | Leased               |   | 14,350     |   |
| Madison, South Dakota        |   | Manufacturing                    |   | Owned                |   | 40,000     |   |
| Bucyrus, Ohio                |   | Distribution Center              |   | Owned                |   | 220,000    |   |
| Winnipeg, Manitoba           |   | Service Center                   |   | Leased               |   | 10,602     |   |
| Island Park, Idaho           |   | Test & Development Facility  |   | Owned                |   | 3,000      |   |

 

# **ITEM 3.** LEGAL PROCEEDINGS

 

Accidents involvingpersonal injury and property damage occur in the use of snowmobiles and ATVs.Claims have been made against the Company from time to time. It is theCompany’s policy to vigorously defend against these actions. The Companybelieves that the cases in discovery are adequately covered by reserves andproduct liability insurance. The Company is not involved in any legalproceedings which it believes will have the potential for a materially adverseimpact on the Company’s business or financial condition.

 

Product liabilityinsurance is presently maintained by the Company on a “per occurrence” basis(with coverage being provided in respect of accidents which occurred during thepolicy year, regardless of when the related claim is made) in the amount of$10,000,000 in the aggregate, with a $5,000,000 self-insured retention. TheCompany believes such insurance is adequate.

 

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# **ITEM 4.** SUBMISSION OF MATTERS TO A VOTEOF SECURITY HOLDERS

 

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

 

# **ITEM 4A.** EXECUTIVE OFFICERS OF REGISTRANT

 
| **Name**              |   | **Age** |   | **Position**                                                               |
|-----------------------|--------|---------|--------|----------------------------------------------------------------------------|
| Christopher A. Twomey |   | 56      |   | Chairman of the Board  of Directors, President and Chief Executive Officer |
| Timothy C. Delmore    |   | 50      |   | Chief Financial Officer  and Corporate Secretary                           |
| Terry J. Blount       |   | 61      |   | Vice President – Human  Resources                                     |
| Robert Bonev          |   | 46      |   | Vice President – Sales  and Marketing                                 |
| Ronald G. Ray         |   | 55      |   | Vice President –  Operations                                          |
| Roger H. Skime        |   | 61      |   | Vice President –  Research & Development                          |
| Ole E. Tweet          |   | 57      |   | Vice President – New  Product Development                             |

 

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

 

**Mr. Delmore** has been Chief FinancialOfficer of the Company since 1986 and has been Corporate Secretary of theCompany since 1989. Mr. Delmore, a CPA with seven years of prior publicaccounting experience, joined the Company in 1985 as Controller.

 

**Mr. Blount** has been Vice President – HumanResources since August of 1996. Mr. Blount has over 30 years of HumanResource experience in the manufacturing field. Prior to joining the Company,Mr. Blount worked as Vice President-Human Resources at Washington ScientificIndustries since 1981.

 

**Mr. Bonev** has been Vice President – Salesand Marketing since June of 2001 and has over 20 years of marketingexperience. From February 1999 to January 2000, Mr. Bonev served asVice President of Marketing for Outdoor Marine Corporation. FromDecember 1998 to February 1999, Mr. Bonev was employed by TeledyneContinental Motors, a business segment of Teledyne Technologies Incorporated,as Vice President of Sales/Marketing. From June 1993 toDecember 1998, Mr. Bonev was Director of Marketing for Mercury Marine, adivision of The Brunswick Corporation.

 

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

 

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

 

**Mr. Tweet** has been Vice President – NewProduct Development since May 1992. Prior to that, he had been the Company’sVice President – Marketing since its inception in 1983 and has been employedeither in the snowmobile or ATV industry for over 30 years.

 

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**PartII**

 

# **ITEM 5.** MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS ANDISSUER OF EQUITY SECURITIES

 

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

 
| **Years ended March 31,** |   | **2004** |      | **2003**   |   |
|--------------------------------|--------|----------|-----------|------------|--------|
| **Quarterly Prices**           |   | **High** |      | **Low**    |   | **High** |   | **Low** |   |
| **First Quarter**              |   | **$**    | **19.71** | ** ** | **$**  | **15.03** |   | $ | 20.75 |   | $ | 16.00 |   |
| **Second Quarter**             |   | **$**    | **22.25** | ** ** | **$**  | **18.25** |   | $ | 17.41 |   | $ | 13.54 |   |
| **Third Quarter**              |   | **$**    | **25.45** | ** ** | **$**  | **18.52** |   | $ | 18.20 |   | $ | 12.95 |   |
| **Fourth Quarter**             |   | **$**    | **28.55** | ** ** | **$**  | **22.68** |   | $ | 17.93 |   | $ | 12.35 |   |

 

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

 

**Cash Dividends Paid**

 

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

 
| **Quarter**    |   | **2004** |     | **2003** |   |
|----------------|--------|----------|----------|----------|--------|
| First Quarter  |   | **$**    | **0.06** |     | $      | 0.06 |   |
| Second Quarter |   | **$**    | **0.06** |     | $      | 0.06 |   |
| Third Quarter  |   | **$**    | **0.07** |     | $      | 0.06 |   |
| Fourth Quarter |   | **$**    | **0.07** |     | $      | 0.06 |   |
| Total          |   | **$**    | **0.26** |     | $      | 0.24 |   |

 

**Purchasesof Company Equity Securities**

 
| **Period**                                           |   | **Total  Number of  Shares Purchased** |   | **Average  Price  Paid per Share** |   | **Total  number of  Shares Purchased  as Part of Publicly  Announced Plans  or Programs** |    | **Maximum  Number  of Shares that May  Yet be Purchased  Under the Plans  or Programs** |    |
|------------------------------------------------------|--------|----------------------------------------|--------|------------------------------------|--------|-------------------------------------------------------------------------------------------|---------|-----------------------------------------------------------------------------------------|---------|
| January 1, 2004 – January 31,  2004   |   | 0                                      |   | $                                  | — |                                                                                      | 0       |                                                                                    | 567,800 |   |
| February 1, 2004 – February 28,  2004 |   | 131,400                                |   | $                                  | 26.21  |                                                                                      | 131,400 |                                                                                    | 436,400 |   |
| March 1, 2004 – March 31, 2004        |   | 18,600                                 |   | $                                  | 25.69  |                                                                                      | 18,600  |                                                                                    | 417,800 |   |

 

The Company purchases Company common stock primarily to offset thedilution created by employee stock option programs and as an alternative inreturning excess cash to shareholders.

 

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

 

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

 

9

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

 
| **(In thousands, except per share  amounts)**     |   |        |        |       |       |       |       |       |       |       |       |
|---------------------------------------------------|--------|-------------|-------------|------------|------------|------------|------------|------------|------------|------------|------------|
| **Years ended March 31,**                    |   | **2004**    | ** **  | **2003**   | ** ** | **2002**   | ** ** | **2001**   | ** ** | **2000**   | ** ** |
| **INCOME STATEMENT  DATA:**                       |   |        | ** **  |       | ** ** |       | ** ** |       | ** ** |       | ** ** |
| **Net sales**                                     |   | **$**       | **649,617** |       | $          | 577,070    |       | $          | 556,079    |       | $          | 502,449 |   | $ | 461,460 |   |
| **Cost of goods sold**                            |   | **510,445** |        | 448,266    |       | 433,297    |       | 398,019    |       | 376,202    |       |
| **Gross profit**                                  |   | **139,172** |        | 128,804    |       | 122,782    |       | 104,430    |       | 85,258     |       |
| **Selling, general and administrative  expenses** |   | **95,511**  |        | 81,757     |       | 83,228     |       | 68,712     |       | 79,550     |       |
| **Operating profit**                              |   | **43,661**  |        | 47,047     |       | 39,554     |       | 35,718     |       | 5,708      |       |
| **Interest income**                               |   | **993**     |        | 1,442      |       | 2,543      |       | 4,563      |       | 4,591      |       |
| **Interest expense**                              |   | **—**  |        | **—** |       | **—** |       | **—** |       | **—** |       |
| **Earnings before income taxes**                  |   | **44,654**  |        | 48,489     |       | 42,097     |       | 40,281     |       | 10,299     |       |
| **Income taxes**                                  |   | **14,289**  |        | 15,786     |       | 13,471     |       | 13,293     |       | 2,678      |       |
| **Net earnings**                                  |   | **$**       | **30,365**  |       | $          | 32,703     | (1)        | $          | 28,626     |       | $          | 26,988 |   | $ | 7,621 | (2) |
| **Net earnings per share**                        |   |        |        |       |       |       |       |       |       |       |       |
| **Basic**                                         |   | **$**       | **1.42**    |       | $          | 1.46       | (1)        | $          | 1.21       |       | $          | 1.11 |   | $ | 0.30 | (2) |
| **Diluted**                                       |   | **$**       | **1.40**    |       | $          | 1.45       | (1)        | $          | 1.20       |       | $          | 1.10 |   | $ | 0.30 | (2) |
| **Cash dividends per share**                      |   | **$**       | **0.26**    |       | $          | 0.24       |       | $          | 0.24       |       | $          | 0.24 |   | $ | 0.24 |   |
| **Weighted average shares outstanding**           |   |        |        |       |       |       |       |       |       |       |       |
| **Basic**                                         |   | **21,424**  |        | 22,396     |       | 23,587     |       | 24,231     |       | 25,535     |       |
| **Diluted**                                       |   | **21,730**  |        | 22,615     |       | 23,925     |       | 24,457     |       | 25,586     |       |

 
| **As of March 31,**                |   | **2004**    | ** **  | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
|-----------------------------------------|--------|-------------|-------------|----------|------------|----------|------------|----------|------------|----------|------------|
| **BALANCE SHEET DATA**  (In thousands): |   |        |        |     |       |     |       |     |       |     |       |
| **Cash and short-term investments**     |   | **$**       | **106,440** |     | $          | 91,295   |       | $        | 102,040    |     | $          | 99,828 |   | $ | 108,277 |   |
| **Working capital**                     |   | **133,012** |        | 136,964  |       | 133,785  |       | 127,216  |       | 132,072  |       |
| **Total assets**                        |   | **285,562** |        | 278,291  |       | 268,595  |       | 255,658  |       | 246,535  |       |
| **Long-term debt**                      |   | **0**       |        | 0        |       | 0        |       | 0        |       | 0        |       |
| **Shareholders’ equity**           |   | **185,953** |        | 187,286  |       | 181,638  |       | 170,442  |       | 162,558  |       |
|                                         |        |             |             |          |            |          |            |          |            |          |            |  |  |  |  |  |

 

----

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

 

(2)               During fiscal 2000 the Company announcedthat it was exiting the PWC business effective September 30, 1999. Fiscal2000 results include a pretax charge of $26.2 million ($16.9 million after tax)or $0.66 per share for certain costs related to the discontinued PWC business.

 

10

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**QUARTERLY FINANCIAL DATA**(unaudited)

 
| **(In thousands, except per share  amounts)** |        | **Total  Year** | ** **  | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** **  | **Fourth  Quarter** | ** ** |
|-----------------------------------------------|-------------|-----------------|-------------|--------------------|------------|---------------------|------------|--------------------|-------------|---------------------|------------|
| **Net Sales**                                 |        |            |        |               |       |                |       |               |        |                |       |
| **2004**                                      |        | **$**           | **649,617** | ** **         | **$**      | **77,189**          | ** ** | **$**              | **237,650** | ** **          | **$**      | **194,618** | ** ** | **$** | **140,160** |   |
| 2003                                          |        | 577,070         |        | 78,283             |       | 211,242             |       | 176,175            |        | 111,370             |       |
| 2002                                          |        | 556,079         |        | 77,821             |       | 211,081             |       | 167,917            |        | 99,260              |       |
|                                          |        |            |        |               |       |                |       |               |        |                |       |
| **Gross Profit**                              |        |            |        |               |       |                |       |               |        |                |       |
| **2004**                                      |        | **$**           | **139,172** | ** **         | **$**      | **18,526**          | ** ** | **$**              | **56,172**  | ** **          | **$**      | **43,981** | ** ** | **$** | **20,493** |   |
| 2003                                          |        | 128,804         |        | 18,843             |       | 52,970              |       | 39,653             |        | 17,338              |       |
| 2002                                          |        | 122,782         |        | 18,876             |       | 51,925              |       | 35,642             |        | 16,339              |       |
|                                          |        |            |        |               |       |                |       |               |        |                |       |
| **Net Earnings (Loss)**                       |        |            |        |               |       |                |       |               |        |                |       |
| **2004**                                      |        | **$**           | **30,365**  | ** **         | **$**      | **102**             | ** ** | **$**              | **21,569**  | ** **          | **$**      | **9,733** | ** ** | **$** | **(1,039** | **)** |
| 2003                                          |        | 32,703          |        | 1,969              |       | 20,520              |       | 11,912             |        | (1,698              | )          |
| 2002                                          |        | 28,626          |        | 1,957              |       | 20,332              |       | 8,151              |        | (1,814              | )          |
|                                          |        |            |        |               |       |                |       |               |        |                |       |
| **Net Earnings (Loss) Per Share**             |        |            |        |               |       |                |       |               |        |                |       |
| **2004**                                      | **Basic**   |            | **$**       | **1.42**           | ** ** | **$**               | **0.00**   | ** **         | **$**       | **0.99**            | ** ** | **$** | **0.46** | ** ** | **$** | **(0.05** | **)** |
|                                          | **Diluted** |            | **1.40**    | ** **         | **0.00**   | ** **          | **0.98**   | ** **         | **0.46**    | ** **          | **(0.05**  | **)** |
| 2003                                          | Basic       |            | 1.46        |               | 0.09       |                | 0.92       |               | 0.54        |                | (0.08      | ) |
|                                          | Diluted     |            | 1.45        |               | 0.08       |                | 0.91       |               | 0.53        |                | (0.08      | ) |
| 2002                                          | Basic       |            | 1.21        |               | 0.08       |                | 0.85       |               | 0.35        |                | (0.08      | ) |
|                                          | Diluted     |            | 1.20        |               | 0.08       |                | 0.84       |               | 0.34        |                | (0.08      | ) |

 

11

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**Part III**

 

**ITEM7.****MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

## **Executive LevelOverview**

 

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

 

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

 

ATV salesincreased 25% in fiscal 2004 to $294.4 million from $235.9 million in fiscal2003. For the first time ATV net sales have surpassed snowmobile net sales andare now the Company’s largest product line, comprising over 45% of net sales.The Company’s rapid ATV growth is due to Arctic Cat’s expanded product line-upthat now fills nearly every market segment as well as overall growth in the ATVmarket.

 

Snowmobile salesincreased 5% in fiscal 2004 to $258.4 million from $245.2 million in fiscal2003 despite less than normal snowfall during the prior winter season. TheCompany expects that with normal snowfall Arctic Cat customers will renew theirenthusiasm for the sport. Snowmobiles comprised 40% of the Company’s net salesin fiscal 2004.

 

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

 

## **Results ofOperations**

 

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

 

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

 

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

 

Operating profitsdecreased 7.2% to $43,661,000 in 2004 from $47,047,000 in 2003. As a percent ofnet sales, operating profits were 6.7% in 2004 compared to 8.2% in 2003. Theprincipal reason for this decrease was the PWC matter described in the grossmargin discussion.

 

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

 

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

 

**2003 vs. 2002****–**During fiscal 2003 net sales increased 3.8% to $577,070,000 from $556,079,000in fiscal 2002. ATV unit volume increased 9.2%, snowmobile unit volumedecreased 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 arestructuring accrual for estimated sales incentives related to Arctic Cat’sexit from the PWC business in fiscal 2000. The Company believes the continuedincrease in ATV sales is due both to enthusiastic dealer and consumer receptionof the Arctic Cat ATV and growth in the ATV market. Snowmobile unit volumedecreased because of lower dealer orders related to less than normal snowfallsduring the prior winter season.

 

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

 

12

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

 

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

 

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

 

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

 

## **CriticalAccounting Policies**

 

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

 

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

 

**Marketing and Sales Incentive Costs****–**The Company provides for various marketing and sales incentive costs which areoffered to its dealers and consumers at the latter of when the revenue isrecognized or when the marketing and sales incentive program is approved andcommunicated. Examples of these costs include: dealer and consumer rebates,dealer floor plan financing assistance, sales associate incentives and otherincentive and promotion programs. Adverse market conditions resulting in lowerthan expected retail sales or the matching of competitor programs could causeaccrued marketing and incentive costs to materially increase if the Companyauthorizes and communicates new programs to its dealers. The Company estimatesmarketing and sales incentive costs based on expected usage and historicalexperience. The related marketing and sales incentive costs accrual is includedin accrued marketing in the Company’s balance sheet. To the extent currentexperience differs with previous estimates the accrued liability for marketingand sales incentives is adjusted accordingly.

 

**Product Warranties****–**The Company generally provides a limited warranty to the original owner ofsnowmobiles 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 subsequent adjustmentsto their estimate as actual claims become known or the amounts aredeterminable. Adverse changes in actual warranty costs compared to theCompany’s initial estimates could cause accrued warranty to materially change.

 

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

 

The Companyutilizes historical trends and other analysis to assist in determining theappropriate loss. Adverse changes in the final determination of productliability or other claims made against the Company could have a material impacton the Company’s financial condition.

 

## **Liquidity andCapital Resources**

 

The seasonality of theCompany’s snowmobile production cycle and the lead time between thecommencement of snowmobile and ATV production in the early spring andcommencement of shipments late in the first quarter have resulted insignificant fluctuations in the Company’s working capital requirements duringthe year. Historically, the Company has financed its working capitalrequirements out of available cash balances at the beginning and end of theproduction

 

13

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

 

## **Cash andShort-Term Investments**

 

Cash and short-terminvestments were $106,440,000 at March 31, 2004 compared to $91,295,000 atMarch 31, 2003. The Company’s cash balances traditionally peak early inthe fourth quarter and then decrease as working capital requirements increasewhen the Company’s snowmobile and spring ATV production cycles begin. TheCompany’s investment objectives are first, safety of principal and second, rateof return.

 

## **FinancingArrangements and Cash Flows**

 

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

 

The Company hasagreements with certain finance companies to provide snowmobile and ATV floorplan financing for the Company’s North American dealers. These agreementsimprove the Company’s liquidity by financing dealer purchases of productswithout requiring substantial use of the Company’s working capital. The Companyis paid by the floor plan companies shortly after shipment and as part of itsmarketing programs the Company pays the floor plan financing of its dealers forcertain set time periods depending on the size of a dealer’s order. Thefinancing agreements require repurchase of repossessed new and unused units andset limits upon the Company’s potential liability for annual repurchases. Theaggregate potential liability was approximately $23,549,000 at March 31, 2004.No material losses have been incurred by the Company under these agreements.The Company believes current available cash and cash generated from operationsprovide sufficient funding in the event there is a requirement to perform underthis guarantee and repurchase agreement.

 

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

 

## **ContractualObligations**

 

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

 
|                          |   | **Payment  Due by Period** |   |
|-------------------------------|--------|----------------------------|--------|
|                          |   | **Total**                  |   | **Less than  1 Year** |   | **1-3 Years** |   | **More than  3 Years** |   |
| **Contractual  Obligations**  |   |                       |   |   |   |   |   |   |   |
| Operating Lease Obligations   |   | $                          | 0.2    |   | $ | 0.2 |   | 0 |   | 0 |   |
| Purchase Obligations(1)       |   | 91.7                       |   | 91.7 |   | 0 |   | 0 |   |
| Total Contractual Obligations |   | $                          | 91.9   |   | $ | 91.9 |   | 0 |   | 0 |   |

 

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

 

## **Forward-LookingStatements**

 

The Private SecuritiesLitigation Reform Act of 1995 provides a safe harbor for certainforward-looking statements. This Report on Form 10-K, as well as the Company’sAnnual Report and future filings with the Securities and Exchange Commission,the Company’s press releases and oral statements made with the approval of anauthorized executive officer, contain forward-looking statements that reflectthe Company’s current views with respect to future events and financialperformance. These forward-looking statements are subject to certain risks anduncertainties that could cause actual results to differ materially fromhistorical results or those anticipated. The words “aim,” “believe,” “expect,”“anticipate,” “intend,” “estimate” and other expressions that indicate futureevents and trends identify forward-looking statements. Actual future resultsand trends may differ materially from historical results or those anticipateddepending on a variety of factors, including, but not limited to: product mixand volume; competitive pressure on sales and pricing; increase in material orproduction cost which cannot be recouped in product pricing; changes in thesourcing of engines from Suzuki; warranty expenses; foreign currency exchangerate fluctuations; product liability claims and other legal proceedings in excessof insured amounts; environmental and product safety regulatory activity;effects of the weather; overall economic conditions; and consumer demand andconfidence.

 

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# **ITEM 7A.** QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

**Inflation, Foreign Exchange Rates andInterest Rates**

 

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

 

During fiscal2004, approximately 29% of the Company’s cost of sales was purchased fromJapanese 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.This agreement renews annually. During fiscal 2004, the exchange ratefluctuation between the U.S. dollar and the Japanese yen had a modest negativeimpact on the Company’s operating results. From time to time the Companyutilizes foreign exchange cash flow hedging contracts to minimize the impact ofexchange rate fluctuations relating to ATV engine purchases. During 2004, theaverage contracted forward exchange rate on these cash flow hedges wasapproximately 120 (Japanese Yen to the U.S. Dollar).  At March 31, 2004, there were no foreign exchange contractsoutstanding for Japanese yen.

 

Sales to Canadiandealers are made in Canadian dollars with the U.S. dollar serving as thefunctional currency. During fiscal 2004, sales to Canadian dealers comprised18.0% of total net sales. During fiscal 2004, the exchange rate fluctuationbetween the U.S. dollar and the Canadian dollar had a modest positive impact onoperating profits. During 2004, the Company utilized cash flow hedges tomitigate the variability in Canadian exchange rate changes relating to Canadiandollar fund transfers to the United States. During 2004, the average contractedforward exchange rate on these cash flows hedges was approximately $1.50(Canadian Dollar to U.S. Dollar). At March 31, 2004 there were Canadiandollar forward exchange contracts outstanding with notional amounts of$73,101,000.

 

The fair values ofthe Canadian dollar hedge contracts at March 31, 2004 represent anunrealized loss of $655,000.  A tenpercent fluctuation in the currency rates as of March 31, 2004 would haveresulted in a change in the fair value of the Canadian dollar hedge contractsof approximately $7,000,000. However, since these contracts hedge foreigncurrency denominated transactions, any change in the fair value of thecontracts would be offset by changes in the underlying value of the transactionbeing hedged.

 

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

 

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

 

# **ITEM8.** FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Financial Statements,Notes, and Report of Independent Certified Public Accountants appear on pages20 through 32. Quarterly financial data appears in Item 6.

 

# **ITEM9.** CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE

 

None.

 

# **ITEM 9A.** CONTROLS AND PROCEDURES

 

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

 

There have been nosignificant changes in internal controls over financial reporting during thefiscal quarter ended March 31, 2004 that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

15

----

 

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

 

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

 

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

 

# **ITEM 11.** EXECUTIVE COMPENSATION

 

The information includedunder the heading “Executive Compensation and Other Information” in theCompany’s definitive Proxy Statement for the Annual Meeting of Shareholders tobe held August 4, 2004, is incorporated herein by reference.

 

# **ITEM12.** SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ANDRELATED STOCKHOLDER MATTERS

 

The information includedunder the heading “Beneficial Ownership of Capital Stock” in the Company’sdefinitive Proxy Statement for the Annual Meeting of Shareholders to be heldAugust 4, 2004, is incorporated herein by reference.

 

# **ITEM 13.** CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

Information with respectto certain relationships and related transactions, appearing under the heading“Executive Compensation and Other Information-Certain Transactions” in theCompany’s definitive Proxy Statement for the Annual Meeting of Shareholders tobe held on August 4, 2004, is incorporated herein by reference.

 

# **ITEM14.** PRINCIPAL ACCOUNTANT FEES ANDSERVICES

 

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

 

16

----

 

**PartIV**

 

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

 

## **(a) Documentsfiled as part of report**

## ** **

## **1. FinancialStatements.**

## ** **

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

 
|   | **(i)**   | Consolidated Balance Sheets  as of March 31, 2004 and 2003                                                     |   |
|--------|-----------|---------------------------------------------------------------------------------------------------------------------|--------|
|   |      |                                                                                                                |   |
|   | **(ii)**  | Consolidated  Statements of Earnings for the three years ended March 31, 2004, 2003  and 2002                  |   |
|   |      |                                                                                                                |   |
|   | **(iii)** | Consolidated  Statements of Shareholders’ Equity for the three years ended March 31,  2004, 2003 and 2002 |   |
|   |      |                                                                                                                |   |
|   | **(iv)**  | Consolidated  Statements of Cash Flows for the three years ended March 31, 2004, 2003  and 2002                |   |
|   |      |                                                                                                                |   |
|   | **(v)**   | Notes to  Consolidated Financial Statements                                                                         |   |
|   |      |                                                                                                                |   |
|   | **(vi)**  | Report  of Independent Certified Public Accountants                                                                 |   |

 

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

## ** **

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

 

## **3. Exhibits**

 
|      |   |                                                                                                                                                                                                                                                                                                                                                         |   | **Method of Filing** |
|-----------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------|
| **3(a)**  |   | Amended and Restated  Articles of Incorporation of Company                                                                                                                                                                                                                                                                                                   |   | (3)                  |
|      |   |                                                                                                                                                                                                                                                                                                                                                         |   |                 |
| **3(b)**  |   | Restated By-Laws of the  Company                                                                                                                                                                                                                                                                                                                             |   | (1)                  |
|      |   |                                                                                                                                                                                                                                                                                                                                                         |   |                 |
| **4(a)**  |   | Form of specimen Common  Stock Certificate                                                                                                                                                                                                                                                                                                                   |   | (1)                  |
|      |   |                                                                                                                                                                                                                                                                                                                                                         |   |                 |
| **4(b)**  |   | Rights Agreement by and  between the Company and Wells Fargo Bank Minnesota, N.A., dated  September 17, 2001                                                                                                                                                                                                                                            |   | (4)                  |
|      |   |                                                                                                                                                                                                                                                                                                                                                         |   |                 |
| **10(a)** |   | 1989 Stock Option Plan,  as amended                                                                                                                                                                                                                                                                                                                          |   | (3)                  |
|      |   |                                                                                                                                                                                                                                                                                                                                                         |   |                 |
| **10(b)** |   | 1995 Stock Option Plan,  as amended                                                                                                                                                                                                                                                                                                                          |   | (3)                  |
|      |   |                                                                                                                                                                                                                                                                                                                                                         |   |                 |
| **10(c)** |   | Purchase/Supply  Agreement dated as of March 1, 1985 between Suzuki Motor Co., Ltd. and  the Company, and related Agreement on Implementation of Warranty Provision.                                                                                                                                                                                    |   | (1)                  |
|      |   |                                                                                                                                                                                                                                                                                                                                                         |   |                 |
| **10(d)** |   | Form of Employment  Agreement between the Company and each of its executive officers                                                                                                                                                                                                                                                                         |   | (1)                  |
|      |   |                                                                                                                                                                                                                                                                                                                                                         |   |                 |
| **10(e)** |   | Floorplan Repurchase  Agreement dated July 13, 1984, between the Company and ITT Commercial  Finance Corp.                                                                                                                                                                                                                                              |   | (1)                  |
|      |   |                                                                                                                                                                                                                                                                                                                                                         |   |                 |
| **10(f)** |   | Floorplan Repurchase  Agreement dated as of June 15, 1988, between the Company and ITT  Commercial Finance, a division of ITT Industries of Canada, Ltd.                                                                                                                                                                                                |   | (1)                  |
|      |   |                                                                                                                                                                                                                                                                                                                                                         |   |                 |
| **10(g)** |   | Discretionary Revolving  Credit Facility, dated as of June 6, 1997, between the Company and Wells  Fargo Bank Minnesota, National Association.                                                                                                                                                                                                          |   | (3)                  |
|      |   |                                                                                                                                                                                                                                                                                                                                                         |   |                 |
| **10(h)** |   | 2002 Stock Plan                                                                                                                                                                                                                                                                                                                                              |   | (5)                  |
|      |   |                                                                                                                                                                                                                                                                                                                                                         |   |                 |
| **10(i)** |   | Program  agreement, dated as of January 20, 2003, by and between Arctic Cat Sales Inc.  and Textron Financial Corporation (Confidential treatment pursuant to 17 CFR  Sections 200.80(b) and 240.246-2 has been requested for certain portions of  this exhibit.  Such portions have been  omitted herein and have been filed separately with the SEC.) |   | (6)                  |
|      |   |                                                                                                                                                                                                                                                                                                                                                         |   |                 |
| **10(j)** |   | Repurchase  Agreement, dated as of January 20, 2003, by and between Arctic Cat Sales Inc.  and Textron Financial Corporation                                                                                                                                                                                                                                 |   | (6)                  |
|      |   |                                                                                                                                                                                                                                                                                                                                                         |   |                 |
| **21**    |   | Subsidiaries of the  Registrant                                                                                                                                                                                                                                                                                                                              |   | (2)                  |
|      |   |                                                                                                                                                                                                                                                                                                                                                         |   |                 |
| **23**    |   | Consent of Independent  Certified Public Accountants                                                                                                                                                                                                                                                                                                         |   | (2)                  |
|      |   |                                                                                                                                                                                                                                                                                                                                                         |   |                 |
| **31.1**  |   | Section 302  Certificate of Chief Executive Officer                                                                                                                                                                                                                                                                                                     |   | (2)                  |
|      |   |                                                                                                                                                                                                                                                                                                                                                         |   |                 |
| **31.2**  |   | Section 302  Certificate of Chief Financial Officer                                                                                                                                                                                                                                                                                                     |   | (2)                  |
|      |   |                                                                                                                                                                                                                                                                                                                                                         |   |                 |
| **32.1**  |   | Certification of  Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                                   |   |                 |
|      |   |                                                                                                                                                                                                                                                                                                                                                         |   |                 |
| **32.2**  |   | Certification of  Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                                   |   | (2)                  |

 

## **(b) Reports onForm 8-K**

## ** **

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

 

17

----

 

## **(c) Exhibits**

## ** **

Reference is made to Item15(a) 3.

 

(1)Incorporated herein by reference to the Company’s Form S-1 RegistrationStatement (File Number 33-34984).

 

(2)Filed with this Form 10-K.

 

(3)Incorporated herein by reference to the Company’s Annual Report on Form 10-Kfor the fiscal year ended March 31, 1997.

 

(4)Incorporated by reference to Exhibit 1 to the Company’s Registration on Form8-A filed with the SEC on September 20, 2001.

 

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

 

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

 

 

18

----

 

**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15 (d) of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized, on the 14th day of June, 2004.

 

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

 

 

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

 
| **Signature** |                                                                    | **Date** |
|---------------|-------------------------------------------------------------------------|----------|
|          |                                                                    |     |
| /s/           | Christopher A. Twomey                                                   |     |   | June 14, 2004 |
|          | Christopher A. Twomey                                                   |     |   |
|          | Chairman of the Board  of Directors, President, Chief Executive Officer |     |   |
|          | (Principle Executive  Officer)                                          |     |   |
|          |                                                                    |     |   |
| /s/           | Timothy C. Delmore                                                      |     |   | June 14, 2004 |
|          | Timothy C. Delmore                                                      |     |   |
|          | Chief Financial Officer                                                 |     |   |
|          | (Principle Financial  and Accounting Officer)                           |     |   |
|          |                                                                    |     |   |
| /s/           | Robert J. Dondelinger                                                   |     |   | June 14, 2004 |
|          | Robert J. Dondelinger,  Director                                        |     |   |
|          |                                                                    |     |   |
| /s/           | William I. Hagen                                                        |     |   | June 14, 2004 |
|          | William I. Hagen,  Director                                             |     |   |
|          |                                                                    |     |   |
| /s/           | William G. Ness                                                         |     |   | June 14, 2004 |
|          | William G Ness, Vice  Chairman of the  Board of Directors               |     |   |
|          |                                                                    |     |   |
| /s/           | Gregg A. Ostrander                                                      |     |   | June 14, 2004 |
|          | Gregg A. Ostrander,  Director                                           |     |   |
|          |                                                                    |     |   |
| /s/           | Kenneth J. Roering                                                      |     |   | June 14, 2004 |
|          | Kenneth J. Roering,  Lead Director                                      |     |   |
|          |                                                                    |     |   |
| /s/           | Motoo Murakami                                                          |     |   | June 14, 2004 |
|          | Motoo Murakami,  Director                                               |     |   |

 

19

----

 

**Consolidated Balance Sheets**

 
| **Arctic Cat Inc. March 31,**                                                                                                             |   | **2004**        |            | **2003**        |   |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------|-----------------|-----------------|--------|
|                                                                                                                                           |   |            |            |            |   |
| **ASSETS**                                                                                                                                     |   |            | ** **      |            |   |
| **Current Assets**                                                                                                                             |   |            | ** **      |            |   |
| **Cash and equivalents**                                                                                                                       |   | **$**           | **44,045,000**  | ** **      | **$**  | 33,081,000 |   |
| **Short-term investments**                                                                                                                     |   | **62,395,000**  | ** **      | **58,214,000**  |   |
| **Accounts receivable, less allowances**                                                                                                       |   | **28,274,000**  | ** **      | **29,018,000**  |   |
| **Inventories**                                                                                                                                |   | **61,127,000**  | ** **      | **71,723,000**  |   |
| **Prepaid expenses**                                                                                                                           |   | **3,592,000**   | ** **      | **3,829,000**   |   |
| **Income taxes receivable**                                                                                                                    |   | **4,607,000**   | ** **      | **5,009,000**   |   |
| **Deferred income taxes**                                                                                                                      |   | **12,020,000**  | ** **      | **14,417,000**  |   |
| **Total current assets**                                                                                                                       |   | **216,060,000** | ** **      | **215,291,000** |   |
|                                                                                                                                           |   |            |            |            |   |
| **Property and Equipment – At Cost**                                                                                                      |   |            | ** **      |            |   |
| **Machinery, equipment and tooling**                                                                                                           |   | **125,584,000** | ** **      | **110,924,000** |   |
| **Land, buildings and improvements**                                                                                                           |   | **22,213,000**  | ** **      | **20,428,000**  |   |
|                                                                                                                                           |   | **147,797,000** |            | **131,352,000** |   |
| **Less accumulated depreciation**                                                                                                              |   | **78,295,000**  | ** **      | **68,352,000**  |   |
|                                                                                                                                           |   | **69,502,000**  |            | **63,000,000**  |   |
|                                                                                                                                           |   | **$**           | **285,562,000** |            | **$**  | 278,291,000 |   |
|                                                                                                                                           |   |            |            |            |   |
| **LIABILITIES AND  SHAREHOLDERS’ EQUITY**                                                                                                 |   |            | ** **      |            |   |
| **Current Liabilities**                                                                                                                        |   |            | ** **      |            |   |
| **Accounts payable**                                                                                                                           |   | **$**           | **48,148,000**  | ** **      | **$**  | 35,865,000 |   |
| **Accrued expenses**                                                                                                                           |   | **34,900,000**  | ** **      | **42,462,000**  |   |
| **Total current liabilities**                                                                                                                  |   | **83,048,000**  | ** **      | **78,327,000**  |   |
|                                                                                                                                           |   |            |            |            |   |
| **Deferred Income Taxes**                                                                                                                      |   | **16,561,000**  | ** **      | **12,678,000**  |   |
|                                                                                                                                           |   |            |            |            |   |
| **Commitments and Contingencies**                                                                                                              |   | **—**      | ** **      | **—**      |   |
|                                                                                                                                           |   |            |            |            |   |
| **Shareholders’ Equity**                                                                                                                  |   |            | ** **      |            |   |
| **Preferred stock, par value $1.00; 2,050,000 shares authorized; none  issued**                                                                |   | **—**      | ** **      | **—**      |   |
| **Preferred stock – Series A Junior Participating, par value $1.00;****450,000 shares authorized; none issued**                           |   | **—**      | ** **      | **—**      |   |
| **Common stock, par value $.01; 37,440,000 shares authorized; shares  issued****and  outstanding, 14,285,882 in 2004; 14,487,849 in 2003**     |   | **143,000**     | ** **      | **144,000**     |   |
| **Class B common stock, par value $.01; 7,560,000 shares authorized,****Shares issued, and outstanding 6,717,000  in 2004; 7,560,000 in 2003** |   | **67,000**      | ** **      | **76,000**      |   |
| **Accumulated other comprehensive loss**                                                                                                       |   | **(221,000**    | **)**           | **(336,000**    | )      |
| **Retained earnings**                                                                                                                          |   | **185,964,000** | ** **      | **187,402,000** |   |
|                                                                                                                                           |   | **185,953,000** |            | **187,286,000** |   |
|                                                                                                                                           |   | **$**           | **285,562,000** |            | **$**  | 278,291,000 |   |

 

The accompanying notesare an integral part of these statements.

 

20

----

 

**Consolidated Statements of Earnings**

 
| **Arctic Cat Inc. Years ended  March 31,**   |   | **2004**        | ** **      | **2003**        | ** ** | **2002**    | ** ** |
|---------------------------------------------------|--------|-----------------|-----------------|-----------------|------------|-------------|------------|
| **Net sales**                                     |   | **$**           | **649,617,000** | ** **      | **$**      | 577,070,000 |       | $ | 556,079,000 |   |
| **Cost of goods sold**                            |   | **510,445,000** | ** **      | **448,266,000** |       | 433,297,000 |       |
| **Gross profit**                                  |   | **139,172,000** | ** **      | **128,804,000** |       | 122,782,000 |       |
|                                              |   |            |            |            |       |        |       |
| **Selling, general and administrative  expenses** |   | **95,511,000**  | ** **      | **84,161,000**  |       | 83,228,000  |       |
| **Watercraft exit costs**                         |   | **—**      | ** **      | **(2,404,000**  | **)**      | **—**  |       |
| **Operating profit**                              |   | **43,661,000**  | ** **      | **47,047,000**  |       | 39,554,000  |       |
|                                              |   |            |            |            |       |        |       |
| **Other income**                                  |   |            |            |            |       |        |       |
| **Interest income**                               |   | **993,000**     | ** **      | **1,442,000**   |       | 2,543,000   |       |
| **Earnings Before Income Taxes**                  |   | **44,654,000**  | ** **      | **48,489,000**  |       | 42,097,000  |       |
| **Income tax expense**                            |   | **14,289,000**  | ** **      | **15,786,000**  |       | 13,471,000  |       |
| **Net Earnings**                                  |   | **$**           | **30,365,000**  | ** **      | **$**      | 32,703,000  |       | $ | 28,626,000 |   |
| **Net Earnings Per Share**                        |   |            |            |            |       |        |       |
| **Basic**                                         |   | **$**           | **1.42**        | ** **      | **$**      | 1.46        |       | $ | 1.21 |   |
| **Diluted**                                       |   | **$**           | **1.40**        | ** **      | **$**      | 1.45        |       | $ | 1.20 |   |
| **Weighted average shares outstanding**           |   |            |            |            |       |        |       |
| **Basic**                                         |   | **21,424,000**  | ** **      | **22,396,000**  |       | 23,587,000  |       |
| **Diluted**                                       |   | **21,730,000**  | ** **      | **22,615,000**  |       | 23,925,000  |       |

 

The accompanying notesare an integral part of these statements.

 

21

----

 

**Consolidated Statements of Shareholders’Equity**

 
| **Arctic Cat Inc.  Years ended March 31,**                   |                      |           |       |        |        | **Additional  Paid-in  Capital** |          | **Accumulated  Other  Comprehensive  Income** |       | **Retained  Earnings** |       | **Total**    |       |
|-------------------------------------------------------------------|---------------------------|----------------|------------|-------------|-------------|----------------------------------|---------------|-----------------------------------------------|------------|------------------------|------------|--------------|------------|
| **Common  Stock**                                                 | **Class B  Common Stock** |
| **Shares**                                                        |                      | **Amount**     | **Shares** |        | **Amount**  |
| Balances at March 31, 2001                                   |                      | 16,228,412     |       | $           | 162,000     |                             | 7,560,000     |                                          | $          | 76,000                 |       | $            | —     |   | $ | **320,000** | ** ** | **$** | 169,884,000 |   | $ | 170,442,000 |   |
| Exercise of stock options                                         |                      | 801,869        |       | 8,000       | ** **  | **—**                       | ** **    | **—**                                    |       | 7,922,000              | ** ** | **—**   | ** ** | **—** |   | 7,930,000 |   |
| Tax benefits from stock option exercises                          |                      | —         | ** ** | **—**  | ** **  | **—**                       | ** **    | **—**                                    |       | 1,256,000              | ** ** | **—**   | ** ** | **—** |   | 1,256,000 |   |
| Repurchase of common stock                                        |                      | (1,335,965     | )          | (13,000     | **)**       | **—**                       | ** **    | **—**                                    |       | (9,178,000             | **)**      | **—**   |       | (11,316,000 | ) | (20,507,000 | ) |
| Other comprehensive income:                                       |                      |           |       |        |        |                             |          |                                          |       |                   |       |         |       |   |   |   |   |
| Net earnings                                                      |                      | **—**     | ** ** | **—**  | ** **  | **—**                       | ** **    | **—**                                    | ** ** | **—**             | ** ** | **—**   |       | 28,626,000 |   | 28,626,000 |   |
| Unrealized loss on securities available-for-sale,  net of tax     |                      | **—**     | ** ** | **—**  | ** **  | **—**                       | ** **    | **—**                                    | ** ** | **—**             |       | (49,000      | **)**      | **—** |   | (49,000 | ) |
| Effect of adoption of SFAS No. 133                                |                      | **—**     | ** ** | **—**  | ** **  | **—**                       | ** **    | **—**                                    | ** ** | **—**             |       | (741,000     | )          | — |   | (741,000 | ) |
| Unrealized gain on derivative instruments, net of  tax            |                      | **—**     | ** ** | **—**  | ** **  | **—**                       | ** **    | **—**                                    | ** ** | **—**             |       | 348,000      |       | — |   | 348,000 |   |
| Total other comprehensive income                                  |                      | **—**     | ** ** | **—**  | ** **  | **—**                       | ** **    | **—**                                    | ** ** | **—**             |       | —       | ** ** | **—** |   | 28,184,000 |   |
| Dividends ($.24 per share)                                        |                      | **—**     | ** ** | **—**  | ** **  | **—**                       | ** **    | **—**                                    | ** ** | **—**             | ** ** | **—**   |       | (5,667,000 | ) | (5,667,000 | ) |
| Balances at March 31, 2002                                   |                      | 15,694,316     |       | 157,000     |        | 7,560,000                        |          | 76,000                                        | ** ** | **—**             |       | (122,000     | )          | 181,527,000 |   | 181,638,000 |   |
| Exercise of stock options                                         |                      | 256,160        |       | 2,000       | ** **  | **—**                       | ** **    | **—**                                    |       | 2,777,000              | ** ** | **—**   | ** ** | **—** |   | 2,779,000 |   |
| Tax benefits from stock option exercises                          |                      | **—**     | ** ** | **—**  | ** **  | **—**                       | ** **    | **—**                                    |       | 1,207,000              | ** ** | **—**   | ** ** | **—** |   | 1,207,000 |   |
| Repurchase of common stock                                        |                      | (1,462,627     | )          | (15,000     | **)**       | **—**                       | ** **    | **—**                                    |       | (3,984,000             | **)**      | **—**   |       | (21,445,000 | ) | (25,444,000 | ) |
| Other comprehensive income:                                       |                      |           |       |        |        |                             |          |                                          |       |                   |       |         |       |   |   |   |   |
| Net earnings                                                      |                      | **—**     | ** ** | **—**  | ** **  | **—**                       | ** **    | **—**                                    | ** ** | **—**             | ** ** | **—**   |       | 32,703,000 |   | 32,703,000 |   |
| Unrealized gain on securities available-for-sale,  net of tax     |                      | **—**     | ** ** | **—**  | ** **  | **—**                       | ** **    | **—**                                    | ** ** | **—**             |       | 75,000       | ** ** | **—** |   | 75,000 |   |
| Unrealized loss on derivative instruments, net of  tax            |                      | **—**     | ** ** | **—**  | ** **  | **—**                       | ** **    | **—**                                    | ** ** | **—**             |       | (289,000     | **)**      | **—** |   | (289,000 | ) |
| Total other comprehensive income                                  |                      | **—**     | ** ** | **—**  | ** **  | **—**                       | ** **    | **—**                                    | ** ** | **—**             | ** ** | **—**   | ** ** | **—** |   | 32,489,000 |   |
| Dividends ($.24 per share)                                        |                      | **—**     | ** ** | **—**  | ** **  | **—**                       | ** **    | **—**                                    | ** ** | **—**             | ** ** | **—**   |       | (5,383,000 | ) | (5,383,000 | ) |
| **Balances at  March 31, 2003**                              |                      | **14,487,849** | ** ** | **144,000** | ** **  | **7,560,000**                    | ** **    | **76,000**                                    | ** ** | **—**             | ** ** | **(336,000** | **)**      | **187,402,000** | ** ** | **187,286,000** | ** ** |
| **Exercise of stock options**                                     |                      | **644,305**    | ** ** | **6,000**   | ** **  | **—**                       | ** **    | **—**                                    | ** ** | **7,649,000**          | ** ** | **—**   | ** ** | **—** | ** ** | **7,655,000** | ** ** |
| **Tax  benefits from stock****option exercises**                  |                      | **—**     | ** ** | **—**  | ** **  | **—**                       | ** **    | **—**                                    | ** ** | **1,868,000**          | ** ** | **—**   | ** ** | **—** | ** ** | **1,868,000** | ** ** |
| **Repurchase  of common stock**                                   |                      | **(846,272**   | **)**      | **(7,000**  | **)**       | **(843,000**                     | **)**         | **(9,000**                                    | **)**      | **(9,517,000**         | **)**      | **—**   | ** ** | **(26,230,000** | **)** | **(35,763,000** | **)** |
| **Other  comprehensive income:**                                  |                      |           |       |        |        |                             |          |                                          |       |                   |       |         |       |   |   |   |   |
| **Net  earnings**                                                 |                      | **—**     | ** ** | **—**  | ** **  | **—**                       | ** **    | **—**                                    | ** ** | **—**             | ** ** | **—**   | ** ** | **30,365,000** | ** ** | **30,365,000** | ** ** |
| **Unrealized  loss on securities available-for-sale, net of tax** |                      | **—**     | ** ** | **—**  | ** **  | **—**                       | ** **    | **—**                                    | ** ** | **—**             | ** ** | **(154,000** | **)**      | **—** | ** ** | **(154,000** | **)** |
| **Unrealized  gain on derivative instruments, net of tax**        |                      | **—**     | ** ** | **—**  | ** **  | **—**                       | ** **    | **—**                                    | ** ** | **—**             | ** ** | **269,000**  | ** ** | **—** | ** ** | **269,000** | ** ** |
| **Total other comprehensive  income**                             |                      | **—**     | ** ** | **—**  | ** **  | **—**                       | ** **    | **—**                                    | ** ** | **—**             | ** ** | **—**   | ** ** | **—** | ** ** | **30,480,000** | ** ** |
| **Dividends  ($.26 per share)**                                   |                      | **—**     | ** ** | **—**  | ** **  | **—**                       | ** **    | **—**                                    | ** ** | **—**             | ** ** | **—**   | ** ** | **(5,573,000** | **)** | **(5,573,000** | **)** |
| **Balances  at March 31, 2004**                              |                      | **14,285,882** | ** ** | **$**       | **143,000** | ** **                       | **6,717,000** | ** **                                    | **$**      | **67,000**             | ** ** | **$**        | **—** | ** ** | **$** | **(221,000** | **)** | **$** | **185,964,000** | ** ** | **$** | **185,953,000** | ** ** |

 

The accompanying notesare an integral part of these statements.

 

22

----

 

**Consolidated Statements of Cash Flows**

 
| **Arctic Cat Inc. Years ended  March 31,**                                         |   | **2004**        |           | **2003**        |   | **2002**    |   |
|-----------------------------------------------------------------------------------------|--------|-----------------|----------------|-----------------|--------|-------------|--------|
| **Cash flows from operating activities**                                                |   |            |           |            |   |        |   |
| **Net earnings**                                                                        |   | **$**           | **30,365,000** | ** **      | **$**  | 32,703,000  |   | $ | 28,626,000 |   |
| **Adjustments to reconcile net earnings to  net cash provided by operating activities** |   |            | ** **     |            |   |        |   |
| **Depreciation**                                                                        |   | **18,551,000**  | ** **     | **15,684,000**  |   | 14,571,000  |   |
| **Deferred income taxes**                                                               |   | **6,213,000**   | ** **     | **5,674,000**   |   | 4,694,000   |   |
| **Tax benefit from stock option exercises**                                             |   | **1,868,000**   | ** **     | **1,207,000**   |   | 1,256,000   |   |
| **Watercraft exit costs**                                                               |   | **—**      | ** **     | (6,404,000      | **)**  | —      |   |
| **Changes in operating assets and liabilities,****net of effect  of watercraft costs**  |   |            | ** **     |            |   |        |   |
| **Trading securities**                                                                  |   | **(6,155,000**  | **)**          | **(1,031,000**  | )      | (2,845,000  | )      |
| **Accounts receivable**                                                                 |   | **744,000**     | ** **     | **(5,199,000**  | )      | 1,078,000   |   |
| **Inventories**                                                                         |   | **10,596,000**  | ** **     | **(9,547,000**  | )      | (1,237,000  | )      |
| **Prepaid expenses**                                                                    |   | **237,000**     | ** **     | **(436,000**    | )      | (1,536,000  | )      |
| **Accounts payable**                                                                    |   | **12,710,000**  | ** **     | **6,996,000**   |   | (1,521,000  | )      |
| **Accrued expenses**                                                                    |   | **(7,562,000**  | **)**          | **(948,000**    | )      | 229,000     |   |
| **Income taxes**                                                                        |   | **402,000**     | ** **     | **(1,072,000**  | )      | (3,395,000  | )      |
| **Net cash provided by operating activities**                                           |   | **67,969,000**  | ** **     | **37,627,000**  |   | 39,920,000  |   |
|                                                                                    |   |            |           |            |   |        |   |
| **Cash flows from investing activities**                                                |   |            | ** **     |            |   |        |   |
| **Purchase of property and equipment**                                                  |   | **(25,053,000** | **)**          | **(21,475,000** | )      | (22,231,000 | )      |
| **Sale and maturity of available-for-sale  securities**                                 |   | **1,729,000**   | ** **     | **1,861,000**   |   | 1,140,000   |   |
| **Purchase of available-for-sale securities**                                           |   | **—**      | ** **     | (350,000        | **)**  | —      |   |
| **Net cash used in investing activities**                                               |   | **(23,324,000** | **)**          | **(19,964,000** | )      | (21,091,000 | )      |
|                                                                                    |   |            |           |            |   |        |   |
| **Cash flows from financing activities**                                                |   |            | ** **     |            |   |        |   |
| **Proceeds from issuance of common stock**                                              |   | **6,425,000**   | ** **     | **2,767,000**   |   | 6,514,000   |   |
| **Repurchase of common stock**                                                          |   | **(34,533,000** | **)**          | **(25,432,000** | )      | (19,091,000 | )      |
| **Dividends paid**                                                                      |   | **(5,573,000**  | **)**          | **(5,383,000**  | )      | (5,667,000  | )      |
| **Net cash used in financing activities**                                               |   | **(33,681,000** | **)**          | **(28,048,000** | )      | (18,244,000 | )      |
|                                                                                    |   |            |           |            |   |        |   |
| **Net increase (decrease) in cash and  equivalents**                                    |   | **10,964,000**  | ** **     | **(10,385,000** | )      | 585,000     |   |
| **Cash and equivalents at beginning of year**                                           |   | **33,081,000**  | ** **     | **43,466,000**  |   | 42,881,000  |   |
| **Cash and equivalents at end of year**                                                 |   | **$**           | **44,045,000** | ** **      | **$**  | 33,081,000  |   | $ | 43,466,000 |   |
| **Supplemental disclosure of cash payments  for income taxes**                          |   | **$**           | **9,423,000**  | ** **      | **$**  | 12,978,000  |   | $ | 10,787,000 |   |

 

Supplemental disclosureof non-cash investing and financing activities:

 

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

 

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

 

During2004 and 2003, mature common shares with a fair market value of $1,230,000 and$12,000 were exchanged in settlement for the exercise of certain stock options.

 

The accompanying notesare an integral part of these statements.

 

23

----

 

**Notes to Consolidated Financial Statements**

 

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

 

**A****               SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

# ** **

Arctic Cat Inc. (the“Company”) operates in a single industry segment and designs, engineers,manufactures and markets snowmobiles and all-terrain vehicles (ATVs) under theArctic Cat® brand name, and related parts, garments and accessoriesprincipally through its facilities in Thief River Falls, Minnesota. TheCompany’s products are sold through a network of independent dealers anddistributors located throughout the United States, Canada, Scandinavia andother international markets.

 

## **Use of Estimates**

## ** **

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

 

## **Principles of Consolidation**

## ** **

The consolidatedfinancial statements include the accounts of Arctic Cat Inc. and itswholly-owned subsidiaries. All significant intercompany accounts andtransactions have been eliminated in consolidation.

 

## **Cash andEquivalents**

## ** **

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

 

**FairValues of Financial Instruments**

 

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

 

## **Short-TermInvestments**

## ** **

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

 

## **AccountsReceivable**

## ** **

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

 

## **Inventories**

## ** **

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

 

## **DerivativeInstruments and Hedging Activities**

## ** **

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

 

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

 

24

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

 

## **Property andEquipment**

## ** **

Depreciation is providedin amounts sufficient to relate the cost of depreciable assets to operationsover their estimated service lives, using the units of production method fortooling and the straight-line method for all other property and equipment.Repairs and maintenance cost that are considered not to extend the useful lifeof the property and equipment are expensed as incurred. Tooling is amortizedover the life of the product, generally three years. Estimated service livesrange from 15 - 20 years for buildings and improvements and 5 - 7 years formachinery and equipment. Accelerated and straight-line methods are used forincome tax reporting.

 

## **Product Warranties**

## ** **

The Company generallyprovides a limited warranty to the original owner of snowmobiles for twelvemonths from the date of consumer registration and for six months on ATVs. TheCompany provides for estimated warranty costs at the time of sale based onhistorical rates and trends and makes subsequent adjustments to its estimate asactual claims become known or the amounts are determinable. The followingrepresents changes in the Company’s accrued warranty liability for the fiscalyears ended March 31,

 
|                           |   | **2004**       |           | **2003**   |   | **2002**   |       |
|--------------------------------|--------|----------------|----------------|------------|--------|------------|------------|
| Balance at April 1,       |   | **$**          | **12,205,000** |       | $      | 12,937,000 |       | $ | 11,922,000 |   |
| Warranty Provision             |   | **14,141,000** |           | 15,318,000 |   | 11,512,000 |       |
| Warranty Claim Payments        |   | **16,015,000** |           | 16,050,000 |   | 10,497,000 |       |
| **Balance at  March 31,** |   | **$**          | **10,331,000** | ** ** | $      | 12,205,000 | ** ** | $ | 12,937,000 | ** ** |

 

## **Insurance**

## ** **

The Company isself-insured for employee medical, workers’ compen-sation, and productliability claims. Specific stop loss coverages are provided for catastrophicclaims. Losses and claims are charged to operations when it is probable a losshas been incurred and the amount can be reasonably estimated.

 

## **RevenueRecognition**

## ** **

The Company recognizesrevenue and provides for estimated marketing and sales incentive costs whenproducts are shipped to dealers and distributors pursuant to their order, the price is fixed andcollection is reasonably assured.

 

## **Marketing andSales Incentive Costs**

## ** **

At the time productrevenue is recognized the Company provides for various marketing and salesincentive costs which are offered to its dealers and consumers. Examples ofthese costs, which are recognized as a reduction of revenue when the productsare sold, include: dealer and consumer rebates, dealer floor plan financingassistance, sales associate incentives and other incentive and promotionprograms. Generally, the Company records costs related to these marketingprograms at the later of when the revenue is recognized or when the salesincentive or marketing program is approved and communicated for productspreviously shipped. Sales incentives that involve a free product or servicedelivered to the consumer are recorded as a component of cost of goods sold.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.

 

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

 

## **Dealer Holdback**

## ** **

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

## ** **

## **Research andDevelopment**

## ** **

Research and developmentcosts are expensed as incurred and are reported as a component of selling,general and administrative expenses. Research and development expense was$14,736,000, $14,254,000 and $15,244,000 during 2004, 2003 and 2002.

 

## **Advertising**

## ** **

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

 

25

----

 

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

 

## **Stock-BasedCompensation**

## ** **

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

 
|                                             |   | **2004**      |           | **2003**   |   | **2002**   |   |
|--------------------------------------------------|--------|---------------|----------------|------------|--------|------------|--------|
| **Net earnings:**                                |   |          | ** **     |       |   |       |   |
| **As reported**                                  |   | **$**         | **30,365,000** | ** ** | $      | 32,703,000 |   | $ | 28,626,000 |   |
| **Additional  compensation expense, net of tax** |   | **1,337,000** | ** **     | 1,366,000  |   | 1,067,000  |   |
| **Pro forma**                                    |   | **$**         | **29,028,000** | ** ** | $      | 31,337,000 |   | $ | 27,559,000 |   |
| **Net earnings per  share:**                     |   |          | ** **     |       |   |       |   |
| **As reported**                                  |   |          | ** **     |       |   |       |   |
| **Basic**                                        |   | **$**         | **1.42**       | ** ** | $      | 1.46       |   | $ | 1.21 |   |
| **Diluted**                                      |   | **$**         | **1.40**       | ** ** | $      | 1.45       |   | $ | 1.20 |   |
| **Pro forma**                                    |   |          | ** **     |       |   |       |   |
| **Basic**                                        |   | **$**         | **1.35**       | ** ** | $      | 1.40       |   | $ | 1.17 |   |
| **Diluted**                                      |   | **$**         | **1.34**       | ** ** | $      | 1.39       |   | $ | 1.15 |   |

 

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

 
|                          |   | **2004**    |       | **2003** |   | **2002** |   |
|-------------------------------|--------|-------------|------------|----------|--------|----------|--------|
| **Assumptions:**              |   |        | ** ** |     |   |     |   |
| **Dividend yield**            |   | **1.3**     | **%**      | 1.4      | %      | 1.5      | %      |
| **Average term**              |   | **7 years** | ** ** | 7 years  |   | 8 years  |   |
| **Volatility**                |   | **39**      | **%**      | 31       | %      | 37       | %      |
| **Risk-free rate of  return** |   | **3.8**     | **%**      | 3.9      | %      | 5.0      | %      |

 

The weightedaverage fair value of options granted during each of the following years endedMarch 31:

 
|                               |   | **2004** |     | **2003** |   | **2002** |   |
|------------------------------------|--------|----------|----------|----------|--------|----------|--------|
| **Fair value of  options granted** |   | **$**    | **8.46** |     | $      | 5.32     |   | $ | 6.46 |   |
|                                    |        |          |          |          |        |          |        |  |  |  |

 

See Note K for additionaldisclosures regarding stock option plans.

 

## **Net Earnings PerShare**

## ** **

The Company’s dilutedweighted average shares outstanding include common shares and common shareequivalents relating to stock options, when dilutive. Options to purchase85,180, 369,295, and 128,512 shares of common stock with weighted averageexercise prices of $20.94, $15.80, and $16.80 were outstanding during 2004,2003 and 2002, but were excluded from the computation of common shareequivalents because they were anti-dilutive.

 

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

 
|                                                  |   | **2004**       |   | **2003**   |   | **2002**   |   |
|-------------------------------------------------------|--------|----------------|--------|------------|--------|------------|--------|
| Weighted average number Of common shares  outstanding |   | **21,424,000** |   | 22,396,000 |   | 23,587,000 |   |
| Dilutive effect of option plan                        |   | **306,000**    |   | 219,000    |   | 338,000    |   |
| Common and potential shares outstanding -  Diluted    |   | **21,730,000** |   | 22,615,000 |   | 23,925,000 |   |

 

## **Foreign CurrencyTranslation**

 

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

 

## **ComprehensiveIncome**

## ** **

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

 

## **Accounting Policyand Disclosure Changes**

## ** **

**Accounting for Derivative Instruments and Hedging Activities–**The Company 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 recognizederivatives in their financial statements as either assets or liabilitiesmeasured at fair value. The accounting for changes in the fair value of aderivative

 

26

----

 

isrecognized into earnings unless certain criteria are met. These Standards alsorequire formal documentation, designation and effectiveness assessmentof transactions receiving hedge accounting.At April 1, 2001, the Company had open Japanese yen forwardexchange contracts with notional amounts totaling $21,495,000 maturing throughJune 2001. Under the new standard the Company recorded a liability of$1,176,000 for the open Japanese yen forward contracts, accumulated othercomprehensive income, net of tax, of $741,000, and current deferred tax assetsof $435,000.

 

**B****               SHORT-TERMINVESTMENTS**

# ** **

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

 
|                                    |   | **2004**      |           | **2003**   |   |
|-----------------------------------------|--------|---------------|----------------|------------|--------|
| **Trading securities**                  |   | **$**         | **55,282,000** | ** ** | $      | 49,127,000 |   |
| **Available-for-sale  debt securities** |   | **7,113,000** | ** **     | 9,087,000  |   |
|                                    |   | **$**         | **62,395,000** |       | $      | 58,214,000 |   |

 

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

 

**C****               INVENTORIES**

# ** **

Inventoriesconsist of the following at March 31:

 
|                                  |   | **2004**       |           | **2003**   |   |
|---------------------------------------|--------|----------------|----------------|------------|--------|
| **Raw materials and  sub-assemblies** |   | **$**          | **16,942,000** | ** ** | $      | 17,575,000 |   |
| **Finished goods**                    |   | **14,719,000** | ** **     | 22,293,000 |   |
| **Parts, garments and  accessories**  |   | **29,466,000** | ** **     | 31,855,000 |   |
|                                  |   | **$**          | **61,127,000** |       | $      | 71,723,000 |   |

 

**D****               ACCRUED EXPENSES**

 

Accrued expenses consistof the following at March 31:

 
|             |   | **2004**       |           | **2003**   |   |
|------------------|--------|----------------|----------------|------------|--------|
| **Marketing**    |   | **$**          | **8,566,000**  |       | $      | 13,275,000 |   |
| **Compensation** |   | **9,206,000**  |           | 8,389,000  |   |
| **Warranties**   |   | **10,331,000** |           | 12,205,000 |   |
| **Insurance**    |   | **5,061,000**  |           | 5,619,000  |   |
| **Other**        |   | **1,736,000**  |           | 2,974,000  |   |
|             |   | **$**          | **34,900,000** |       | $      | 42,462,000 |   |

 

**E****                 DISCONTINUEDPERSONAL WATERCRAFT BUSINESS AND RELATED COSTS**

# ** **

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

 
|                               |   | **Consumer  Incentives** |        | **Other  Matters** |   | **Total**   |       |
|------------------------------------|--------|--------------------------|-------------|--------------------|--------|-------------|------------|
| Balance at April 1, 2001      |   | $                        | 4,886,000   |               | $      | 3,072,000   |       | $ | 7,958,000 |   |
| Cash payments                      |   | (231,000                 | )           | (218,000           | )      | (449,000    | )          |
| Balance on March 31, 2002     |   | 4,655,000                |        | 2,854,000          |   | 7,509,000   |       |
| Change in estimates                |   | (4,000,000               | )           | (2,854,000         | )      | (6,404,000  | )          |
| Cash payments                      |   | (228,000                 | )           | —             |   | (228,000    | )          |
| Balance at Marach 31, 2003         |   | 427,000                  |        | 450,000            |   | 877,000     |       |
| Cash payments                      |   | (269,000                 | )           | —             |   | (269,000    | )          |
| **Balance on March 31, 2004** |   | **$**                    | **158,000** | ** **         | **$**  | **450,000** | ** ** | **$** | **608,000** | ** ** |

 

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**F****                 FINANCING**

 

The Company has a$60,000,000 unsecured bank credit agreement for documentary and stand-byletters of credit and for working capital purposes. In fiscal 2004 the Companyincurred no short term bank borrowings. Total working capital borrowings underthe credit agreement are limited to $45,000,000 during the last six months ofthe fiscal year. The credit agreement is due on demand and expiresJuly 31, 2004, however, management believes they will be able to renew theexisting line of credit under materially similar terms. Interest on the workingcapital borrowings is payable monthly at alternative interest rates, at theCompany’s election. The credit agreement contains certain covenants. AtMarch 31, 2004, there was $35,253,000 of issued letters of creditoutstanding and no working capital borrowings outstanding. Of the issuedletters of credit outstanding, $30,215,000 was issued to Suzuki MotorCorporation (Suzuki) for engine and service parts purchases (see Note H).Outstanding letters of credit will be repaid over the following six months inaccordance with the credit agreement and any such renewal.

 

**G****               RETIREMENT SAVINGSPLAN**

# ** **

The Company’s 401(k)retirement savings plan covers substantially all eligible employees. Employeesmay contribute up to 50% of their compensation with the Company matching 100%of the employee contributions, up to a maximum of 3% of the employee’scompensation. The Company can elect to make additional contributions at itsdiscretion. Total Company matching contributions were $1,286,000, $1,284,000and $1,230,000 in 2004, 2003 and 2002. There were no discretionarycontributions made during 2004, 2003 and 2002.

 

**H****               RELATED PARTYTRANSACTIONS**

# ** **

The Company purchasesengines and service parts from Suzuki, owner of the Company’s Class B commonstock. Such purchases totaled $129,700,000, $114,472,000 and $124,438,000 in2004, 2003 and 2002. The purchase price of the engines and service parts isdetermined annually. The Company has an agreement with Suzuki for snowmobileengine purchases to share the impact of fluctuations in the exchange ratebetween the U.S. dollar and the Japanese yen above and below a fixed rangecontained in the agreement. This agreement renews annually.

 

The Company is dependenton Suzuki for the near term supply of its engines and service parts. Aninterruption of this supply could have a material adverse effect on theCompany’s operations. Certain raw materials and services are purchased fromvendors in which certain of the Company’s directors are officers or significantshareholders. In 2004, 2003 and 2002, these transactions aggregated $7,150,000,$6,165,000 and $4,315,000.

 

**I****                    INCOME TAXES**

# ** **

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

 
|         |   | **2004**      |           | **2003**   |   | **2002**   |   |
|--------------|--------|---------------|----------------|------------|--------|------------|--------|
| **Current**  |   |          | ** **     |       |   |       |   |
| **Federal**  |   | **$**         | **7,083,000**  | ** ** | $      | 9,307,000  |   | $ | 8,159,000 |   |
| **State**    |   | **926,000**   | ** **     | 929,000    |   | 973,000    |   |
| **Deferred** |   | **6,280,000** | ** **     | 5,550,000  |   | 4,339,000  |   |
|         |   | **$**         | **14,289,000** |       | $      | 15,786,000 |   | $ | 13,471,000 |   |

 

 

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

 
|                           |   | **2004** |       | **2003** |   | **2002** |   |
|--------------------------------|--------|----------|------------|----------|--------|----------|--------|
| **Statutory income  tax rate** |   | **35.0** | **%**      | 35.0     | %      | 35.0     | %      |
| **State taxes**                |   | **1.4**  | ** ** | 1.3      |   | 1.1      |   |
| **Tax exempt interest**        |   | **(0.5** | **)**      | (0.5     | )      | (0.8     | )      |
| **Foreign sales  corporation** |   | **(2.1** | **)**      | (1.8     | )      | (1.6     | )      |
| **Other**                      |   | **(1.8** | **)**      | (1.4     | )      | (1.7     | )      |
|                           |   | **32.0** | **%**      | 32.6     | %      | 32.0     | %      |

 

The cumulative 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:

 
|                                         |   | **2004**      |           | **2003**   |   |
|----------------------------------------------|--------|---------------|----------------|------------|--------|
| **Short-term deferred  income taxes**        |   |          | ** **     |       |   |
| **Accrued expenses**                         |   | **$**         | **9,127,000**  | ** ** | $      | 11,513,000 |   |
| **Inventory  capitalization and writedowns** |   | **2,492,000** | ** **     | 2,503,000  |   |
| **Other**                                    |   | **401,000**   | ** **     | 401,000    |   |
| **Net short-term  deferred tax asset**       |   | **$**         | **12,020,000** | ** ** | $      | 14,417,000 |   |
| **Long-term deferred  income taxes**         |   |          | ** **     |       |   |
| **Property and  equipment**                  |   | **$**         | **11,585,000** | ** ** | $      | 8,279,000 |   |
| **Other**                                    |   | **4,976,000** | ** **     | 4,399,000  |   |
| **Net long-term  deferred tax liability**    |   | **$**         | **16,561,000** | ** ** | $      | 12,678,000 |   |

 

 

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**J****                 COMMITMENTS ANDCONTINGENCIES**

 

## **Dealer Financing**

## ** **

Finance companies providecertain of the Company’s dealers and distributors with floor plan financing.The Company has agreements with these finance companies to repurchase certainrepossessed products sold to its dealers. At March 31, 2004, the Companywas contingently liable under these agreements for a maximum repurchase amountof approximately $23,549,000.  TheCompany’s financial exposure under these agreements is limited to thedifference between the amount paid to the finance companies for repurchases andthe amount received upon the resale of the repossessed product. Losses incurredunder these agreements during the periods presented have not been material.

 

## **Litigation**

## ** **

The Company is subject tolegal proceedings and claims which arise in the ordinary course of business.Accidents involving personal injury and property damage occur in the use ofsnowmobiles and ATVs. Claims have been made against the Company from time totime. It is the Company’s policy to vigorously defend against these actions.The Company believes that the cases in discovery are adequately covered byreserves and product liability insurance. The Company is not involved in anylegal proceedings which it believes will have the potential for a materiallyadverse impact on the Company’s business or financial condition, results ofoperations or cash flows.

 

**K****               SHAREHOLDERS’EQUITY**

# ** **

## **Stock Option Plans**

## ** **

The Company has stockoption plans that provide for incentive and non-qualified stock options to begranted to directors, officers and other key employees. The stock optionsgranted generally have a five to ten year life, vest over a period of one tothree years, and have an exercise price equal to the fair market value of thestock on the date of grant. At March 31, 2004, the Company had 1,031,942shares of common stock available for grant under the plans.

 

Transactions under theplans during each of the three years in the period ended March 31, 2004are summarized as follows:

 
|                                    |   | **Number of  shares under  option** |       | **Weighted  average  exercise price** |      |
|-----------------------------------------|--------|-------------------------------------|------------|---------------------------------------|-----------|
| Outstanding at April 1, 2001       |   | 1,908,612                           |       | $                                     | 10.60     |   |
| Granted                                 |   | 282,500                             |       | 15.21                                 |      |
| Exercised                               |   | (801,869                            | )          | 9.89                                  |      |
| Outstanding at March 31, 2002      |   | 1,389,243                           |       | 11.87                                 |      |
| Granted                                 |   | 327,000                             |       | 15.59                                 |      |
| Exercised                               |   | (256,160                            | )          | 10.85                                 |      |
| Cancelled                               |   | (3,000                              | )          | 15.21                                 |      |
| Outstanding  at March 31, 2003     |   | 1,457,083                           |       | 12.88                                 |      |
| Granted                                 |   | 316,000                             |       | 21.00                                 |      |
| Exercised                               |   | (644,305                            | )          | 11.88                                 |      |
| **Outstanding at  March 31, 2004** |   | **1,128,778**                       | ** ** | **$**                                 | **15.72** | ** ** |

 

Options exercisable atMarch 31 are as follows:

 
|     |   | **Number of  shares under  option** |   | **Weighted  average  exercise price** |      |
|----------|--------|-------------------------------------|--------|---------------------------------------|-----------|
| 2002     |   | 937,906                             |   | $                                     | 11.26     |   |
| 2003     |   | 922,081                             |   | $                                     | 11.64     |   |
| **2004** |   | **578,282**                         |   | **$**                                 | **13.22** |   |

 

The following tablessummarize information concerning currently outstanding and exercisable stockoptions at March 31, 2004:

 

**OptionsOutstanding**

 
| **Range of  Exercise Prices**       |   | **Number  Outstanding** |   | **Weighted  Average  Remaining  Contractual Life** |   | **Weighted  Average  Exercise  Price** |   |
|-------------------------------------|--------|-------------------------|--------|----------------------------------------------------|--------|----------------------------------------|--------|
| $ 6.11 – $ 9.13           |   | 11,814                  |   | 4.4 years                                          |   | $                                      | 6.11   |   |
|   9.38 –  13.33 |   | 298,856                 |   | 5.1 years                                          |   | 10.82                                  |   |
| 14.41 –  21.03            |   | 818,108                 |   | 8.0 years                                          |   | 17.65                                  |   |
|                                |   | 1,128,778               |   |                                               |   | $                                      | 15.72  |   |

 

**OptionsExercisable**

 
| **Range of  Exercise Prices**       |   | **Number  Exercisable** |   | **Weighted  Average  Exercise  Price** |   |
|-------------------------------------|--------|-------------------------|--------|----------------------------------------|--------|
| $ 6.11 – $ 9.13           |   | 11,814                  |   | $                                      | 6.11   |   |
|   9.38 –  13.33 |   | 298,856                 |   | 10.82                                  |   |
| 14.41 –  21.03            |   | 267,612                 |   | 16.21                                  |   |
|                                |   | 578,282                 |   | $                                      | 13.22  |   |

 

29

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## **Class B CommonStock**

## ** **

Suzuki owns alloutstanding shares of the Company’s Class B common stock. At the option ofSuzuki, the Class B common stock is convertible into an equal number of sharesof the Company’s common stock. The Class B shareholder is entitled to elect onemember of the Company’s Board of Directors but cannot vote for the election ofother directors of the Company. The Class B shareholder can vote on all othermatters submitted to the common shareholders. The Class B common stockparticipates equally with the common stock in all dividends and otherdistributions duly declared by the Company’s Board of Directors. The Class Bcommon shares are converted into an equal number of shares of common stock if:Suzuki owns less than 15% of the aggregate number of outstanding common andClass B common shares; the Company becomes a non-surviving party due to amerger or recapitalization; the Company sells substantially all of its assets;or Suzuki transfers its Class B common stock to any person.

 

In addition, theCompany has a Stock Purchase Agreement with Suzuki that prohibits the purchaseof additional shares of the Company’s common stock unless, following suchpurchase, Suzuki’s ownership is less than or equal to 32% of the aggregateoutstanding shares of common and Class B common stock. The Company has thefirst right of refusal to purchase any shares Suzuki intends to sell. Suzukihas agreed not to compete in the manufacture of snowmobiles or related parts solong as it supplies engines to the Company or owns at least 10% of theaggregate common and Class B common shares outstanding.

 

## **Preferred Stock**

## ** **

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

 

## **Shareholders’Rights Plan**

## ** **

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

 

## **Share RepurchaseAuthorization**

## ** **

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

 

**L****                EXPORT SALES**

# ** **

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

 

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**REPORTOF INDEPENDENT****CERTIFIED PUBLIC ACCOUNTANTS**

 

**Board of Directors**

Arctic Cat Inc.

 

We have audited theaccompanying consolidated balance sheets of Arctic Cat Inc. and subsidiaries asof March 31, 2004 and 2003, and the related consolidated statements ofearnings, shareholders’ equity, and cash flows for each of the three years inthe period ended March 31, 2004. These financial statements are theresponsibility of the company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

 

We conducted ouraudits in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, 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.

 

In our opinion,the financial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Arctic Cat Inc. andsubsidiaries as of March 31, 2004 and 2003, and the consolidated resultsof their operations and their consolidated cash flows for each of the threeyears in the period ended March 31, 2004, in conformity with accountingprinciples generally accepted in the United States of America.

 

 
| /s/ GRANT  THORNTON LLP |   |   |
|-------------------------|--------|--------|
|                    |   |   |
| Minneapolis, Minnesota  |
| May 5, 2004             |

 

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**ARCTIC CAT INC. EXHIBITINDEX**

 

# **EXHIBIT NUMBER**

# ** **

| **21**   | Subsidiaries of  Registrant                          |
|----------|------------------------------------------------------|
| **23**   | Consent of Independent  Certified Public Accountants |
| **31.1** | Certificate of  Chief Executive Officer              |
| **31.2** | Certificate of  Chief Financial Officer              |
| **32.1** | **Certification  of Chief Executive Officer**        |
| **32.2** | **Certification of Chief Financial  Officer**        |

 

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