**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-K**
| x      |   | Annual report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934 for the fiscal year ended  March 31, 2006 or |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                              |
| o      |   | Transition report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934 For the Transition period                     |
|   |   | from                                                                                                                                              | to |

** **

**CommissionFile Number: 0-18607**

**ARCTIC CAT INC.**

(Exact name ofregistrant as specified in its charter)

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

** **

**601 Brooks Avenue South**

**Thief River Falls, Minnesota56701**

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

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act:

                Yes o    No x

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Exchange Act:

                Yes o    No x

**Note** — Checkingthe box above will not relieve any registrant required to file reports pursuantto Section 13 or 15(d) of the Exchange Act from their obligationsunder those Sections.

Indicate by check markwhether the registrant (1) has filed all reports required by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days:

                Yes x    No o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, tothe best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K:

x

Indicate by check markwhether the registrant is a large accelerated filer, and accelerated filer, ora non-accelerated filer. See definition of “accelerated filer” in Rule 12b-2of the Exchange Act.

Large accelerated filer o                    Accelerated filer x             Non-accelerated filer  o

Indicated by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act)

Yes o    No x

The aggregate marketvalue of the voting and non-voting common equity held by non-affiliatescomputed by reference to the price at which the common equity was last sold, orthe average bid and asked price of such common equity, as of the last businessday of the Registrant’s most recently completed second fiscal quarter:$400,760,007.

At June 1, 2006,12,688,606 shares of Common Stock and 6,717,000 shares of Class B CommonStock of the Registrant were outstanding.

**Documents Incorporated byReference:**

Portions of the Company’s Proxy Statement for its Annual Meeting ofShareholders currently scheduled to be held on August 2, 2006 areincorporated by reference into Part III of this Form 10-K

 

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**Arctic Cat Inc.Form 10-kTable of Contents**

** **
|                   | ** ** | **Description**                                                                                                     | **Page Numbers** |
|-------------------|------------|---------------------------------------------------------------------------------------------------------------------|-----------------------|
| **PART I**   | ** ** | ** **                                                                                                          | ** **            | ** ** |
| ****ITEM 1.****   |       | Business                                                                                                            |                  | 4-9 |
| **ITEM  1A.**     |       | Risk  Factors                                                                                                       |                  | 10-11 |
| **ITEM 1B.**      |       | Unresolved Staff  Comments                                                                                          |                  | 11 |
| ****ITEM 2.****   |       | Properties                                                                                                          |                  | 11 |
| ****ITEM 3.****   |       | Legal  Proceedings                                                                                                  |                  | 11 |
| ****ITEM 4.****   |       | Submission of  Matters to a Vote of Security Holders                                                                |                  | 11 |
| **PART II**  | ** ** | ** **                                                                                                          | ** **            | ** ** |
| ****ITEM 5.****   |       | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities |                  | 12 |
| ****ITEM 6.****   |       | Selected Financial  Data                                                                                            |                  | 13 |
|              |       | Quarterly Financial Data                                                                                            |                  | 14 |
| ****ITEM 7.****   |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         |                  | 14-16 |
| ****ITEM 7A.****  |       | Quantitative  and Qualitative Disclosures About Market Risk                                                         |                  | 17 |
| ****ITEM 8.****   |       | Financial  Statements and Supplementary Data                                                                        |                  | 17 |
| ****ITEM 9.****   |       | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure                               |                  | 17 |
| ****ITEM 9A.****  |       | Controls and  Procedures                                                                                            |                  | 17-19 |
| ****ITEM 9B.****  |       | Other Information                                                                                                   |                  | 19 |
| **PART III** | ** ** | ** **                                                                                                          | ** **            | ** ** |
| ****ITEM 10.****  |       | Directors and Executive Officers of the Registrant                                                                  |                  | 20 |
| ****ITEM 11.****  |       | Executive Compensation                                                                                              |                  | 20 |
| ****ITEM 12.****  |       | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                     |                  | 20 |
| ****ITEM 13.****  |       | Certain Relationships and Related Transactions                                                                      |                  | 20 |
| ****ITEM 14.****  |       | Principal Accountant Fees and Services                                                                              |                  | 20 |
|                   |            |                                                                                                                     |                       |  |  |

 

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| **PART IV**                                         | ** ** | ** **                                 | ** ** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------|------------|------------|
| ****ITEM 15.****                                         |       | Exhibits and Financial Statement Schedules |       | 21-22      |
| Signatures                                               |       |                                       |       | 23         |
| Consolidated  Balance Sheet                              |       | 24                                         |
| Consolidated Statements of Earnings                      |       | 25                                         |
| Consolidated Statements of Shareholders’ Equity     |       | 26                                         |
| Consolidated Statements of Cash Flows                    |       | 27                                         |
| Notes to Consolidated Financial Statements               |       | 28-35                                      |
| Report of Independent Registered Public Accounting  Firm |       | 36                                         |
| Exhibit Index                                       |       |                                       |       | 37         |
| 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., a Minnesota corporation (the “Company”),is based in Thief River Falls, Minnesota. The Company operates in a singleindustry segment and designs, engineers, manufactures and markets snowmobilesand all-terrain vehicles (ATVs) under the Arctic Catâ brandname, as well as related parts, garments and accessories. The Company marketsits products through a network of independent dealers located throughout theUnited States, Canada, and Europe and through distributors representing dealersin Europe, the Middle East, Asia and other international markets. The ArcticCat brand name has existed for over 40 years and is among the most widelyrecognized and respected names in the snowmobile industry. The Company tradeson the NASDAQ National Market under the symbol ACAT.

**IndustryBackground**

**Snowmobiles —******The snowmobile, developed in the 1950’s, was originallyintended to be used as a utility vehicle, but today the overwhelming majorityof the industry’s sales are for recreational use. Between the late 1950’s andearly 1970’s, the industry expanded dramatically reaching a peak of over 100manufacturers and a high of nearly 495,000 units sold to retail customers inNorth America in 1971. Today the number of major industry participants hasdecreased to four, Arctic Cat, Bombardier Recreational Products (BRP), Polarisand Yamaha. The Company believes there are currently more significant barriersto entry into the snowmobile market than existed in the 1970’s. These barriersinclude increased brand loyalty, long-standing dealer and distributor networksand relationships, limited engine sources, cost of four stroke enginedevelopment, manufacturing and engineering expertise and higher initialstart-up costs. Industry-wide snowmobile sales to retail customers in NorthAmerica were approximately 135,000 units for the 2006 model year.

**All-Terrain Vehicles(ATVs) —**The ATV industry evolved from the three-wheelmodel that was developed in the early 1970s to the four-wheel models that aresold today. The most popular ATV use is general recreation, followed byhunting/fishing, farm/ranch use, hauling/towing, transportation, and commercialuses. From 1970 to 1986, the number of ATVs retailed in the United Statescontinued to grow until peaking in 1986 with approximately 535,000 units soldduring that calendar year. From 1987 to 1991, the number of ATVs sold declinedto a low of approximately 151,000 units. Industry wide sales were 782,000 unitsin the U.S. and 88,000 units in Canada in calendar 2005. Major competitors inthe industry include Honda, Yamaha, Kawasaki, BRP, Polaris and Suzuki and inearly 2004 John Deere entered the market.

**Products**

**Snowmobiles —**The Company produces a full line of snowmobiles, consisting of 53 models,marketed under the Arctic Cat brand name, and designed to satisfy variousmarket niches. The 2006 Arctic Cat models carry suggested U.S. retail pricesranging from $4,299 to $10,799, excluding a youth model which is sold at asuggested U.S. retail price of $2,149. Arctic Cat snowmobiles are sold in theUnited States, Canada, Scandinavia and other international markets.

The Company’s 2006 yearsnowmobile models are categorized as High Performance, Trail Performance,Mountain, Crossover, Touring and Utility. The Company markets: PerformanceArctic Cat snowmobiles under the names Firecat and ZR; Trail Performance ArcticCat snowmobiles under the name Z, Sabercat and T660 Turbo; Mountain snowmobilesunder the names M series and King Cat; Touring models under the names Panther, Pantera,and T660 Touring; and Utility models under the name Bearcat. The Company’smodel crossing the mountain category and the trail category called theCrossfire. In addition, to encourage family involvement in snowmobiling, theCompany offers a youth snowmobile marketed under the F 120 name.

The Company believes theArctic Cat brand name enjoys a premier image among snowmobile enthusiasts andthat its snowmobiles have a long-standing reputation for quality, performance,fuel management, style, comfort, ride and handling. Arctic Cat snowmobilesoffer a wide range of standard and optional features which enhance theiroperation, riding comfort and performance. Such features include hydraulic discbrakes, remote starters and a technologically advanced front and rearsuspension. Arctic Cat is the industry leader in fuel management technologyoffering an electronic fuel injection (EFI) system on many of its snowmobiles.The Company was the first in the snowmobile industry to utilize four strokeengines to reduce emissions. The Company subsequently introduced a snowmobilewith a turbo charged four stroke inter-cooled engine.

Arctic Cat focuses on newproduct development in order to grow its market share and introduces at leastone new model every year. These new models are consistently the Company’s bestsellers in their respective category. In the 2006 model year, over 75 percentof the Company’s snowmobile sales were from models or model variations notavailable three years earlier. Some recent examples of the success of ArcticCat’s new products were *SnowGoer Magazine*voted the 2006 Crossfire 700 the best crossover sled for trail and powderriding, Sledheads Magazine voted the M-Series the lightest mountain sledsfor 2006 and the 2005 M7 Mountain Cat was named “Snowmobile of the Year” by *SnowGoer Magazine*.

For the last three fiscalyears ended 2006, 2005 and 2004 snowmobiles accounted for 32%, 37% and 40% ofthe Company’s revenues.

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**All-Terrain Vehicles(ATVs) —** In December 1995, the Company introducedits first ATV. Since that time the Arctic Cat line has grown to 26 models. Featureslike fully independent front and rear suspensions, hydraulic disc brakes,hi-low range transmission, long travel suspension with high ground clearance,MRP Speedracks, automatic transmissions, selectable 2WD/4WD shaft drive,locking differentials, newly introduced electronic fuel injection and a largefuel tank, all make Arctic Cat ATVs consumer friendly. The Company has specialtwo rider models that provide a proper alternative for customers that want toride double. The 2006 Arctic Cat ATV models carry suggested U.S. retail pricesranging from $3,499 to $8,399, excluding youth models which are sold atsuggested U.S. retail prices ranging from $1,799 to $2,299.

The Company introduced itsnew Prowler UTV into the utility vehicle market in 2006. The Prowler utilizesthe Company’s 650cc engine, a rear cargo box, dual bucket seats as well asArctic Cat’s renowned travel, suspension and ride characteristics. The Prowlerretails for $9,499.

Arctic Cat has continuedto expand into international markets by focusing on new product development,adding new distributors, entering new territories, and developing new markets.In July 2005, the Company acquired a 100% interest in a European companythat designs, engineers, manufactures and markets ATVs which utilize theCompany’s components. The Company completed this acquisition to further expandits ATV model offerings and strengthen its European presence.

The Company has enteredinto a strategic partnership with Piagio Group to expand Arctic Cat’sinternational distribution capabilities. The Company and Piagio will cooperateon product distribution, with Arctic Cat selling its ATV products throughselected Piagio dealers in Europe, and with Piagio selling its motorcycles andmotor scooters through selected Arctic Cat North American dealers.

Arctic Cat believes itsATVs are recognized for their power, durability, utility, suspension, style andare well received within the market. *Farm Industry News*gave Arctic Cat 2000 models the FinOvation Award for having the greatest readerinterest. *ATV Magazine* awarded the Arctic Cat 2504x4 model “Best in Class” in 2001 and “Best Utility” in 2002. In 2003 ArcticCat MRP Speedrack models received the 2003 Product Innovation Award from *ATV Magazine*. In 2004 the Arctic Cat 650 V-twin received “ATVof the Year” award from both “*ATV Illustrated”*and “*ATV Guide”*. In 2005 *ATVIllustrated* voted the Prowler the best new UTV for sport and utilitypurposes.

For the last three fiscalyears ended 2006, 2005 and 2004 ATVs accounted for 54%, 49% and 45% of the Company’s revenues.

**Parts, Garments andAccessories —**The Company is the exclusive provider ofgenuine Arctic Cat snowmobile and ATV parts, garments and accessories. Includedare replacement parts and accessory items to upgrade Arctic Cat snowmobilessuch as electric start and reverse kits, luggage racks and bags, backrests,machine covers, windshields, and colored accessories. Other items includemaintenance supplies such as oil and fuel additives, track studs and carbiderunners. Arctic Cat ATV parts and accessories include winch kits, snow  plow kits, MRP Speedrack accessories,portable lights, utility bags as well as maintenance supplies.

The Company 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 offers ATVgarments under the “Arcticwear ATV Gear” label. This line of clothing is gearedtoward function and comfort and includessuits, jackets, gloves, helmets, gear bags, sweatshirts, T-shirts, andcaps.

For the last three fiscalyears ended 2006, 2005 and 2004 parts, garments and accessories accounted for14%, 14% and 15% of the Company’s revenues.

**Manufacturing andEngineering**

Arctic Cat snowmobiles and most ATVs are manufacturedat the Company’s facilities in Thief River Falls, Minnesota. A Taiwanesecompany manufactures 90cc and 250cc ATVs for Arctic Cat. The Company paintssnowmobile hoods and produces other parts for Arctic Cat snowmobiles and ATVsin its Madison, South Dakota plant. The Company also has a facility in Bucyrus,Ohio which houses its service parts, garments and accessories distributionoperations. The Company has strategically identifiedspecific core manufacturing competencies for vertical integration andhas chosen outside vendors to provide other parts. The Company has developedrelationships with selected high quality vendors in order to obtain access toparticular capabilities and technologies outside the scope of the Company’sexpertise. The Company designs component parts often in cooperation with itsvendors, contracts with them for the development of tooling, and then enters into agreements with these vendors topurchase component parts manufactured utilizing the tooling. In itsvertically integrated operations, the Company manufactures foam seats, seatcovers and machines, welds and paints other components. The Company completesthe total assembly of most of its products at its facilities in Thief RiverFalls. Manufacturing operations include robotics as well as digital andcomputer-automated equipment to speed production, reduce costs and improve thequality, fit and finish of every product. The Company believes that most rawmaterials used in its manufacturing process and most component parts, with theexception of engines are available from

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multiple alternative vendors on relatively shortnotice at competitive prices.

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

The Company and Suzukihave enjoyed an excellent relationship since the Company’s inception. Suzukipurchased approximately 31% of the Company’s then outstanding capital stock in July 1988,prior to the Company’s initial public offering in July of 1990, and iscurrently the Company’s largest shareholder with approximately 34.6% of theCompany’s outstanding capital stock. If Suzuki were ever to cease supplyingengines to the Company, such an interruption could materially and adverselyaffect production. The Company believes it could take up to two model years fora new engine supplier to be in a position to manufacture the Company’sspecially designed engines.

During late fiscal 2005the Company began manufacturing its own designed 650 cc ATV engine as part of astrategic first step in a new engine program. The Company believes that havingthe capability to design and manufacture its own ATV engines will enable ArcticCat to offer customers more choices, provide excellent value, lower Japaneseyen currency exposure and enhance its long-term competitive position. TheCompany will transition its engine manufacturing from its current Thief RiverFalls facility to its new 60,800 square foot facility in St. Cloud, Minnesotain the fall of 2006.

Since the Company begansnowmobile 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.

Most sales of snowmobilesto retail customers begin in the early fall and continue during the winter.Orders by dealers and distributors for each year’s production are placed in thespring following dealer and distributor meetings. Snowmobiles are builtcommencing in the spring and continuing through late autumn or early winter.

Retail sales of ATVsoccur throughout the year with seasonal highs occurring in the spring and fall.The Company builds and purchases ATVsthroughout the year to coincide with expected dealer and consumer demand.

The Company is committedto an ongoing engineering program dedicated to innovation and to continuedimprovements in the quality and performance of its products as well as newproduct introduction. The Company currently employs 163 individuals in thedesign and development of new and existing products, with an additional 31individuals directly involved in the testing of snowmobiles and ATVs in normal andextraordinary conditions. In addition, snowmobiles and ATVs are tested inconditions and locations similar to those in which they are used. The Companyuses computer-aided design and manufacturing systems to shorten the timebetween initial concept and final production. For 2006, 2005, and 2004, theCompany spent approximately $17,067,000, $17,350,000, and $14,736,000 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 products are currently sold through anextensive network of independent dealers located throughout the United States,Canada, and Europe and through distributors representing dealers in Europe, theMiddle East, Asia and other international markets. To promote new dealershipsand to service its existing dealer network,the Company also employs sales representatives throughout the United States andCanada. See Item 7A, Consolidated Statements of Earnings and Notes A &L  of Notes to Consolidated FinancialStatements for a discussion of export sales.

The Company’s dealersenter into an annual renewable contract and are required to maintain status as an authorized dealer in order tocontinue selling the Company’s products. To obtain and maintain such status,dealers are expected to order a sufficient number of snowmobiles and/or ATVs toservice their market area adequately. In addition, the dealers must perform serviceon these units and maintain satisfactory service performance levels, and theirmechanics must complete special training provided by the Company. Dealers arealso expected to carry adequate levels of inventory of genuine Arctic Cat partsand accessories. As is typical in the industry, most of the Company’s dealersalso sell some combination of motorcycles, marine products, lawn and gardenproducts and other related products.

The Company utilizesdistributors outside the United States and Canada to take advantage of theirknowledge and experience in their respectivemarkets and to increase market penetration of its products. Canadiansales are made in Canadian dollars, nearly all of which is financed throughcertain Canadian financial institutions. Most sales to distributors outsideNorth America are made in U.S. dollars and are supported by letters of credit.

The Company’s sales andmarketing efforts are comprised of dealer and consumer promotions, directadvertising and cooperative advertising programs with its dealers. Each year, the Company and its

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distributors conduct dealer shows in order tointroduce the upcoming year’s models and to promote dealer orders. Marketingactivities are designed to promote directly to consumers. Products areadvertised by the Company in consumer magazines and through other media. Inaddition, the Company engages in extensive dealer cooperative advertising, on alocal and national level, whereby the Company and its dealers share advertisingcosts. Each season the Company produces promotional films, product brochures,point of purchase displays, leaflets, posters and banners, and otherpromotional items for use by dealers. The Company also participates in consumershows and rallies with dealers and sponsors independent racers who participatein snowmobile races throughout the world. In order for its dealers anddistributors to remain price competitive and to reduce retail inventories, theCompany will from time to time make available to them rebate programs,discounts, or other incentives. In order to build brand loyalty the Companypublishes and mails, during the year, magazines called *Pride*(snowmobile) and *Ride* (ATV) to  registered owners of its products.

The Company places strongemphasis on identifying and addressing the specific needs of its customers byperiodically conducting dealer and consumer focus group meetings and surveys.

The Company warrants itssnowmobiles and ATVs under a limited warranty against defects in materials andworkmanship for a period generally ranging from six months to one year from thedate of retail sale or for a period of 90 days from the date of commercial orrental use. Repairs or replacements under warranty are administered through theCompany’s dealers and distributors.

**Competition**

The snowmobile and ATV markets are highly competitive,based on a number of factors, including performance, ride, suspension,  innovation, technology, styling, fit andfinish, brand loyalty, reliability, durability, price and distribution. TheCompany believes Arctic Cat snowmobiles and ATVs are highly regarded byconsumers in all of these competitive categories. Certain of the Company’scompetitors are more diversified and have financial and marketing resourceswhich 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.

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

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.

The EPA recently adoptedregulations affecting snowmobiles and ATVs for model years 2006 and beyond. TheCompany believes that it is and will be in compliance with these regulations.The Company supports balanced and appropriate programs that educate thecustomer on the safe use of its products and protect the environment.

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

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

**Effects of Weather**

While from time to time lack of snowfall in aparticular region of the United States or Canada may adversely affectsnowmobile retail sales within that region, the Company works to mitigate thiseffect by taking snowmobile orders in the spring for the following winterseason. There is no assurance that weather conditions will not materiallyaffect the Company’s future sales of snowmobiles.

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**Employees**

At March 31, 2006, the Company had 1,802employees including 374 salaried and 1,428 hourly and production personnel. TheCompany’s employees are not represented by a union or subject to a collectivebargaining agreement. The Company has never experienced a strike or work stoppage andconsiders its relations with its employees to be excellent.

**IntellectualProperty**

The Company makes an effort to patent all significantinnovations that it considers patentable and owns numerous patents for itssnowmobiles, ATVs and other products. Trademarks are also important to theCompany’s snowmobile, ATVs and related parts, garments and accessories businessactivities. The Company has a program of trademark enforcement to eliminate theunauthorized use of its patents and trademarks, thereby strengthening theirvalue. The Company believes that its “Arctic Cat” registered trademark is itsmost significant trademark. Additionally, the Company has numerous registeredtrademarks, trade names and logos, both in the United States andinternationally.

**AvailableInformation**

The Company is subject to the reporting requirementsof the Securities Exchange Act of 1934 and its rules and regulations (the “1934Act”). The 1934 Act requires the Company to file reports, proxy statements andother information with the Securities and Exchange Commission (the “SEC”).Copies of these reports, proxy statements and other information can be read andcopied at: SEC Public Reference Room, 100 F Street, N.E., Washington D.C.20549. Information on the operation of the Public Reference Room may beobtained by calling the SEC at 1-800-SEC-0330. The SECmaintains a website that contains reports, proxy statements, and otherinformation regarding issuers that file electronically with the SEC. Thesematerials may be obtained electronically by accessing the SEC’s home page athttp://www.sec.gov.

The Company has a websiteat www.arcticcat.com, the contents of which are not part of or incorporated byreference into this annual report. TheCompany makes its annual reports on Form 10 -K, quarterly reportson Form 10-Q and current reports on Form 8-K andamendments to those reports, available on its website, free of charge, as soonas reasonably practicable after such report has been filed with or furnishedto, the SEC. The Company’s Code of Conduct, as well as any waivers from andamendments to the Code, are also posted on the Company’s website.

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**ExecutiveOfficers of Registrant**
| **Name**               | ** ** | **Age** | ** ** | **Position**                                                               |
|------------------------|------------|---------|------------|----------------------------------------------------------------------------|
| Christopher A.  Twomey |       | 58      |       | Chairman of the Board of Directors, President and  Chief Executive Officer |
| Timothy C.  Delmore    |       | 52      |       | Chief Financial Officer and Corporate Secretary                            |
| Terry J. Blount        |       | 63      |       | Vice President — Human Resources                                      |
| Ronald G. Ray          |       | 57      |       | Vice President — Operations                                           |
| Roger H. Skime         |       | 63      |       | Vice President — Research & Development                      |
| Ole E. Tweet           |       | 59      |       | Vice President — New Product Development                              |

** **

**Mr. Twomey** has beenChairman since 2003, President and Chief Executive Officer of the Company sinceJanuary 1986 and director since 1987. Mr. Twomey is currently servingas a director of The Toro Company and Universal Trailer Corporation.

**Mr. Delmore** has been ChiefFinancial Officer of the Company since 1986 and has been Corporate Secretary ofthe Company since 1989. Mr. Delmore, a CPA with seven years of priorpublic accounting experience, joined the Company in 1985 as Controller.

**Mr. Blount** has been VicePresident — Human Resources since August of 1996. Mr. Blount has over30 years of Human Resource experience in the manufacturing field. Prior tojoining the Company, Mr. Blount worked as Vice President-Human Resourcesfor a Minnesota-based company.

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

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

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

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**ITEM1A. RISK FACTORS**

The following are significant factors known to theCompany that could adversely affect the Company’s business, financialcondition, or operating results, as well as adversely affect the value of aninvestment in the Company’s common stock. These risks could cause Arctic Cat’sactual results to differ materially from its historical experience and fromresults predicted by forward-looking statements. All forward-looking statementsmade by Arctic Cat are qualified by the risks described below. There may beadditional risks that are not presently material or known. You should carefullyconsider each of the following risks and all other information set forth inthis annual report.

**The Company’sproducts are subject to extensive federal and state safety, environmental andother government regulation that may require the Company to incur expenses ormodify product offerings in order to maintain compliance with the actions ofregulators.**

The Company’s products are subject to extensive lawsand regulations relating to safety, environmental and other regulationspromulgated by the U.S. federal government and individual states as well asinternational regulatory authorities. Although the Company believes that itssnowmobiles, and ATVs have always complied with applicable vehicle safety andemissions standards and related regulations, there can be no assurance thatfuture regulations will not require additional safety standards or emissionreductions that would require additional expenses and/or modification ofproduct offerings in order to maintain such compliance. Although the Company isunable to predict the ultimate impact of adopted or proposed regulations on itsbusiness and operating results, the Company believes that its business would beno more adversely affected than those of its competitors by the adoption of anypending laws or regulations.

**A significantadverse determination in any material product liability claim against theCompany could adversely affect its operating results or financial condition.**

Accidents involving personal injury and propertydamage occur in the use of snowmobiles and ATVs. Claims have been made againstthe Company from time to time. It is the Company’s policy to vigorously defendagainst these actions. Product liability insurance is presently maintained bythe Company on a “per occurrence” basis (with coverage being provided inrespect of accidents which occurred during the policy year, regardless of whenthe related claim is made) in the amount of $10,000,000 in the aggregate, witha $5,000,000 self-insured retention. While Arctic Cat does not believe theoutcome of any pending product liability litigation will have a materialadverse effect on its operations, no assurance can be given that materialproduct liability claims against Arctic Cat will not be made in the future.Adverse determination of material product liability claims made against ArcticCat could adversely affect its operating results or financial condition.

**Significant repairand/or replacement with respect to product warranty claims or product recallscould have a material adverse impact on the results of operations.**

The Company provides a limited warranty for ATVs for aperiod of six months and for a period of one year for its snowmobiles. TheCompany may provide longer warranties in certain geographical markets asdetermined by local regulations and market conditions. Although the Companyemploys quality control procedures, sometimes a product is distributed whichneeds repair or replacement. The Company’s standard warranties require theCompany or its dealers to repair or replace defective products during suchwarranty periods at no cost to the consumer. Historically, product recalls havebeen administered through the Company’s dealers and distributors and have nothad a material effect on the Company’s business. See Note A of Notes toConsolidated Financial Statements in this annual report.

**Changing weather conditions mayreduce demand for certain Arctic Cat products and negatively impact net sales.**

Lack of snowfall in any year in any particular regionof the United States or Canada may adversely affect snowmobiles retail salesand related parts, garments & accessories sales in that region. Thereis no assurance that weather conditions will not materially affect the Company’sfuture sales of snowmobiles, ATVs, and parts, garments & accessories.

**The Company facesintense competition in all product lines, from competitors that have greaterfinancial and marketing resources. Failure to compete effectively againstcompetitors would negatively impact the Company’s business and operatingresults.**

The snowmobile and ATV markets in the United Statesand Canada are highly competitive. Competition in such markets is based upon anumber of factors, including performance, ride, suspension, innovation,technology, styling, fit and finish, brand loyalty, reliability, durability,price and distribution. At the dealer level, competition is based on a number of factors including sales andmarketing support programs (such as sales incentives and cooperativeadvertising).

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The Company’s competitors are more diversified andhave financial and marketing resources which are substantially greater thanthose of the Company. In addition, the Company’s products compete with manyother recreational products for the discretionary spending of consumers and toa lesser extent, with other vehicles designed for utility applications. If theCompany is not able to effectively compete in this environment, its businessand operating results will be negatively impacted.

**Termination orinterruption of supply arrangements could have a material adverse effect on theCompany’s business or results of operations.**

Suzuki manufactures 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 and Suzuki have enjoyed an excellent relationshipsince the Company’s inception. Suzuki purchased approximately 31% of theCompany’s then outstanding capital stock in July 1988, prior to theCompany’s initial public offering in July of 1990, and is currently theCompany’s largest shareholder with approximately 34.6% of the Company’soutstanding capital stock. If Suzuki were ever to cease supplying engines to the Company, such aninterruption could materially and adversely affect production as well asresults of operations. The Company believes it could take up to two model yearsfor a new engine supplier to be in a position to manufacture the Company’sspecially designed engines. While the Company anticipates no significantdifficulties in obtaining substitute supply arrangements for other rawmaterials or components for which it relies upon limited sources of supply,there can be no assurance that alternate supply arrangements will be made onsatisfactory terms.

**General EconomicConditions and Certain Other External Factors**

Companies within the snowmobile and ATV industry aresubject to volatility in operating results due to external factors such asgeneral economic conditions and political changes. Specific factors affectingthe industry include:

·                  Overall consumer confidence and thelevel of discretionary consumer spending;

·                  Interest rates and related higherdealer floorplan costs;

·                  Adverse impact on margins ofincreases in raw material costs which the Company is unable to pass on to dealerswithout negatively affecting sales; and

·                  Fluctuationin foreign currency exchange rates.

**ITEM 1B.UNRESOLVED STAFF COMMENTS**

Not applicable.

**ITEM2. PROPERTIES**

The following sets forth the Company’s materialproperty holdings as of March 31, 2006.
| ** **                    | ** ** | ** **                           | ** ** | **Owned or** | ** ** | ** ** |
|-------------------------------|------------|--------------------------------------|------------|--------------|------------|------------|
| **Location**                  | ** ** | **Facility Type / Use**              | ** ** | **Leased**   | ** ** | **Sq Ft.** |
| Thief River  Falls, Minnesota |       | Manufacturing / Corporate Office     |       | Owned        |       | 558,000    |
| Thief River  Falls, Minnesota |       | Warehouse                            |       | Leased       |       | 92,135     |
| Thief River  Falls, Minnesota |       | Warehouse                            |       | Leased       |       | 14,350     |
| Madison, South  Dakota        |       | Manufacturing                        |       | Owned        |       | 40,000     |
| Bucyrus, Ohio                 |       | Distribution Center                  |       | Owned        |       | 220,000    |
| Winnipeg,  Manitoba           |       | Service Center                       |       | Leased       |       | 10,602     |
| Island Park,  Idaho           |       | Test & Development Facility |       | Owned        |       | 3,000      |
| St. Johann,  Austria          |       | Manufacturing/Distribution           |       | Leased       |       | 5,899      |

 

**ITEM3. LEGAL PROCEEDINGS**

Accidents involving personal injury and propertydamage occur in the use of snowmobiles and ATVs. Claims have been made againstthe Company from time to time. It is the Company’s policy to vigorously defendagainst these actions. The Company is not involved in any legal proceedingswhich it believes will have the potential for a materially adverse impact onthe Company’s business or financial condition.

         Product liability insurance is presently maintained by theCompany on a “per occurrence” basis (with coverage being provided in respect ofaccidents which occurred during the policy year, regardless of when the relatedclaim is made) in the amount of $10,000,000 in the aggregate, with a $5,000,000self-insured retention. The Company believes such insurance is adequate.

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

No matters were submitted to the shareholders duringthe fourth quarter of fiscal 2006

11

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**PART II**

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

The Company’s common stock is traded on the NASDAQNational Market under the NASDAQ symbol “ACAT”. Quotations below represent thehigh and low sale prices as reported by NASDAQ. The Company’s stock begantrading on the NASDAQ National Market on June 26, 1990.
| **Years ended March 31,** | ** ** | **2006** | ** ** | **2005**   | ** ** |
|------------------------------------------|------------|----------|------------|------------|------------|
| **Quarterly Prices**                | ** ** | **High** | ** ** | **Low**    | ** ** | **High** | ** ** | **Low** | ** ** |
| **First Quarter**                        | ** ** | **$**    | **28.20**  | ** ** | **$**      | **18.63** |   | $ | 28.07 |   | $ | 20.58 |   |
| **Second Quarter**                       | ** ** | **$**    | **22.66**  | ** ** | **$**      | **19.50** |   | $ | 27.96 |   | $ | 24.88 |   |
| **Third Quarter**                        | ** ** | **$**    | **22.57**  | ** ** | **$**      | **17.93** |   | $ | 27.30 |   | $ | 23.76 |   |
| **Fourth Quarter**                       | ** ** | **$**    | **25.75**  | ** ** | **$**      | **20.05** |   | $ | 29.20 |   | $ | 23.82 |   |

 

As of June 1, 2006, the Company had approximately413 stockholders of record, including the nominee of Depository Trust Companywhich held 11,980,453 shares of common stock.

**Cash DividendsPaid**

Cash Dividends are declared quarterly and have beenpaid since 1995.
| **Quarter**    | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| First Quarter  | ** ** | **$**    | **0.07**   |     | $          | 0.07 |   |
| Second Quarter | ** ** | **$**    | **0.07**   |     | $          | 0.07 |   |
| Third Quarter  | ** ** | **$**    | **0.07**   |     | $          | 0.07 |   |
| Fourth Quarter | ** ** | **$**    | **0.07**   |     | $          | 0.07 |   |
| Total          | ** ** | **$**    | **0.28**   |     | $          | 0.28 |   |

 

**Company 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, 2006 —  January 31, 2006   |       | 0                                                    |       | $                                                | —     |                                                                                                                             | 0          |                                                                                                                                | 451,900    | * |
| February 1, 2006 —  February 28, 2006 |       | 0                                                    |       | $                                                | —     |                                                                                                                             | 0          |                                                                                                                                | 439,100    | * |
| March 1, 2006 —  March 31, 2006       |       | 0                                                    |       | $                                                | —     |                                                                                                                             | 0          |                                                                                                                                | 438,000    | * |
| Total                                                |       | 0                                                    |       | $                                                | —     |                                                                                                                             | 0          |                                                                                                                                | 438,000    | * |

 

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*Number of Sharespurchasable at closing price of the Company’s common stock on the last tradingday of the month.

The Company purchases Company common stock primarilyto offset the dilution created by employee stock option programs and becausethe Board of Directors believes investment in the Company’s common stock is anexcellent use of its excess cash.

The Company has a publicly announced stock repurchaseprogram which has been approved by the Board of Directors. On June 24,2004 the Company announced the Board approved a $20 million repurchase programand on May 12, 2005, the Company announced the Board approved a $20million repurchase program. Pricing under this program has been delegated tomanagement. There is no expiration date for this program.

The Company has executed the Company stock purchasesin accordance with Rule 10b-18 of the Securities Exchange Act of1934. There have been no other purchases of the Company’s common stock.

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** **

**ITEM 6. SELECTED FINANCIAL DATA**
| **(In thousands, except per share amounts)** | ** ** | ** **  | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------|------------|-------------|-------------|------------|------------|------------|------------|------------|------------|------------|------------|
| **Years ended March 31,**                              | ** ** | **2006**    | ** **  | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
| **INCOME  STATEMENT DATA:**                                           |       |        | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net  sales**                                                        | ** ** | **$**       | **732,794** |       | $          | 689,145    |       | $          | 649,617    |       | $          | 577,070 |   | $ | 556,079 |   |
| **Cost of  goods sold**                                               | ** ** | **596,284** |        | 553,365    |       | 510,445    |       | 448,266    |       | 433,297    |       |
| **Gross  profit**                                                     | ** ** | **136,510** |        | 135,780    |       | 139,172    |       | 128,804    |       | 122,782    |       |
| **Selling,  general and administrative expenses**                     | ** ** | **103,775** |        | 95,745     |       | 95,511     |       | 81,757     |       | 83,228     |       |
| **Operating  profit**                                                 | ** ** | **32,735**  |        | 40,035     |       | 43,661     |       | 47,047     |       | 39,554     |       |
| **Interest  income**                                                  | ** ** | **1,451**   |        | 1,213      |       | 993        |       | 1,442      |       | 2,543      |       |
| **Interest  expense**                                                 | ** ** | **—**  |        | —     |       | —     |       | —     |       | —     |       |
| **Earnings  before income taxes**                                     | ** ** | **34,186**  |        | 41,248     |       | 44,654     |       | 48,489     |       | 42,097     |       |
| **Income  tax expense**                                               | ** ** | **10,440**  |        | 12,949     |       | 14,289     |       | 15,786     |       | 13,471     |       |
| **Net  earnings**                                                     | ** ** | **$**       | **23,746**  |       | $          | 28,299     |       | $          | 30,365     |       | $          | 32,703 | (1) | $ | 28,626 |   |
| **Net  earnings per share**                                           | ** ** | ** **  |        |       |       |       |       |       |       |       |       |
| **Basic**                                                             | ** ** | **$**       | **1.21**    |       | $          | 1.38       |       | $          | 1.42       |       | $          | 1.46 | (1) | $ | 1.21 |   |
| **Diluted**                                                           | ** ** | **$**       | **1.20**    |       | $          | 1.36       |       | $          | 1.40       |       | $          | 1.45 | (1) | $ | 1.20 |   |
| **Cash  dividends per share**                                         | ** ** | **$**       | **0.28**    |       | $          | 0.28       |       | $          | 0.26       |       | $          | 0.24 |   | $ | 0.24 |   |
| **Weighted  average shares outstanding**                              | ** ** | ** **  |        |       |       |       |       |       |       |       |       |
| **Basic**                                                             | ** ** | **19,642**  |        | 20,516     |       | 21,424     |       | 22,396     |       | 23,587     |       |
| **Diluted**                                                           | ** ** | **19,828**  |        | 20,794     |       | 21,730     |       | 22,615     |       | 23,925     |       |

 
| **As of March 31,**                         | ** ** | **2006**    | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|------------------------------------------------------------|------------|-------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| **BALANCE SHEET DATA (In thousands):** | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Cash  and short-term investments**                       | ** ** | **$**       | **69,893** |       | $          | 88,394     |       | $          | 106,440    |       | $          | 91,295 |   | $ | 102,040 |   |
| **Working  capital**                                       | ** ** | **108,348** |       | 123,069    |       | 128,036    |       | 132,525    |       | 129,873    |       |
| **Total  assets**                                          | ** ** | **311,236** |       | 291,733    |       | 280,586    |       | 273,852    |       | 264,683    |       |
| **Long-term  debt**                                        | ** ** | **—**  | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** |
| **Shareholders’ equity**                              | ** ** | **189,365** |       | 185,510    |       | 185,953    |       | 187,286    |       | 181,638    |       |
|                                                            |            |             |            |            |            |            |            |            |            |            |            |  |  |  |  |  |

 

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

13

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**QUARTERLY FINANCIAL DATA** (unaudited)
| ** **                                                            | ** **  | **Total**  | ** **  | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** **  | **Fourth**  | ** ** |
|-----------------------------------------------------------------------|-------------|------------|-------------|-------------|------------|-------------|------------|-------------|-------------|-------------|------------|
| **(In thousands, except per share amounts)** | ** **  | **Year**   | ** **  | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** **  | **Quarter** | ** ** |
| **Net  Sales**                                                        | ** **  | ** ** | ** **  | ** **  | ** ** | ** **  | ** ** | ** **  | ** **  | ** **  | ** ** |
| **2006**                                                              | ** **  | **$**      | **732,794** | ** **  | **$**      | **107,924** | ** ** | **$**       | **276,270** | ** **  | **$**      | **195,301** | ** ** | **$** | **153,299** | ** ** |
| 2005                                                                  |        | 689,145    |        | 102,594     |       | 240,673     |       | 188,855     |        | 157,023     |       |
| 2004                                                                  |        | 649,617    |        | 77,189      |       | 237,650     |       | 194,618     |        | 140,160     |       |
| **Gross  Profit**                                                     | ** **  | ** ** | ** **  | ** **  | ** ** | ** **  | ** ** | ** **  | ** **  | ** **  | ** ** |
| **2006**                                                              | ** **  | **$**      | **136,510** | ** **  | **$**      | **22,280**  | ** ** | **$**       | **55,082**  | ** **  | **$**      | **36,072** | ** ** | **$** | **23,076** | ** ** |
| 2005                                                                  |        | 135,780    |        | 18,956      |       | 52,612      |       | 37,849      |        | 26,363      |       |
| 2004                                                                  |        | 139,172    |        | 18,526      |       | 56,172      |       | 43,981      |        | 20,493      |       |
| **Net  Earnings (Loss)**                                              | ** **  | ** ** | ** **  | ** **  | ** ** | ** **  | ** ** | ** **  | ** **  | ** **  | ** ** |
| **2006**                                                              | ** **  | **$**      | **23,746**  | ** **  | **$**      | **448**     | ** ** | **$**       | **19,217**  | ** **  | **$**      | **4,673** | ** ** | **$** | **(592** | **)** |
| 2005                                                                  |        | 28,299     |        | 124         |       | 19,651      |       | 5,792       |        | 2,732       |       |
| 2004                                                                  |        | 30,365     |        | 102         |       | 21,569      |       | 9,733       |        | (1,039      | )          |
| **Net  Earnings (Loss) Per Share**                                    | ** **  | ** ** | ** **  | ** **  | ** ** | ** **  | ** ** | ** **  | ** **  | ** **  | ** ** |
| **2006**                                                              | **Basic**   | ** ** | **$**       | **1.21**    | ** ** | **$**       | **0.02**   | ** **  | **$**       | **0.97**    | ** ** | **$** | **0.24** | ** ** | **$** | **(0.03** | **)** |
| ** **                                                            | **Diluted** | ** ** | **1.20**    | ** **  | **0.02**   | ** **  | **0.96**   | ** **  | **0.24**    | ** **  | **(0.03**  | **)** |
| 2005                                                                  | Basic       |       | 1.38        |        | 0.01       |        | 0.95       |        | 0.28        |        | 0.14       |   |
|                                                                  | Diluted     |       | 1.36        |        | 0.01       |        | 0.94       |        | 0.28        |        | 0.13       |   |
| 2004                                                                  | Basic       |       | 1.42        |        | 0.00       |        | 0.99       |        | 0.46        |        | (0.05      | ) |
|                                                                  | Diluted     |       | 1.40        |        | 0.00       |        | 0.98       |        | 0.46        |        | (0.05      | ) |

 

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

**Executive LevelOverview**

Fiscal 2006 was the sixth consecutive year of recordsales for Arctic Cat. Fiscal 2006 net sales increased over 6% to $732.8 millionfrom $689.1 million in fiscal 2005. Fiscal 2006 net earnings were $23.7 millionor $1.20 per diluted share compared to net earnings of $28.3 million or $1.36per diluted share in fiscal 2005. The decrease in net earnings was mainly dueto increased engine costs resulting from the stronger yen versus dollarrelationship as well as increased raw material and freight costs and salesincentives. During the year the Company repurchased nearly 727,000 shares ofthe common stock and ended the year with $69.9 million in cash and short-terminvestments.

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

ATV sales increased 16% in fiscal 2006 to $394.9 millionfrom $341.0 million in fiscal 2005. ATV net sales surpassed snowmobile netsales in fiscal 2004 and are the Company’s largest product line, comprisingover 54% of net sales in fiscal 2006. The Company’s ATV growth is due to ArcticCat’s expanded product line-up that now fills nearly every market segment aswell as overall growth in the ATV market.

Snowmobile sales decreased 6% in fiscal 2006 to $238.1million from $252.5 million in fiscal 2005 because of less than normal snowfallduring the prior winter season. Snowmobiles comprised 32% of the Company’s netsales in fiscal 2006. Parts, garments and accessory sales increased 4% infiscal 2006 to $99.8 million from $95.7 million in fiscal 2005. Parts, garmentsand accessory sales were 14% of the Company’s net sales in fiscal 2006. Thefollowing discussions should be read in conjunction with the consolidatedfinancial statements and notes thereto included elsewhere in this annualreport.

**Results ofOperations**

**Fiscal 2006 vs. Fiscal2005****—** During fiscal2006 net sales increased 6.3% to $732,794,000 from $689,145,000 in fiscal 2005.ATV unit volume increased 9.9%, snowmobile unit volume decreased 9.4% anddollar sales of parts, garments and accessories increased $4,151,000. TheCompany believes the continued increase in ATV sales is due both toenthusiastic dealer and consumer reception of the Arctic Cat ATV and growth in certainsegments of 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 profit increased to $136,510,000 in 2006 from$135,780,000 in 2005. The gross profit percentage decreased to 18.6% versus19.7% in 2005. The decrease in the 2006 gross profit percentage was mainly dueto increased engine costs resulting from the stronger yen versus dollarrelationship, increased raw material, freight costs and sales incentives.

Selling, general and administrative expenses increased8.4% to $103,775,000 in 2006 from $95,745,000 in 2005, resulting mainly from a$3.4 million increase in Canadian currency hedge costs, operating costs of theEuropean subsidiary acquired in July 2005 and

14

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increased ATV marketing costs. As a percent of netsales, operating expenses were 14.2% in 2006 compared with 13.9% in 2005.

Operating profits decreased 18.2% to $32,735,000 in2006 from $40,035,000 in 2005. As a percent of net sales, operating profitswere 4.5% in 2006 compared to 5.8% in 2005. The decrease in operating profitsis attributable to the decrease in gross profit and increased operatingexpenses.

Interest income increased 19.6% to $1,451,000 infiscal 2006 from $1,213,000 in fiscal 2005 due to higher yields on investedcash related to higher rates of return than the prior year and interest incomereceived with income tax refunds.

Net earnings decreased 16.1% to $23,746,000 or $1.20per diluted share from $28,299,000 or $1.36 per diluted share for fiscal 2005.Net earnings as a percent of net sales were 3.2% and 4.1% in 2006 and 2005,respectively.

**Fiscal 2005 vs. Fiscal2004****—** During fiscal2005 net sales increased 6.1% to $689,145,000 from $649,617,000 in fiscal 2004.ATV unit volume increased 8.4%, snowmobile unit volume decreased 4.1% anddollar sales of parts, garments and accessories decreased $1,101,000. TheCompany believes the continued increase in ATV sales is due both toenthusiastic dealer and consumer reception of the Arctic Cat ATV and growth inthe ATV market. Snowmobile unit volume decreased because of lower dealer ordersrelated to less than normal snowfalls during the prior winter season in certainkey regions in North America.

Gross profit decreased 2.4% to $135,780,000 in 2005from $139,172,000 in 2004. The gross profit percentage decreased to 19.7%versus 21.4% in 2004. The decrease in the 2005 gross profit percentage wasmainly due to increased engine costs resulting from the stronger yen versusdollar relationship, and to a lesser extent increased raw material and freightcosts.

Selling, general and administrative expenses were flatat $95,745,000 in 2005 from $95,511,000 in 2004. Selling, general andadministrative costs increased at a rate in line with the overall salesincrease when considering that fiscal 2004 operating expenses includedapproximately $5 million of Canadian currency hedge costs. As a percent of netsales, operating expenses were 13.9% in 2005 compared with 14.7% in 2004.

Operating profits decreased 8.3% to $40,035,000 in2005 from $43,661,000 in 2004. As a percent of net sales, operating profitswere 5.8% in 2005 compared to 6.7% in 2004. The decrease in operating profitsis attributable to the decrease in gross profit.

Interest income increased 22.2% to $1,213,000 infiscal 2005 from $993,000 in fiscal 2004 due to higher yields on invested cashrelated to higher rates of return than the prior year.

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

**CriticalAccounting Policies**

The preparation of the consolidated financialstatements in accordance with accounting principles generally accepted in theUnited States requires management to make certain estimates and assumptionsthat affect the amount of reported assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the consolidated financialstatements and revenues and expenses during the periods reported. Actualresults may differ from those estimates. The Company reviewed the developmentand selection of the critical accounting policies and believes the followingare the most critical accounting policies that could have an effect on theCompany’s reported results. These critical accounting policies and estimateshave been reviewed with the audit committee of the Board of Directors.

**Revenue Recognition****—** The Company recognizes revenue and provides for estimatedmarketing and sales incentive costs 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 SalesIncentive Costs****—** The Companyprovides for various marketing and sales incentive costs which are offered toits dealers and consumers at the later of when the revenue is recognized orwhen the marketing and sales incentive program is approved and communicated.Examples of these costs include: dealer and consumer rebates, dealer floorplanfinancing assistance and other incentive and promo­tion programs. Adversemarket conditions resulting in lower than expected retail sales or the matchingof competitor programs could cause accrued marketing and incentive costs tomaterially increase if the Companyauthorizes and communicates new programs to its dealers. The Companyesti­mates marketing and sales incentive costs based on expected usage andhistorical experience. The related marketing and sales incentive costs accrualis included in accrued marketing in the Company’s balance sheet. To the extentcurrent experience differs with previous estimates the accrued liability formarketing and sales incentives is adjusted accordingly.

**Product Warranties****—** The Company generally provides a limited warranty to theowner of snowmobiles for twelve months from the date of consumer registrationand for six months on ATVs. The Company provides for estimated warranty costsat the time of sale based on historical rates and trends and makes subsequentadjustments to their estimate as actual claims become known or the amounts aredeterminable. Adverse changes in actual warranty costs compared to the Company’sinitial estimates could cause accrued warranty to materially change.

**Product Liability andLitigation****—** The Companyis subject to product liability claims and other litigation in the normalcourse of business. Arctic Cat insures for product liability claims although itretains a modest self insured retention accrual within the balance sheetcaption Insurance. The estimated costs resulting from any losses over insuredamounts are charged to operating expenses when it is probable a loss has beenincurred and the amount of the loss is reasonably determinable.

15

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

**Liquidity andCapital Resources**

The seasonality of the Company’s snowmobile productioncycle and the lead time between the commencement of snowmobile and ATVproduction in the early spring and commencement of shipments late in the firstquarter have resulted in significant fluctuations in the Company’s workingcapital requirements during the year. Historically, the Company has financedits working capital requirements out of available cash balances at thebeginning and end of the production cycle and with short-term bank borrowingsduring the middle of the cycle. The Company believes current available cash andcash generated from operations together with its available line of credit willprovide sufficient funds to finance the Company on a short and long-term basis.

**Cash andShort-Term Investments**

Cash and short-term investments were $69,893,000 at March 31,2006 compared to $88,394,000 at March 31, 2005. The Company’s cashbalances traditionally peak early in the fourth quarter and then decrease asworking capital requirements increase when the Company’s snowmobile and spring ATV production cycles begin. TheCompany’s investment objectives are first, safety of principal andsecond, rate of return.

**FinancingArrangements and Cash Flows**

The Company has a $60,000,000 unsecured bank creditagreement for the documentary and stand-by letters of credit and for workingcapital purposes. Total working capital borrowings under the credit agreementare limited to $45,000,000 during the last six months of the fiscal year. Thetotal letters of credit issued at March 31, 2006 were $21,548,000, ofwhich $16,966,000 was issued to Suzuki Motor Corporation for engine and serviceparts 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 $40,553,000 at March 31,2006. The Company has incurred no material losses under these agreements. TheCompany 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 2006, the Companyinvested $34,763,000 in capital expenditures. The Company expects that capitalexpenditures, will increase to approximately $36,000,000 in fiscal 2007. Thisincrease is mainly due to an increase in tooling expenditures for new productdevelopment across all product lines and investment in a new ATV engineproduction facility. Since 1996, the Company has repurchased over 10 millionshares of common stock. There is approximately $10.5 million remaining on the May 2005repurchase authorization. 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 followingtable summarizes the Company’s significant future contractual obligations at March 31,2006 (in millions):
| ** **                       | ** ** | **Payment Due by Period** | ** ** |
|----------------------------------|------------|------------------------------------------|------------|
| ** **                       | ** ** | ** **                               | ** ** | **Less than** | ** ** | ** ** | ** ** | ** ** | ** ** | **More than** | ** ** |
| **Contractual Obligations** | ** ** | **Total**                                | ** ** | **1 Year** | ** ** | **1-3 years** | ** ** | **3-5 Years** | ** ** | **5 years** | ** ** |
| Operating Lease  Obligations     |       | $                                        | 0.3        |   | $ | 0.3 |   | 0 |   | 0 |   | 0 |   |
| Purchase  Obligations(1)         |       | 165.7                                    |       | 165.7 |   | 0 |   | 0 |   | 0 |   |
| Total Contractual  Obligations   |       | $                                        | 166.0      |   | $ | 166.0 |   | 0 |   | 0 |   | 0 |   |

 

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(1)             TheCompany has outstanding purchase obligations with suppliers and vendors   at March 31, 2006 for raw materials andother supplies as part of the normal course of business.

**Forward-LookingStatements**

ThePrivate Securities Litigation Reform Act of 1995 provides a safe harbor forcertain forward-looking statements. This annual report on Form 10-K,as well as the Company’s Annual Report and future filings with the Securitiesand Exchange Commission, the Company’s press releases and oral statements madewith the approval of an authorized executive officer, contain forward-lookingstatements that reflect the Company’s current views with respect to futureevents and financial performance. These forward-looking statements are subjectto certain risks and uncertainties that could cause actual results to differmaterially from historical results or those anticipated. The words “aim,” “believe,”“expect,” “anticipate,” “intend,” “estimate” and other expressions thatindicate future events and trends identify forward-looking statements. Actualfuture results and trends may differ materially from historical results orthose anticipated depending on a variety of factors, including, but not limitedto the risk factors described in Item 1A of this annual report. The Companydoes not undertake any obligation to publicly update or revise anyforward-looking statement, whether as a result of new information, futureevents or otherwise.

16

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**ITEM 7A.QUANTITATIVE AND QUALITATIVE  DISCLOSURESABOUT MARKET RISK**

**Inflation, ForeignExchange Rates and Interest Rates**

Inflation is not expected to have a significant impacton the Company’s business. The Company generally has been able to offset theimpact of increasing costs through a combination of productivity gains andprice increases.

During fiscal 2006, approximately 23% of the Company’scost of sales was purchased from Japanese yen denominated suppliers. Themajority of these purchases were made from Suzuki Motor Corporation whosupplies engines for the Company’s snowmobiles and ATVs. The Company has anagreement with Suzuki Motor Corporation for snowmobile engine purchases toshare the impact of fluctuations in the exchange rate between the U.S. dollarand the Japanese yen above and below a fixed range contained in the agreement.This agreement renews annually. During fiscal 2006, 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 2006, theaverage contracted forward exchange rate on these cash flow hedges wasapproximately 107 (Japanese yen to the U.S. dollar). At March 31, 2006,there were Japanese yen forward exchange contracts outstanding with a notionalamount of $59,966,000.

Sales to Canadian dealers are made in Canadian dollarswith the U.S. dollar serving as the functional currency. During fiscal 2006,sales to Canadian dealers comprised 9.5% of total net sales. During fiscal2006, the exchange rate fluctuation between the U.S. dollar and the Canadiandollar had a modest positive impact on operating profits. During 2006, theCompany utilized cash flow hedges to mitigate the variability in Canadianexchange rate changes relating to Canadian dollar fund transfers to the UnitedStates. During 2006, the average contracted forward exchange rate on these cashflows hedges was approximately $1.24 (Canadian dollar to U.S. dollar). At March 31,2006 there were Canadian dollar forward exchange contracts outstanding withnotional amounts of $51,655,000.

Sales to European on-road ATV dealers and distributorsare made in Euros with the Euro serving as the functional currency. Duringfiscal 2006, sales to European on-road ATV dealers comprised 1.6% of total netsales. During fiscal 2006, the exchange rate fluctuation between the U.S.dollar and the Euro had an immaterial impact on operating profits. During 2006,the Company did not utilize any hedges to mitigate the variability in the Euroexchange rate and at March 31, 2006, there were no foreign exchangecontracts outstanding for the Euro.

The fair values of the Japanese yen hedge contracts atMarch 31, 2006 represented an unrealized loss of $1,549,000. A ten percentfluctuation in the currency rates as of March 31, 2006 would have resultedin a change in fair value of the Japanese yen hedge contracts of approximately$5,997,000.

The fair values of the Canadian dollar hedge contractsat March 31, 2006 represent an unrealized gain of $840,000. A ten percentfluctuation in the currency rates as of March 31, 2006 would have resultedin a change in the fair value of the Canadian dollar hedge contracts ofapproximately $5,166,000. However, since these contracts hedge foreign currencydenominated transactions, any change in the fair value of the contracts wouldbe offset by changes in the underlying value of the transaction being hedged.

Interest rate market risk is managed for cash andshort-term investments by investing in a diversified frequently maturingportfolio consisting of municipal bonds, auction rate securities and moneymarket 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 a party to an unsecured bank line ofcredit arrangement under which it may borrow an aggregate of up to $60 million.The total letters of credit issued at March 31, 2006 were $21,548,000 ofwhich $16,966,000 was issued to Suzuki Motor Corporation for engine and serviceparts purchases. Interest is charged at variable rates based on either LIBOR orprime. Because the interest rate risk related to the line of credit is notdeemed to be significant, the Company does not actively manage this exposure.

**ITEM 8. FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

Financial Statements, Notes, and Report ofIndependent  Registered Public AccountingFirm appear on pages 24 through 35. Quarterly financial data appears inItem 6.

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

None.

**ITEM9A. CONTROLS AND PROCEDURES**

The Company’s management, including the ChiefExecutive Officer and Chief FinancialOfficer, have conducted an evaluation of the effectiveness of the designand operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15under

17

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the 1934 Act as of March 31, 2006. Based on that evaluation, the Company’s ChiefExecutiveOfficer and Chief FinancialOfficer concluded that the Company’s disclosure controls and procedures areeffective in ensuring that information required to be disclosed by theCompany in the reports it files or submits under the 1934 Act is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms.

There have been no significant changes in internalcontrols over financial reporting during the fiscal quarter ended March 31,2006 that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

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

The management of Arctic Cat Inc. is responsible forestablishing and maintaining adequate internal control over financial reportingas defined in Rule 13a-15(f) under the Securities and ExchangeAct of 1934. The Company’s internal control system was designed to providereasonable assurance to the Company’s management and Board of Directorsregarding the preparation and fair presentation of published financialstatements.

All internal control systems, no matter how welldesigned, have inherent limitations. Therefore, even those systems determinedto be effective can provide only reasonable assurance with respect to financialstatement preparation and presentation.

Arctic Cat Inc.’s management assessed theeffectiveness of the Company’s internal control over financial reporting as of March 31,2006. In making this assessment, it used the criteria set forth by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO) in *Internal Control — Integrated Framework*.Based on the assessment management believes that, as of March 31, 2006,the Company’s internal control over financial reporting is effective based onthose criteria.

Arctic Cat Inc.’s independent auditors have issued anaudit report on our assessment of the Company’s internal control over financialreporting. This report appears below.

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

Board of Directors and Shareholders of Arctic Cat Inc.

We have audited management’s assessment, included inthe accompanying Manage­ment’s Report included in Item 9 of this Form 10-K,that Arctic Cat Inc. and subsidiaries main­tained effective internal controlover financial reporting as of March 31, 2006, based on the criteria estab­lishedin *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(the COSO criteria). Arctic Cat Inc. and subsidiaries’ management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express an opinion on management’s assess­mentand an opinion on the effectiveness of the Company’s internal control overfinancial reporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Account­ing Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinions.

A company’s internal control over financial reportingis a process designed to pro­vide reason­able assurance regarding thereliability of financial reporting and the preparation of financial state­mentsfor external purposes in accordance with generally accepted accountingprinciples. A company’s internal control over financial reporting includesthose policies and procedures that (1) pertain to the maintenance ofrecords that, in reasonable detail, accurately and fairly reflect thetransactions and dispo­sitions of the assets of the company; (2) providereason­able assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or 

18

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disposition of the company’s assets that could have amaterial effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

In our opinion, management’s assessment that ArcticCat Inc. and subsidiaries main­tained effective internal control over financialreporting as of March 31, 2006, is fairly stated, in all materialrespects, based on the COSO criteria. Also, in our opinion, Arctic Cat Inc. andsubsidiaries maintained, in all material respects, effective internal controlover financial reporting as of March 31, 2006, based on the COSO criteria.

We also have audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theconsolidated balance sheets of Arctic Cat Inc. and subsidiaries as of March 31,2006 and March 31, 2005, and the related consolidated state­ments ofearnings, shareholders’ equity, and cash flows for each of the three years inthe period ended March 31, 2006 and our report dated June 12, 2006expressed an unqualified opinion on those consolidated financial statements.

/s/ GRANT THORNTON LLP

Minneapolis, MinnesotaJune 12, 2006

**ITEM 9B. OTHERINFORMATION**

None.

19

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**PART III**

**Item 10. Directors and Executive Officers  of the Registrant**

Theinformation included under the heading “Election of Directors, “ “Election ofDirectors — Board Committees,” “ Election of Directors — Code of Conduct” and “BeneficialOwnership of Capital Stock-Section 16(a) Beneficial OwnershipReporting Compliance” in the Company’s definitive Proxy Statement for theAnnual Meeting of Shareholders to be held August 2, 2006, is incorporatedherein by reference.

Pursuantto instruction 3 to Item 401(b) of Regulation S-K, information as toexecutive officers of the Company is set forth in Item 4A of this annualreport.

**Item 11. Executive Compensation**

Theinformation included under the heading “Executive Compensation and OtherInformation” in the Company’s definitive Proxy Statement for the Annual Meetingof Shareholders to be held August 2, 2006, is incorporated herein byreference.

**Item 12. Security Ownership of Certain Beneficial Owners and Managementand related stockholder matters**

Theinformation included under the heading “Beneficial Ownership of Capital Stock”and “Beneficial Ownership of Capital Stock — Equity Compensation PlanInformation” in the Company’s definitive Proxy Statement for the Annual Meetingof Shareholders to be held August 2, 2006, is incorporated herein by reference.

**Item 13. Certain Relationships and Related Transactions**

Informationwith respect to certain relationships and related transactions, appearing underthe heading “Executive Compensation and Other Information-Certain Transactions”in the Company’s definitive Proxy Statement for the Annual Meeting ofShareholders  to be held on August 2,2006, is incorporated herein by reference.

**Item 14. Principal Accountant Fees and  Services**

Theinformation required by this item is incorporated by reference to theinformation set forth under the heading “Independent Public Accounting Firm” inthe Company’s definitive Proxy Statement for the Annual Meeting of Shareholdersto be held August 2, 2006.

20

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# **PART IV**

**Item 15. Exhibits and Financial Statement Schedules**

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

**1. FinancialStatements.**

The followingconsolidated financial statements of the Company and its subsidiaries are filed as part of this Form 10-K:
| ** ** | ** ** | ** **                                                                                                                | ** ** | **Form 10-K  Reference Page** | ** ** |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| **(i)**    |       | Consolidated Balance  Sheets as of March 31, 2006 and 2005                                                           |       | 22                                      |       |
| **(ii)**   |       | Consolidated Statements of Earnings for the three  years ended March 31, 2006, 2005 and 2004     |       | 23                                      |       |
| **(iii)**  |       | Consolidated Statements of Shareholders’ Equity for  the three years ended March 31, 2006, 2005 and 2004        |       | 24                                      |       |
| **(iv)**   |       | Consolidated Statements of Cash Flows for the three  years ended March 31, 2006, 2005 and 2004             |       | 25                                      |       |
| **(v)**    |       | Notes to Consolidated Financial Statements                                                                                |       | 26-32                                   |       |
| **(vi)**   |       | Report of Independent Registered Public Accounting  Firm                                                                  |       | 33                                      |       |

 

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

Theinformation required to be disclosed within Schedule II — Valuation andQualifying Accounts is provided within the Consolidated Financial Statements ofthe Company, filed as part of this Form 10-K.

**3. Exhibits**
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                     | ** ** | **Method of  Filing** | ** ** |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| **3(a)**   |       | Amended and  Restated Articles of Incorporation of Company                                                                                                                                                                                                                                                                                                     |       | (3                         | )          |
| **3(b)**   |       | Restated By-Laws of the Company                                                                                                                                                                                                                                                                                                                                |       | (1                         | )          |
| **4(a)**   |       | Form of specimen Common Stock Certificate                                                                                                                                                                                                                                                                                                                 |       | (1                         | )          |
| **4(b)**   |       | Rights Agreement by and between the Company and  Wells Fargo Bank Minnesota, N.A., dated September 17, 2001                                                                                                                                                                                                                                               |       | (4                         | )          |
| **10(a)**  |       | 1989 Stock Option Plan, as amended                                                                                                                                                                                                                                                                                                                             |       | (3                         | )          |
| **10(b)**  |       | 1995 Stock Plan, as amended                                                                                                                                                                                                                                                                                                                                    |       | (3                         | )          |
| **10(c)**  |       | Purchase/Supply Agreement dated as of March 1,  1985 between Suzuki Motor Co., Ltd. and the Company, and related Agreement on  Implementation of Warranty Provision.                                                                                                                                                                                      |       | (1                         | )          |
| **10(d)**  |       | Form of Employment Agreement between the Company  and each of its executive officers                                                                                                                                                                                                                                                                      |       | (1                         | )          |
| **10(e)**  |       | Floorplan Repurchase Agreement dated July 13,  1984, between the Company and ITT Commercial Finance Corp.                                                                                                                                                                                                                                                 |       | (1                         | )          |
| **10(f)**  |       | Floorplan Repurchase Agreement dated as of  June 15, 1988, between the Company and ITT Commercial Finance, a  division of ITT Industries of Canada, Ltd.                                                                                                                                                                                                  |       | (1                         | )          |
| **10(g)**  |       | Discretionary Revolving Credit Facility, dated as of  June 6, 1997, between the Company and Wells Fargo Bank Minnesota,  National Association.                                                                                                                                                                                                            |       | (3                         | )          |
| **10(h)**  |       | 2002 Stock Plan                                                                                                                                                                                                                                                                                                                                                |       | (5                         | )          |
| **10(i)**  |       | Form of incentive stock option agreement for  2002 Stock Plan                                                                                                                                                                                                                                                                                             |       | (7                         | )          |
| **10(j)**  |       | Form of non-qualified stock option agreement  for 2002 Stock Plan                                                                                                                                                                                                                                                                                         |       | (7                         | )          |
| **10(k)**  |       | Form of Director non-qualified stock option  agreement for 2002 Stock Plan                                                                                                                                                                                                                                                                                |       | (7                         | )          |
| **10(l)**  |       | Program agreement, dated as of January 20,  2003, by and between Arctic Cat Sales Inc. and Textron Financial Corporation  (Confidential treatment pursuant to 17 CFR Sections 200.80(b) and  240.246-2 has been granted for certain portions of this exhibit. Such  portions have been omitted herein and have been filed separately with the  SEC.) |       | (6                         | )          |
| **10(m)**  |       | Repurchase Agreement, dated as of January 20,  2003, by and between Arctic Cat Sales Inc. and Textron Financial Corporation.                                                                                                                                                                                                                              |       | (6                         | )          |

 

21

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

 

**(b) Exhibits**

Referenceis made to Item 15(a) 3.

**(c) Schedules**

Referenceis made to Item 15(a) 2.

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(1)             Incorporatedherein by reference to the Company’s Form S-1 Registration Statement(File Number 33-34984).

(2)             Filedwith this Form 10-K.

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

(4)             Incorporatedby reference to Exhibit 1 to the Company’s Registration on Form 8-Afiled with the SEC on September 20, 2001.

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

(6)             Incorporatedherein by reference to the Company’s Quarterly Report on Form 10-Qfor the quarter ended December 31, 2003.

(7)             Incorporatedherein by reference to the Company’s Annual Report on Form 10-K forthe fiscal year ended March 31, 2005.

22

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15 (d) of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto dulyauthorized, on the 14th day of June, 2006.
| ** **                                                                 | **ARCTIC CAT INC.**        | ** ** |
|----------------------------------------------------------------------------|----------------------------|------------|
| ** **                                                                 | ** **                 | ** ** |
|                                                                       | /s/ CHRISTOPHER  A. TWOMEY |       |
|                                                                       | Christopher A. Twomey      |       |
| Chairman of the Board of Directors, President and  Chief Executive Officer |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the Registrant and in the capacities and on the dateindicated.
| Signature                                                               | ** ** | ** ** | ** **         | **Date** |
|-------------------------------------------------------------------------|------------|------------|--------------------|----------|
| /s/ CHRISTOPHER  A. TWOMEY                                         |       |       | June 14, 2006 |
| Christopher A.  Twomey                                                  |       |       |
| Chairman of the  Board of Directors, President, Chief Executive Officer |       |       |
| (Principle  Executive Officer)                                          |       |       |
| /s/ TIMOTHY C.  DELMORE                                                 |       |       | June 14, 2006 |
| Timothy C.  Delmore  Chief Financial Officer                            |       |       |
| (Principle  Financial and Accounting Officer)                           |       |       |
| /s/ ROBERT J.  DONDELINGER                                              |       |       | June 14, 2006 |
| Robert J.  Dondelinger, Director                                        |       |       |
| /s/ WILLIAM I.  HAGEN                                                   |       |       | June 14, 2006 |
| William I.  Hagen, Director                                             |       |       |
| /s/ WILLIAM G.  NESS                                                    |       |       | June 14, 2006 |
| William G Ness,  Vice Chairman of the Board of Directors                |       |       |
| /s/ GREGG A.  OSTRANDER                                                 |       |       | June 14, 2006 |
| Gregg A.  Ostrander, Director                                           |       |       |
| /s/ KENNETH J.  ROERING                                                 |       |       | June 14, 2006 |
| Kenneth J.  Roering, Lead Director                                      |       |       |
| /s/ SUSAN  LESTER                                                       |       |       | June 14, 2006 |
| Susan Lester,  Director                                                 |       |       |
| /s/ MASAYOSHI  ITO                                                      |       |       | June 14, 2006 |
| Masayoshi Ito,  Director                                                |       |       |
|                                                                         |            |            |                    |          |  |

 

 

23

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**ConsolidatedBalance Sheets**
| **Arctic Cat Inc. March 31,**                                                                                       | ** ** | ** **      | ** **      | **2006**    | ** ** | **2005**    | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|-----------------|-------------|------------|-------------|------------|
| **ASSETS**                                                                                                                              | ** ** | ** **      | ** **      | ** **  | ** ** |
| **Current Assets**                                                                                                                      | ** ** | ** **      | ** **      | ** **  | ** ** |
| **Cash and equivalents**                                                                                                                | ** ** | **$**           | **40,075,000**  |        | $          | 20,765,000  |       |
| **Short-term investments**                                                                                                              | ** ** | **29,818,000**  |            | 67,629,000  |       |
| **Accounts receivable, less allowances**                                                                                                | ** ** | **42,295,000**  |            | 46,472,000  |       |
| **Inventories**                                                                                                                         | ** ** | **92,289,000**  |            | 67,989,000  |       |
| **Prepaid expenses**                                                                                                                    | ** ** | **5,463,000**   |            | 3,578,000   |       |
| **Deferred income taxes**                                                                                                               | ** ** | **8,810,000**   |            | 9,428,000   |       |
| **Total current assets**                                                                                                                | ** ** | **218,750,000** |            | 215,861,000 |       |
| **Property  and Equipment — At Cost**                                                                                              | ** ** | ** **      | ** **      | ** **  | ** ** |
| **Machinery, equipment and tooling**                                                                                                    | ** ** | **170,536,000** |            | 150,221,000 |       |
| **Land, buildings and improvements**                                                                                                    | ** ** | **24,556,000**  |            | 22,883,000  |       |
| ** **                                                                                                                              | ** ** | **195,092,000** |            | 173,104,000 |       |
| **Less accumulated depreciation**                                                                                                       | ** ** | **106,145,000** |            | 97,232,000  |       |
| ** **                                                                                                                              | ** ** | **88,947,000**  |            | 75,872,000  |       |
| **Other Assets**                                                                                                                        | ** ** | ** **      | ** **      | ** **  | ** ** |
| **Goodwill and other intangibles**                                                                                                      | ** ** | **3,539,000**   |            | —      |       |
| ** **                                                                                                                              | ** ** | **$**           | **311,236,000** |        | $          | 291,733,000 |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                          | ** ** | ** **      | ** **      | ** **  | ** ** |
| **Current Liabilities**                                                                                                                 | ** ** | ** **      | ** **      | ** **  | ** ** |
| **Accounts payable**                                                                                                                    | ** ** | **$**           | **65,613,000**  |        | $          | 53,202,000  |       |
| **Accrued expenses**                                                                                                                    | ** ** | **43,775,000**  |            | 36,181,000  |       |
| **Income taxes payable**                                                                                                                | ** ** | **1,014,000**   |            | 3,409,000   |       |
| **Total current liabilities**                                                                                                           | ** ** | **110,402,000** |            | 92,792,000  |       |
| **Deferred Income Taxes**                                                                                                               | ** ** | **11,469,000**  |            | 13,431,000  |       |
| **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, 12,708,365 in 2006; 13,378,698 in  2005** | ** ** | **127,000**     | ** **      | 134,000     | ** ** |
| **Class B common stock, par value $.01;  7,560,000 shares authorized, Shares issued, and outstanding 6,717,000 in 2006  and 2005** | ** ** | **67,000**      | ** **      | 67,000      | ** ** |
| **Additional paid-in-capital**                                                                                                          | ** ** | **1,010,000**   |            | —      |       |
| **Accumulated other comprehensive gain (loss)**                                                                                         | ** ** | **(440,000**    | **)**           | 60,000      |       |
| **Retained earnings**                                                                                                                   | ** ** | **188,601,000** |            | 185,249,000 |       |
| ** **                                                                                                                              | ** ** | **189,365,000** |            | 185,510,000 |       |
| ** **                                                                                                                              | ** ** | **$**           | **311,236,000** |        | $          | 291,733,000 |       |

Theaccompanying notes are an integral part of these statements.

24

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**ConsolidatedStatements of Earnings**
| **Arctic Cat Inc. Years ended March 31,** | ** ** | ** **      | ** **      | **2006**    | ** ** | **2005**    | ** ** | **2004** | ** **  |
|-------------------------------------------------------------------------|------------|-----------------|-----------------|-------------|------------|-------------|------------|----------|-------------|
| **Net  sales**                                                          |       | **$**           | **732,794,000** | ** **  | $          | 689,145,000 |       | $        | 649,617,000 |   |
| **Cost of  goods sold**                                                 |       | **596,284,000** | ** **      | 553,365,000 |       | 510,445,000 |       |
| **Gross profit**                                                        |       | **136,510,000** | ** **      | 135,780,000 |       | 139,172,000 |       |
| **Selling, general and administrative expenses**                        |       | **103,775,000** | ** **      | 95,745,000  |       | 95,511,000  |       |
| **Operating profit**                                                    |       | **32,735,000**  | ** **      | 40,035,000  |       | 43,661,000  |       |
| **Other  income**                                                       |       | ** **      |            |        |       |        |       |
| **Interest income**                                                     |       | **1,451,000**   | ** **      | 1,213,000   |       | 993,000     |       |
| **Earnings Before Income Taxes**                                        |       | **34,186,000**  | ** **      | 41,248,000  |       | 44,654,000  |       |
| **Income  tax expense**                                                 |       | **10,440,000**  | ** **      | 12,949,000  |       | 14,289,000  |       |
| **Net  Earnings**                                                       |       | **$**           | **23,746,000**  | ** **  | $          | 28,299,000  |       | $        | 30,365,000  |   |
| **Net Earnings Per Share**                                              |       | ** **      |            |        |       |        |       |
| **Basic**                                                               |       | **$**           | **1.21**        | ** **  | $          | 1.38        |       | $        | 1.42        |   |
| **Diluted**                                                             |       | **$**           | **1.20**        | ** **  | $          | 1.36        |       | $        | 1.40        |   |
| **Weighted average shares  outstanding**                                |       | ** **      |            |        |       |        |       |
| **Basic**                                                               |       | **19,642,000**  | ** **      | 20,516,000  |       | 21,424,000  |       |
| **Diluted**                                                             |       | **19,828,000**  | ** **      | 20,794,000  |       | 21,730,000  |       |

Theaccompanying notes are an integral part of these statements.

25

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**ConsolidatedStatements of Shareholders’ Equity**
| ** **                                                    | ** ** | ** **            | ** ** | ** **            | ** **  | ** **       | ** **    | ** **        | ** ** | ** **   | ** ** | **Accumulated** | ** **    | ** **   | ** ** | ** **   | ** ** |
|---------------------------------------------------------------|------------|-----------------------|------------|-----------------------|-------------|------------------|---------------|-------------------|------------|--------------|------------|-----------------|---------------|--------------|------------|--------------|------------|
| ** **                                                    | ** ** | ** **            | ** ** | ** **            | ** **  | **Class B** | ** **    | **Additional**    | ** ** | **Other**    | ** ** | ** **      | ** **    | ** **   | ** ** |
| **Arctic Cat Inc.**                                 | ** ** | **Common Stock** | ** ** | **Common Stock** | ** **  | **Paid-in**      | ** **    | **Comprehensive** | ** ** | **Retained** | ** ** | ** **      | ** **    |
| **Years ended March 31,**                      | ** ** | **Shares**            | ** ** | **Amount**            | ** **  | **Shares**       | ** **    | **Amount**        | ** ** | **Capital**  | ** ** | **Income**      | ** **    | **Earnings** | ** ** | **Total**    | ** ** |
| Balances at March 31, 2003                               |       | 14,487,849            |       | $                     | 144,000     |             | 7,560,000     |              | $          | 76,000       |       | $               | —        |         | $          | (336,000     | )          | $ | 187,402,000 |   | $ | 187,286,000 |   |
| Exercise of stock options                                     |       | 644,305               |       | 6,000                 |        | —           |          | —            |       | 7,649,000    |       | —          |          | —       |       | 7,655,000    |       |
| Tax benefits from  stock option exercises                     |       | —                |       | —                |        | —           |          | —            |       | 1,868,000    |       | —          |          | —       |       | 1,868,000    |       |
| Repurchase of common stock                               |       | (846,272              | )          | (7,000                | )           | (843,000         | )             | (9,000            | )          | (9,517,000   | )          | —          |          | (26,230,000  | )          | (35,763,000  | )          |
| Other  comprehensive income:                                  |       |                  |       |                  |        |             |          |              |       |         |       |            |          |         |       |         |       |
| Net earnings                                                  |       | —                |       | —                |        | —           |          | —            |       | —       |       | —          |          | 30,365,000   |       | 30,365,000   |       |
| Unrealized loss  on securities available-for-sale, net of tax |       | —                |       | —                |        | —           |          | —            |       | —       |       | (154,000        | )             | —       |       | (154,000     | )          |
| Unrealized gain  on derivative instruments, net of tax        |       | —                |       | —                |        | —           |          | —            |       | —       |       | 269,000         |          | —       |       | 269,000      |       |
| Total other  comprehensive income                             |       | —                |       | —                |        | —           |          | —            |       | —       |       | —          |          | —       |       | 30,480,000   |       |
| Dividends ($.26 per share)                                    |       | —                |       | —                |        | —           |          | —            |       | —       |       | —          |          | (5,573,000   | )          | (5,573,000   | )          |
| Balances at March 31, 2004                               |       | 14,285,882            |       | 143,000               |        | 6,717,000        |          | 67,000            |       | —       |       | (221,000        | )             | 185,964,000  |       | 185,953,000  |       |
| Exercise of stock options                                     |       | 115,762               |       | 1,000                 |        | —           |          | —            |       | 1,429,000    |       | —          |          | —       |       | 1,430,000    |       |
| Tax benefits from  stock option exercises                     |       | —                |       | —                |        | —           |          | —            |       | 618,000      |       | —          |          | —       |       | 618,000      |       |
| Repurchase of common stock                               |       | (1,022,946            | )          | (10,000               | )           | —           |          | —            |       | (2,047,000   | )          | —          |          | (23,272,000  | )          | (25,329,000  | )          |
| Other  comprehensive income:                                  |       |                  |       |                  |        |             |          |              |       |         |       |            |          |         |       |         |       |
| Net earnings                                                  |       | —                |       | —                |        | —           |          | —            |       | —       |       | —          |          | 28,299,000   |       | 28,299,000   |       |
| Unrealized loss  on securities available-for-sale, net of tax |       | —                |       | —                |        | —           |          | —            |       | —       |       | (135,000        | )             | —       |       | (135,000     | )          |
| Unrealized gain  on derivative instruments, net of tax        |       | —                |       | —                |        | —           |          | —            |       | —       |       | 416,000         |          | —       |       | 416,000      |       |
| Total other  comprehensive income                             |       | —                |       | —                |        | —           |          | —            |       | —       |       | —          |          | —       |       | 28,580,000   |       |
| Dividends ($.28 per share)                                    |       | —                |       | —                |        | —           |          | —            |       | —       |       | —          |          | (5,742,000   | )          | (5,742,000   | )          |
| Balances at March 31, 2005                               |       | 13,378,698            |       | 134,000               |        | 6,717,000        |          | 67,000            |       | —       |       | 60,000          |          | 185,249,000  |       | 185,510,000  |       |
| Exercise of stock options                                     |       | 56,167                |       | —                |        | —           |          | —            |       | 902,000      |       | —          |          | —       |       | 902,000      |       |
| Tax benefits from  stock option exercises                     |       | —                |       | —                |        | —           |          | —            |       | 135,000      |       | —          |          | —       |       | 135,000      |       |
| Repurchase of common stock                               |       | (726,500              | )          | (7,000                | )           | _                |          | _                 |       | (27,000      | )          | —          |          | (14,897,000  | )          | (14,931,000  | )          |
| Other  comprehensive income:                                  |       |                  |       |                  |        |             |          |              |       |         |       |            |          |         |       |         |       |
| Net earnings                                                  |       | —                |       | —                |        | —           |          | —            |       | —       |       | —          |          | 23,746,000   |       | 23,746,000   |       |
| Unrealized loss  on securities available-for-sale, net of tax |       | —                |       | —                |        | —           |          | —            |       | —       |       | (43,000         | )             | —       |       | (43,000      | )          |
| Unrealized loss on derivative instruments, net of tax         |       | —                |       | —                |        | —           |          | —            |       | —       |       | (450,000        | )             | —       |       | (450,000     | )          |
| Foreign currency adjustment                                   |       | —                |       | —                |        | —           |          | —            |       | —       |       | (7,000          | )             | —       |       | (7,000       | )          |
| Total other  comprehensive income                             |       | —                |       | —                |        | —           |          | —            |       | —       |       | —          |          | —       |       | 23,246,000   |       |
| Dividends ($.28 per share)                                    |       | —                |       | —                |        | —           |          | —            |       | —       |       | —          |          | (5,497,000   | )          | (5,497,000   | )          |
| **Balances  at March 31, 2006**                          | ** ** | **12,708,365**        | ** ** | **$**                 | **127,000** | ** **       | **6,717,000** | ** **        | **$**      | **67,000**   | ** ** | **$**           | **1,010,000** | ** **   | **$**      | **(440,000** | **)**      | **$** | **188,601,000** | ** ** | **$** | **189,365,000** | ** ** |

Theaccompanying notes are an integral part of these statements.

26

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**ConsolidatedStatements of Cash Flows**
| **Arctic Cat Inc. Years ended March 31,**                  | ** ** | ** **      | ** **     | **2006**    | ** ** | **2005**    | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------|----------------|-------------|------------|-------------|------------|----------|------------|
| **Cash flows from operating  activities**                                                | ** ** | ** **      | ** **     |        |       |        |       |
| **Net earnings**                                                                         | ** ** | **$**           | **23,746,000** | ** **  | $          | 28,299,000  |       | $        | 30,365,000 |   |
| **Adjustments  to reconcile net earnings to net cash provided by operating activities**  | ** ** | ** **      | ** **     |        |       |        |       |
| **Depreciation**                                                                         | ** ** | **22,241,000**  | ** **     | 19,584,000  |       | 18,551,000  |       |
| **Deferred income taxes**                                                                | ** ** | **(1,055,000**  | **)**          | 2,666,000   |       | 5,532,000   |       |
| **Tax benefit from stock option exercises**                                              | ** ** | **135,000**     | ** **     | 618,000     |       | 1,868,000   |       |
| **Other**                                                                                | ** ** | **(7,000**      | **)**          | —      |       | —      |       |
| **Changes in operating assets and liabilities, net  of effect from acquired net assets** | ** ** | ** **      | ** **     |        |       |        |       |
| **Trading securities**                                                                   | ** ** | **36,988,000**  | ** **     | (9,151,000  | )          | (6,155,000  | )          |
| **Accounts receivable**                                                                  | ** ** | **8,121,000**   | ** **     | (18,194,000 | )          | 744,000     |       |
| **Inventories**                                                                          | ** ** | **(17,734,000** | **)**          | (6,862,000  | )          | 10,596,000  |       |
| **Prepaid expenses**                                                                     | ** ** | **(1,815,000**  | **)**          | 14,000      |       | 237,000     |       |
| **Accounts payable**                                                                     | ** ** | **1,456,000**   | ** **     | 5,709,000   |       | 12,710,000  |       |
| **Accrued expenses**                                                                     | ** ** | **6,834,000**   | ** **     | 1,281,000   |       | (7,562,000  | )          |
| **Income taxes**                                                                         | ** ** | **(2,601,000**  | **)**          | 4,648,000   |       | 1,083,000   |       |
| **Net cash provided by operating activities**                                            | ** ** | **76,309,000**  | ** **     | 28,612,000  |       | 67,969,000  |       |
| **Cash  flows from investing activities**                                                | ** ** | ** **      | ** **     |        |       |        |       |
| **Purchase of property and equipment**                                                   | ** ** | **(34,763,000** | **)**          | (25,954,000 | )          | (25,053,000 | )          |
| **Net assets acquired, net of cash acquired**                                            | ** ** | **(3,464,000**  | **)**          | 3,703,000   |       | 1,729,000   |       |
| **Sale and maturity of available-for-sale  securities**                                  | ** ** | **754,000**     | ** **     | —      |       | —      |       |
| **Net cash used in investing activities**                                                | ** ** | **(37,473,000** | **)**          | (22,251,000 | )          | (23,324,000 | )          |
| **Cash  flows from financing activities**                                                | ** ** | ** **      | ** **     |        |       |        |       |
| **Proceeds from issuance of common stock**                                               | ** ** | **902,000**     | ** **     | 1,273,000   |       | 6,425,000   |       |
| **Repurchase of common stock**                                                           | ** ** | **(14,931,000** | **)**          | (25,172,000 | )          | (34,533,000 | )          |
| **Dividends paid**                                                                       | ** ** | **(5,497,000**  | **)**          | (5,742,000  | )          | (5,573,000  | )          |
| **Net cash used in financing activities**                                                | ** ** | **(19,526,000** | **)**          | (29,641,000 | )          | (33,681,000 | )          |
| **Net increase (decrease) in cash and equivalents**                                      | ** ** | **19,310,000**  | ** **     | (23,280,000 | )          | 10,964,000  |       |
| **Cash  and equivalents at beginning of year**                                           | ** ** | **20,765,000**  | ** **     | 44,045,000  |       | 33,081,000  |       |
| **Cash  and equivalents at end of year**                                                 | ** ** | **$**           | **40,075,000** | ** **  | $          | 20,765,000  |       | $        | 44,045,000 |   |
| **Supplemental disclosure of cash  payments for income taxes**                           | ** ** | **$**           | **14,404,000** | ** **  | $          | 7,691,000   |       | $        | 9,423,000  |   |

 

Supplemental disclosureof non-cash investing and financing activities:

As of March 31, 2006and 2005, the unrealized gain on securities available-for-sale, net of tax was$14,000 and $57,000.

As of March 31, 2006and 2005, the unrealized gain (loss) on derivative instruments, net of tax was$(447,000) and $3,000.

During 2005 and 2004, mature common shares with a fairmarket value of $157,000 and $1,230,000 were exchanged in settlement for theexercise of certain stock options.

Theaccompanying notes are an integral part of these statements.

27

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**Notes to ConsolidatedFinancial StatementsArctic Cat Inc.  **March 31, 2006, 2005 and 2004

**A SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

Arctic Cat Inc. (the “Company”)operates in a single industry segment and designs, engineers, manufactures andmarkets snowmobiles and all-terrain vehicles (ATVs) under the Arctic Cat® brand name, and related parts, garments andaccessories principally through its facilities in Thief River Falls, Minnesota.The Company’s products are sold through a network of independent dealerslocated throughout the United States, Canada, and Europe and throughdistributors in Europe, the Middle East, Asia and other 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 ofConsolidation**

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 highly liquid temporaryinvestments with an original maturity of three months or less or variable ratedemand notes with put options exercisable in three months or less to be cashequivalents. Cash and equivalents consist primarily of commercial paper and putbonds. As of March 31, 2006 and 2005, the Company had approximately$5,900,000 and $500,000 of cash located in foreign banks primarily inCanada.The Company’s cash management policy provides for bank disbursementaccounts to be reimbursed on a daily basis. Checks issued but not presented tothe banks for payment are included in cash and equivalents as a reduction of othercash balances.

**Fair Values ofFinancial 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 reported as a separate component of shareholders’ equity. The Companyutilizes the specific identification method in accounting for its short-terminvestments.

**AccountsReceivable**

The Company’s accountsreceivable balance consists of amounts due from its dealers and certain financecompanies. The Company extends credit to its dealers based on an evaluation ofthe dealers’ financial condition. The Company’s collection exposure relating toaccounts receivable amounts due from certain dealer finance companies islimited due to the financial strength of the finance companies and provisionsof its existing agreements. Accounts receivable is presented net of anallowance for estimated uncollectible amounts due from its dealers. The Companyestimates the uncollectible amounts considering numerous factors, mainlyhistorical trends as well as current available information. The Company’sallowance for uncollectible accounts was $966,000, $802,000 and $1,083,000 at March 31,2006, 2005 and 2004. The activity within the allowance for uncollectibleaccounts for the three years ending March 31, 2006 was not significant. Accountsreceivable amounts written off have been within management’s expectations.

**Inventories**

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

**DerivativeInstruments and Hedging Activities**

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

As of March 31,2006 and 2005, the Company had open Canadian dollar forward exchange contracts,maturing through March 2007 and April 2005, with notional amountstotaling $51,655,000 and $1,080,000 and fair value assets and liabilities,netted in accounts 

28

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payable, of $840,000 at March 31, 2006 and $4,000included in accounts receivable at March 31, 2005. The related amountsreported within other comprehensive income (loss), net of tax, were $529,000and $3,000. As of March 31, 2006 the Company had open Japanese yen forwardexchange contracts, maturing through January 2007, with notional amountstotaling $59,966,000 and fair value assets and liabilities, included inaccounts payable, of $1,549,000 at March 31, 2006. The related amountreported within other comprehensive income (loss), net of tax was $(976,000).The amounts reported within other comprehensive income (loss) and the fairvalue assets and liabilities, included in accounts payable, at March 31,2006 for the Canadian dollar and the Japanese yen forward exchange contractshave been offset resulting in a loss, net of tax of $447,000, and a net payableof $709,000 at March 31, 2006. There were no open Japanese yen forwardexchange contracts at March 31, 2005.

**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.

**Goodwill and OtherIntangibles**

In July 2005, theCompany adopted Statement of Financial Accounting Standards (“SFAS”) No. 142“Goodwill and Other Intangible Assets” SFAS No. 142 prohibits theamortization of goodwill and intangible assets with indefinite useful lives.SFAS No. 142 requires that these assets be reviewed for impairment atleast annually. An impairment charge is recognized only when the calculatedfair value of a reporting unit, including goodwill, is less than its carryingamount. The Company performed the analysis as of March 31, 2006. Theresults of the analysis indicated that no goodwill impairment existed. Inaccordance with SFAS No. 142 the Company will complete an impairmentanalysis on an annual basis. The Company had no goodwill or other intangibleassets on its balance sheet at March 31, 2005.

     The changes in the carrying amount ofgoodwill and other intangibles for the year ended March 31, 2006 are asfollows:

|                                             | ** ** | **2006**  | ** ** |
|---------------------------------------------|------------|-----------|------------|
| Balance at  April 1,                   |       | $         | —     |   |
| Goodwill  acquired during the year          |       | 1,750,000 |       |
| Other  intangibles acquired during the year |       | 1,950,000 |       |
| Accumulated  amortization                   |       | (161,000  | )          |
| Balance at  March 31,                  |       | $         | 3,539,000  |   |

 

As required by SFAS No. 142,intangibles with finite lives will continue to be amortized. Included in otherintangible assets are customer relationships, a homologation license, and anon-compete agreement. Other intangible assets before accumulated amortizationwere $1,950,000 at March 31, 2006. Accumulated amortization was $161,000at March 31, 2006. Amortization expense is expected to be approximately$215,000 in each of the next five fiscal years. The net value of otherintangible assets is included as a component of goodwill and other intangiblesin the accompanying consolidated balance sheets.

**Product Warranties**

The Company generallyprovides a limited warranty to the owner of snowmobiles for twelve months fromthe date of consumer registration and for six months on ATVs. The Companyprovides for estimated warranty costs at the time of sale based on historicalrates and trends and makes subsequent adjustments to its estimate as actualclaims become known or the amounts are determinable. The following representschanges in the Company’s accrued warranty liability for the fiscal years ended March 31,

|                            | ** ** | **2006**       | ** **     | **2005**   | ** ** | **2004**   | ** ** |
|----------------------------|------------|----------------|----------------|------------|------------|------------|------------|
| Balance at  April 1,  | ** ** | **$**          | **12,053,000** |       | $          | 10,331,000 |       | $ | 12,205,000 |   |
| Warranty  Provision        | ** ** | **13,377,000** |           | 14,237,000 |       | 14,141,000 |       |
| Warranty Claim  Payments   | ** ** | **11,227,000** |           | 12,515,000 |       | 16,015,000 |       |
| Balance at  March 31, | ** ** | **$**          | **14,203,000** |       | $          | 12,053,000 |       | $ | 10,331,000 |   |

 

**Insurance**

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

**RevenueRecognition**

The Company recognizesrevenue and provides for estimated marketing and sales incentive costs whenproducts are shipped to dealers and distributors pursuant to their order, theprice is fixed 

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and collection isreasonably assured. Shipping and handling costs are recorded as a component ofcosts of goods sold at the time product is shipped.

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

**Dealer Holdback**

The Company records a dealer holdback programliability at the time certain products are shipped to its dealers. If theproducts subject to the holdback program are sold within the program timeperiod, the Company refunds a portion of the original sale price, referred toas dealer holdback, to the dealer. The Company’s dealer holdback program liability,included within the accounts payable, as of March 31, 2006, 2005 and 2004was $17,321,000, $14,085,000 and $9,673,000. The increases from March 31,2005 to 2006 and from March 31, 2004 to 2005 were principally related toqualifying additional products, the period of coverage under the program andthe 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$17,067,000, $17,350,000 and $14,736,000 during 2006, 2005 and 2004.

**Advertising**

The Company expensesadvertising costs as incurred, except for cooperative advertising obligationsarising related to the sale of the Company’s products to its dealers. Theestimated cost of cooperative advertising, which the dealer is required tosupport, is recorded as marketing expense at the time the product is sold.Cooperative advertising was $6,996,000, $6,681,000, and $6,374,000 in 2006,2005 and 2004. Total advertising expense, including cooperative advertising,was $23,482,000, $22,031,000 and $18,900,000 in 2006, 2005 and 2004.

**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:

|                                                 | ** ** | **2006**      | ** **     | **2005**  | ** ** | **2004**   | ** ** |
|-------------------------------------------------|------------|---------------|----------------|-----------|------------|------------|------------|
| **Net  earnings:**                              |       |          |           |      |       |       |       |
| **As reported**                                 | ** ** | **$**         | **23,746,000** |      | $          | 28,299,000 |       | $ | 30,365,000 |   |
| **Additional compensation expense, net of tax** |       | **1,601,000** |           | 1,555,000 |       | 1,337,000  |       |
| **Pro forma**                                   | ** ** | **$**         | **22,145,000** |      | $          | 26,744,000 |       | $ | 29,028,000 |   |
| **Net  earnings per share:**                    |       |          |           |      |       |       |       |
| **As reported**                                 |       |          |           |      |       |       |       |
| **Basic**                                       | ** ** | **$**         | **1.21**       |      | $          | 1.38       |       | $ | 1.42 |   |
| **Diluted**                                     | ** ** | **$**         | **1.20**       |      | $          | 1.36       |       | $ | 1.40 |   |
| **Pro forma**                                   |       |          |           |      |       |       |       |
| **Basic**                                       | ** ** | **$**         | **1.13**       |      | $          | 1.30       |       | $ | 1.35 |   |
| **Diluted**                                     | ** ** | **$**         | **1.12**       |      | $          | 1.29       |       | $ | 1.34 |   |

 

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

|                               | ** ** | **2006**    | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------|------------|-------------|------------|----------|------------|----------|------------|
| **Assumptions:**              |       |        |       |     |       |     |       |
| **Dividend yield**            | ** ** | **1.3%**    |       | 1.1%     |       | 1.3%     |       |
| **Average term**              | ** ** | **5 years** |       | 7 years  |       | 7 years  |       |
| **Volatility**                | ** ** | **30%**     |       | 36%      |       | 39%      |       |
| **Risk-free  rate of return** | ** ** | **5.0%**    |       | 4.1%     |       | 3.8%     |       |

 

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

|                                    | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Fair  value of options granted** | ** ** | **$**    | **6.91**   |     | $          | 10.94    |       | $ | 8.46 |   |
|                                    |            |          |            |          |            |          |            |  |  |  |

 

SeeNote K for additional disclosures regarding stock option plans.

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**NetEarnings Per Share**

The Company’s dilutedweighted average shares outstanding include common shares and common shareequivalents relating to stock options, when dilutive. Options to purchase571,500, 195,000, and 85,180 shares of common stock with weighted averageexercise prices of $24.41, $27.68, and $20.94 were outstanding during 2006,2005 and 2004, but were excluded from the computation of common shareequivalents because they were anti-dilutive.

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

|                                                       | ** ** | **2006**       | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-------------------------------------------------------|------------|----------------|------------|------------|------------|------------|------------|
| Weighted average  number of common shares outstanding | ** ** | **19,642,000** |       | 20,516,000 |       | 21,424,000 |       |
| Dilutive effect  of option plan                       | ** ** | **186,000**    |       | 278,000    |       | 306,000    |       |
| Common and potential  shares outstanding -diluted     | ** ** | **19,828,000** |       | 20,794,000 |       | 21,730,000 |       |

 

**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. The Company’s salesand marketing activities with European on-road ATV dealers and distributors aredenominated in the Euro with the Euro serving as the functional currency.Assets and liabilities denominated in Canadian currency and the Euro aretranslated using the exchange rates in effect at the balance sheet date.Revenues and expenses are translated at the average foreign exchange rates ineffect for the period. Exchange gains and losses relating to the Canadiancurrency and Euro currency are reflected in the results of operations and as acomponent of other comprehensive income.

**ComprehensiveIncome**

Comprehensive incomerepresents net earnings adjusted for the unrealized gain or loss on derivativeinstruments, debt securities classified as available-for-sale and foreigncurrency translation adjustments and shown in the consolidated financialstatements of stockholders’ equity.

**Accounting Policyand Disclosure Changes**

In December 2004,the FASB issued SFAS  No. 123(revised 2004), “Share-Based Payments” (“SFAS No. 123(R)”). SFAS No. 123(R) requires the expensing of stock options in the Company’s financialstatements beginning April 1, 2006. The Company is required to implementSFAS No. 123(R) during the interim period ending June 30, 2006.The adoption of SFAS No. 123(R) is expected to result in a charge tofiscal year 2007 earnings of approximately $0.07 to $0.08 per diluted share.However, the total expense recorded in future periods will depend on severalvariables, including the number of share-based awards granted, the number ofgrants that ultimately vest, and the fair value assigned to those awards.Assuming the Company had adopted SFAS No. 123(R) for fiscal year2006, diluted earnings per share would have been reduced by $0.08 per dilutedshare from $1.20 per diluted share to $1.12 per diluted share.

                InNovember 2004, the FASB issued SFAS No. 151, “Inventory Costs” (“SFAS151”). The provisions of this statement become effective for the Company infiscal 2007. SFAS 151 amends the existing guidance on the recognition ofinventory costs to clarify the accounting for abnormal amounts of idle expense,freight, handling costs, and wasted material (spoilage). Existing rules indicatethat under some circumstances, items such as idle facility expense, excessivespoilage, double freight, and rehandling costs may be so abnormal as to requiretreatment as current period charges. SFAS 151 requires that allocation of fixedproduction overheads to the costs of conversion be based on the normal capacityof the production facilities. The adoption of this Statement is not expected tohave a material impact on the valuation of inventory or operating results.

In October 2004,Congress passed the American Jobs Creation Act of 2004 (the “Act”). The Actprovides a deduction for income from qualified domestic production activities,which will be phased in from 2005 through 2010, as well as other taximplications. The domestic production deduction will be accounted for as aspecial deduction and as such, will have no effect on deferred tax assets andliabilities existing at the date of enactment. The Company is currentlyevaluating recently announced implementation guidance.

In May 2005,the FASB issued SFAS No. 154, “Account Changes and Error Corrections.” This new standard replaces APB Opinion 20, Accounting Changes, and FASB No. 3,Reporting Accounting Changes in Interim Financial Statements. Among otherchanges, SFAS No. 154 requires that a voluntary change in accountingprinciple to be applied retrospectively with all prior period financialstatements presented on a new accounting principle, unless it is impracticableto do so. SFAS No. 154 also provides that (1) a change in method ofdepreciating or amortizing a long-lived non-financial asset be accounted for asa change in estimate (prospectively) that was effected by a change inaccounting principle, and (2) correction of errors in previously issuedfinancial statements should be termed a “restatement.”  The new standardis effective for accounting changes and correction of errors made in fiscalyears beginning after December 15, 2005. The Company believes the 

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adoption of the provisions of SFAS No. 154 willnot have a material impact on the consolidated financial statements.

**B SHORT-TERMINVESTMENTS**

Short-term investmentsconsist primarily of a diversified portfolio of municipal bonds, auction ratesecurities and money market funds and are classified as follows at March 31:

|                                         | ** ** | **2006**      | ** **     | **2005**   | ** ** |
|-----------------------------------------|------------|---------------|----------------|------------|------------|
| **Trading  securities**                 | ** ** | **$**         | **27,445,000** | ** ** | $          | 64,433,000 | ** ** |
| **Available-for-sale  debt securities** | ** ** | **2,373,000** |           | 3,196,000  |       |
|                                    | ** ** | **$**         | **29,818,000** |       | $          | 67,629,000 |   |

 

Trading securitiesconsists of $19,370,000 and $54,608,000 invested in various money market fundsat March 31, 2006 and 2005, respectively, while the remainder of tradingsecurities and available-for-sale securities consists primarily of “A” rated orhigher municipal bond investments and auction rate securities. The amortized costand fair value of debt securities classified as available-for-sale was$2,351,000 and $2,373,000, at March 31, 2006. The unrealized gain onavailable-for-sale debt securities is reported, net of tax, as a separatecomponent of shareholders’ equity. The contractual maturities ofavailable-for-sale debt securities at March 31, 2006, are $2,014,000within one year and $359,000 from one year through five years.

**C INVENTORIES**

Inventories consist ofthe following at March 31:

|                                       | ** ** | **2006**       | ** **     | **2005**   | ** ** |
|---------------------------------------|------------|----------------|----------------|------------|------------|
| **Raw  materials and sub-assemblies** | ** ** | **$**          | **27,214,000** |       | $          | 17,155,000 |   |
| **Finished  goods**                   | ** ** | **36,193,000** |           | 24,149,000 |       |
| **Parts,  garments and accessories**  | ** ** | **28,882,000** |           | 26,685,000 |       |
| ** **                            | ** ** | **$**          | **92,289,000** |       | $          | 67,989,000 |   |

 

**D ACCRUED EXPENSES**

Accrued expenses consist ofthe following at March 31:

 

|                  | ** ** | **2006**       | ** **     | **2005**   | ** ** |
|------------------|------------|----------------|----------------|------------|------------|
| **Marketing**    | ** ** | **$**          | **14,388,000** |       | $          | 7,567,000 |   |
| **Compensation** | ** ** | **8,871,000**  |           | 9,288,000  |       |
| **Warranties**   | ** ** | **14,203,000** |           | 12,053,000 |       |
| **Insurance**    | ** ** | **4,446,000**  |           | 5,315,000  |       |
| **Other**        | ** ** | **1,867,000**  |           | 1,958,000  |       |
| ** **       | ** ** | **$**          | **43,775,000** |       | $          | 36,181,000 |   |

 

**E ACQUISITION**

In July 2005, theCompany acquired a 100% interest in a European company that designs, engineers,manufactures and markets ATVs which utilize the Company’s components. TheCompany completed this acquisition to further expand its ATV model offeringsand strengthen its European presence. The Company invested $3,464,000, net ofcash acquired, to acquire a 100% interest resulting in an excess purchase priceover the estimated fair value of net assets was approximately $1,750,000. TheCompany has completed its evaluation of the purchase price and the allocationof the acquisition costs is as follows:
| Cash                            |   | $          | 2,102,000 |   |
|---------------------------------|--------|------------|-----------|--------|
| Accounts  receivables           |   | 3,948,000  |      |
| Inventories                     |   | 6,566,000  |      |
| Other                           |   | 462,000    |      |
| Goodwill and  other intangibles |   | 3,700,000  |      |
| Total assets acquired           |   | 16,778,000 |      |
| Total liabilities assumed       |   | 11,212,000 |      |
| Net assets  acquired            |   | $          | 5,566,000 |   |

 

**F FINANCING**

The Company has a$60,000,000 unsecured bank credit agreement for documentary and stand-byletters of credit and for working capital purposes. Total working capitalborrowings under the credit agreement are limited to $45,000,000 during thelast six months of the fiscal year. The credit agreement is due on demand andexpires July 27, 2008. Interest on the working capital borrowings ispayable monthly at alternative interest rates, at the Com­pany’s election. Thecredit agreement contains certain covenants. At March 31, 2006, there was$21,548,000 of issued letters of credit outstanding and no working capital borrowingsoutstanding. Of the issued letters of credit 

32

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outstanding, $16,966,000was issued to Suzuki Motor Corporation (Suzuki) for engine and service partspurchases (see Note H). Outstanding letters of credit will be repaid overthe following six months in accordance with the credit agreement and any suchrenewal.

**G RETIREMENTSAVINGS PLAN**

The Company’s 401(k) retirementsavings plan covers substantially all eligible employees. Employees maycontribute up to 50% of their compensation with the Company matching 100% ofthe employee contributions, up to a maximum of 3% of the employee’scompensation. The Company can elect to makeadditional contributions at its discretion. Total Company matchingcontributions were $1,522,000, $1,448,000 and $1,286,000 in 2006, 2005 and2004. There were no discretionary contributions made during 2006, 2005 and2004.

**H RELATED PARTYTRANSACTIONS**

The Company purchasesengines and service parts from Suzuki, owner of the Company’s Class Bcommon stock. Such purchases totaled $128,844,000, $138,021,000 and$129,700,000 in 2006, 2005 and 2004. The purchase price of the engines andservice parts is determined annually. The Company has an agreement with Suzukifor snowmobile engine purchases to share the impact of fluctuations in theexchange rate between the U.S. dollar and the Japanese yen above and below afixed range contained in the agreement. This agreement renews annually.

The Company is dependenton Suzuki for the near term supply of most of its engines and related serviceparts. An interruption of this supply could have a material adverse effect onthe Company’s operations. Certain raw materials and services are purchased fromvendors in which certain of the Company’s directors are officers or significantshareholders. In 2006, 2005 and 2004, these transactions aggregated $2,580,000,$2,678,000 and $7,150,000.

**I INCOME TAXES**

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

|              | ** ** | **2006**       | ** **     | **2005**  | ** ** | **2004**   | ** ** |
|--------------|------------|----------------|----------------|-----------|------------|------------|------------|
| **Current**  |       |           |           |      |       |       |       |
| **Federal**  | ** ** | **$**          | **11,017,000** |      | $          | 9,166,000  |       | $ | 7,831,000 |   |
| **State**    | ** ** | **478,000**    |           | 1,117,000 |       | 926,000    |       |
| **Deferred** | ** ** | **(1,055,000** | **)**          | 2,666,000 |       | 5,532,000  |       |
|         | ** ** | **$**          | **10,440,000** |      | $          | 12,949,000 |       | $ | 14,289,000 |   |

 

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

|                                  | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Statutory  income tax rate**   | ** ** | **35.0** | **%**      | 35.0     | %          | 35.0     | %          |
| **State  taxes**                 | ** ** | **1.3**  |       | 1.8      |       | 1.4      |       |
| **Tax  exempt interest**         | ** ** | **(0.6** | **)**      | (0.7     | )          | (0.5     | )          |
| **Foreign  sales corporation**   | ** ** | **(2.5** | **)**      | (3.2     | )          | (2.1     | )          |
| **Other  permanent differences** | ** ** | **(2.7** | **)**      | (1.5     | )          | (1.8     | )          |
| ** **                       | ** ** | **30.5** | **%**      | 31.4     | %          | 32.0     | %          |

 

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

|                                               | ** ** | **2006**       | ** **     | **2005**   | ** ** |
|-----------------------------------------------|------------|----------------|----------------|------------|------------|
| **Short-term deferred income tax  assets**    |       |           |           |       |       |
| **Accrued expenses**                          | ** ** | **$**          | **8,065,000**  |       | $          | 8,352,000 |   |
| **Inventory capitalization and adjustments**  | ** ** | **2,412,000**  |           | 2,582,000  |       |
| **Other**                                     | ** ** | **301,000**    |           | 297,000    |       |
| **Short-term  deferred income tax liability** |       |           |           |       |       |
| **Prepaid expenses and other**                | ** ** | **(1,968,000** | **)**          | (1,803,000 | )          |
| **Net short-term deferred tax asset**         | ** ** | **$**          | **8,810,000**  |       | $          | 9,428,000 |   |
| **Long-term deferred income tax  liability**  |       |           |           |       |       |
| **Property and equipment**                    | ** ** | **$**          | **11,469,000** |       | $          | 13,431,000 |   |
| **Long-term  deferred tax liability**         | ** ** | **$**          | **11,469,000** |       | $          | 13,431,000 |   |

 

**J COMMITMENTS ANDCONTINGENCIES**

**Dealer Financing**

Finance companies providecertain of the Company’s dealers with floor plan financing. The Company hasagreements with these finance companies to repurchase certain repossessedproducts sold 

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to its dealers. At March 31,2006, the Company was contingently liable under these agreements for a maximumrepurchase amount of approximately $40,553,000. The Company’s financialexposure under these agreements is limited to the difference between the amountpaid to the finance companies for repurchases and the amount received upon theresale of the repossessed product. Losses incurred under these agreementsduring the periods presented have not been material.

**Litigation**

The Company is subject to legal proceedings and claimswhich arise in the ordinary course of business. Accidents involving personalinjury and property damage occur in the use of snowmobiles and ATVs. Claimshave been made against the Company from time to time. It is the Company’spolicy to vigorously defend against these actions. The Company is not involvedin any legal proceedings which it believes will have the potential for amaterially adverse impact on the Company’s business or financial condition,results of operations or cash flows.

**SHAREHOLDERS’EQUITY**

**K  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, 2006, the Company had 420,442shares of common stock available for grant under the plans.

Transactionsunder the plans during each of the three years in the period ended March 31,are summarized as follows:
| ** **                              | ** ** | **Number of  shares under  option** | ** ** | **Weighted  average  exercise price** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------|------------|--------------------------------------------|------------|
| Outstanding at  April 1, 2003      |       | 1,457,083                                     |       | $                                          | 12.88      |   |
| Granted                                 |       | 316,000                                       |       | 21.00                                      |       |
| Exercised                               |       | (644,305                                      | )          | 11.88                                      |       |
| Outstanding at March 31, 2004      |       | 1,128,778                                     |       | 15.72                                      |       |
| Granted                                 |       | 274,000                                       |       | 27.60                                      |       |
| Cancelled                               |       | (1,000                                        | )          | 12.00                                      |       |
| Exercised                               |       | (115,762                                      | )          | 12.35                                      |       |
| Outstanding at March 31, 2005      |       | 1,286,016                                     |       | 18.56                                      |       |
| Granted                                 |       | 338,500                                       |       | 21.69                                      |       |
| Exercised                               |       | (56,167                                       | )          | 16.07                                      |       |
| **Outstanding at March 31,  2006** | ** ** | **1,568,349**                                 | ** ** | **$**                                      | **19.30**  | ** ** |

 

Optionsexercisable at March 31 are as follows:
| ** ** | ** ** | **Number of  shares under  option** | ** ** | **Weighted  average  exercise price** | ** ** |
|------------|------------|-----------------------------------------------|------------|--------------------------------------------|------------|
| 2004       |       | 578,282                                       |       | $                                          | 13.22      |   |
| 2005       |       | 762,189                                       |       | $                                          | 15.51      |   |
| **2006**   | ** ** | **1,013,522**                                 | ** ** | **$**                                      | **17.17**  | ** ** |

 

Thefollowing tables summarize information concerning currently outstanding andexercisable stock options at March 31, 2006:

**Options Outstanding**

| Range of  Exercise Prices | ** ** | ** ** | ** ** | **Number  Outstanding** | ** ** | **Weighted  Average  Remaining  Contractual Life** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|-------------------------------------|------------|------------|------------|-------------------------|------------|---------------------------------------------------------|------------|---------------------------------------|------------|
| $6.11                               |       | 11,814     |       | 2.4 years               |       | $                                                       | 6.11       |                                  |
| 9.38 - 13.33                        |       | 227,906    |       | 3.2 years               |       | 11.03                                                   |       |
| 14.41 - 21.03                       |       | 771,129    |       | 6.3 years               |       | 18.02                                                   |       |
| 21.96 - 28.00                       |       | 557,500    |       | 8.6 years               |       | 24.73                                                   |       |
|                                |       | 1,568,349  |       |                    |       | $                                                       | 19.30      |                                  |

 

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**Options Exercisable**

| Range of Exercise Prices | ** ** | ** ** | ** ** | **Number  Exercisable** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|-----------------------------------------|------------|------------|------------|-------------------------|------------|--------------------------------------------|------------|
| $6.11                                   |       | 11,814     |       | $                       | 6.11       |                                       |
| 9.38 - 13.33                            |       | 225,906    |       | 11.04                   |       |
| 14.41 - 21.03                           |       | 623,800    |       | 17.38                   |       |
| 21.96 - 28.00                           |       | 152,002    |       | 26.27                   |       |
|                                    |       | 1,013,522  |       | $                       | 17.17      |                                       |

 

**Class BCommon Stock**

Suzuki owns alloutstanding shares of the Company’s Class B common stock. At the option ofSuzuki, the Class B common stock is convertible into an equal number ofshares of the Company’s common stock. The Class B shareholder is entitledto elect one member of the Company’s Board of Directors but cannot vote for theelection of other directors of the Company. The Class B shareholder canvote on all other matters submitted to the common shareholders. The Class Bcommon stock participates equally with the common stock in all dividends andother distributions 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 and Class Bcommon shares; the Company becomes a non-surviving party due to a merger orrecapitalization; the Company sells substantially all of its assets; or Suzukitransfers 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 BJunior Participating preferred stock. Under terms of the Company’s ShareholderRights Plan, upon the occurrence of certain events, registered holders ofcommon stock and Class B common stock are entitled to purchaseone-hundredth of a share of Series B Junior Participating preferred stockat a stated price, or to purchase either the Company’s common shares or commonshares of an acquiring entity at half their market value. The Rights related tothis plan expire September 17, 2011.

**Share RepurchaseAuthorization**

The Company invested$14,931,000, $25,329,000 and $35,763,000 during 2006, 2005 and 2004 torepurchase and cancel 726,500, 1,023,000 and 1,689,500 shares of common stock,pursuant to Board of Directors’ authorizations. Included in the 2004repurchases are 843,000 shares of Class B stock from Suzuki MotorCorporation, repurchased for $18,259,000 or $21.66 per share. At March 31,2006, authorization to repurchase $10,538,000 or approximately 438,000 sharesremain outstanding.

**L SEGMENTREPORTING**

Sales to foreigncustomers, located primarily in Canada, amounted to $213,724,000, $171,075,000and $152,657,000 in 2006, 2005 and 2004. The Company has identifiablelong-lived assets of approximately $1,100,000 located in Canada and Europe at March 31,2006. The identifiable long-lived assets for March 31, 2005 and 2004 arenot considered significant.

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**REPORTOF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

Board of Directors andShareholders ofArctic Cat Inc.

Wehave audited the accompanying consolidated balance sheets of Arctic Cat Inc.and subsidi­aries as of March 31, 2006 and March 31, 2005, and therelated con­solidated statements of earnings, shareholders’ equity and cashflows for each of the three years in the period ended March 31, 2006. Theseconsolidated financial statements are the responsi­bility of the Company’s man­agement.Our responsibility is to express an opinion on these consolidated financialstatements based on our audits.

We conductedour audits 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 consolidatedfinancial statements are free of material mis­statement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe consolidated financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the consolidated financial position of ArcticCat Inc. and subsidi­aries as of March 31, 2006 and March 31, 2005and the consolidated results of their operations and their consolidated cashflows for each of the three years in the period ended March 31, 2006 inconformity with accounting principles generally accepted in the United Statesof America.

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the effectiveness of Arctic CatInc.’s internal control over finan­cial reporting as of March 31, 2006,based on criteria established in *Inter­nal Control —Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO), and our report dated June 12,2006 expressed an unqualified opinion on management’s assessment of internalcontrol over financial reporting and an unquali­fied opinion on theeffectiveness of Arctic Cat Inc. and subsidiaries internal control overfinancial reporting.

/s/ GRANT THORNTON LLP

Minneapolis, MinnesotaJune 12, 2006

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**ARCTICCAT INC. EXHIBIT INDEX**
| **EXHIBIT NUMBER** | ** ** | ** **                                                                                                | ** ** |
|-------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|
| **21**                  |       | Subsidiaries of  Registrant                                                                               |       |
| **23**                  |       | Consent of  Independent Registered Public Accounting Firm                                                 |       |
| **31.1**                |       | 302  Certification of Chief Executive Officer                                                             |       |
| **31.2**                |       | 302  Certification of Chief Financial Officer                                                             |       |
| **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 |       |
|                         |            |                                                                                                           |            |  |  |

 

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